Commentary/Yazad Darasha

Last week, we looked at some of the tasks that, like those set for Hercules in his time of history/mythology, Finance Minister P Chidambaram may need to perform to prove himself. We have so far looked at how Chidambaram needs to jumpstart the economy, control the deficit, clean up the petroleum sector, and hike agricultural output.

Here is the second instalment of labours, starting with the crying need to provide viable infrastructure.

Improve Infrastructure: Industry, as well the entire country, is reeling from a severe dearth of quality infrastructure. From telecommunications to transport, the basic services that fuel growth are sorely lacking, or in a shambles.

Chidambaram has realised that. As part of the 1996-97 Budget, which he presented in July 1996, he proposed the setting up of the Infrastructure Development Finance Company, with an equity base of Rs 2 billion. The capital needs of the infrastructure sector are variously placed in a range starting at Rs 5 billion and going all the way up to Rs 200 trillion. Obviously, the IDFC is horribly undercapitalised. But it is a small -- a very small -- step in the direction Chidambaram knows he must go.

Ever since Indira Gandhi tentatively and hesitantly began the process of privatisation, successive governments have baulked at taking anything more than half-measures in this respect. Rs 2 billion sounds like just another edition of that tradition.

Perhaps Chidambaram needs to pursue the concept of infrastructure privatisation a little more intensively. More build-operate-transfer projects. More transparency in awarding them, so that there are more bidders for any project. Perhaps it is also time to take a good look at private participation in rail services as well.

Recast the Disinvestment Process: In this area too, half-measures have been the name of the game. Besides, how can a government sell PSU equity, and then use the proceeds to merely increase its own non-revenue-generating expenditure?

Rather than simply selling parts of the equity and retaining management control with 51 per cent, the government could think about outright privatisation, and hold a considerable -- but not controlling -- stake in the emerging entity. This way, it can have its cake -- in the form of proceeds from the equity sale -- and eat it too -- in the form of regular dividends.

It is an idea whose time may have arrived. But does a 13-party government have the gumption to suggest it? On the other hand, with opposition to any idea fragmented into so many pieces, a coalition may be the ideal launch vehicle for hard decisions.

Free the Insurance Sector: Coming from this perspective, it may be a good time to free the insurance segment from the stranglehold of the public sector. This does not mean privatising the Life Insurance Corporation, the General Insurance Corporation and all its myriad subsidiaries. What it does mean is allowing others to enter the segment.

With such a step, Chidambaram will be doing yeoman service to the common people, people who are so fed up with the abysmal service they receive for the high premia they pay, that they would rather be insecure than insure, to paraphrase the LIC line.

How Chidambaram will get this past the Left elements of the coalition government is not yet clear. But one thing is: the soft, molly-coddled elements of the public sector staff need to be jerked awake to the new realities of a more demanding clientele. If they continue to slumber, let them. But let others who want to provide cheap, efficient service do so.

And anyway, isn't it mandatory for India, as a signatory to the General Agreement on Tariff and Trade and a member of the World Trade Organisation, to open up the insurance sector? The sooner it is done, the less time the pain will last. Hopefully the Left and Labour will realise that.

Continue Tax Reform: On the taxation front, Chidambaram has little to do except continue the process of rationalisation. However, in his last Budget, the finance minister went in the opposite direction, by imposing the Minimum Alternate Tax and the two per cent mandatory import duty. Perhaps this time, he will present his revamped Income Tax Act and make amends for last Budget's mistakes.

What spendthrift governments do not realise -- so busy are they finding quick and dirty ways ways of raising revenue so that they can live in the style they are accustomed to -- is that a rational and low rate and structure of taxation, whether personal or corporate, makes for higher voluntary compliance. This automatically improves the takings at the till.

This does not mean that tax evasion will overnight become a thing of the past, merely an unpleasant dream. There will always be those that prefer to evade rather than pay tax. But their numbers will certainly reduce, if the cost of evasion is just not worth the amount of tax to be paid.

At the same time, vigilance should be beefed, so that the evaders do not get away with it. In this respect, the recent protests by industry against what it calls the emerging raid raj just do not hold water. Industry does not have a very good track record in tax payments, as indicated by the charges against several erstwhile blue-chip companies. Chidambaram does, however, need to keep in mind that a corrupt income tax officer will do his government's revenue generation more harm than good. A more relevant set of incentives and disincentives may need to be worked out for the non-corrupt and the corrupt respectively, for his new Income Tax Act to do much good.

And with that, we go into the third edition of the Labours of Chidambaram, which we will present next week.