The new finance minister — a veteran now in his third stint in the ministry — has begun well. He has to repair the damage done by his predecessor in his last budget, but he also cannot unceremoniously undo what Pranab Mukherjee did without suggesting a certain lack of respect. So he has gone about the business in a methodical and circumspect manner. He has moved his bureaucrats around without demoting them, and he has appointed a committee of economists and retired bureaucrats to advise him on how to reverse Mr Mukherjee’s errors as gently as possible. The committee has expeditiously put out a first report for consultation; it will finalize the report after receiving reactions. It is a pity that the reactions have been so subdued; after the outrage that the budget caused, one would have expected the victims to be more articulate. It is to be hoped that they will read the preliminary report carefully and react to it constructively but critically.
The draft intrigues at first glance. The committee had two of India’s most distinguished economists, both of whom have been closely associated with the finance ministry, but their influence on the report is well concealed. It is true that its approach on most matters is generally not inconsistent with economics. But if the economists had had their way, they would surely have begun with a statement of the basic principles of good fiscal practice, which Mr Mukherjee blatantly violated. One such principle which has been much in the air in recent months is residence as the criterion for taxability: Mr Mukherjee imposed tax on a transaction that had been entered into outside India. If finance ministers of the world followed his practice, there would be terrible chaos; it would lead to a world war, fought not with arms but with laws. Surely the committee should declare its fidelity to the principle — or its departure from it — on the very first page. Another principle that needs to be reinstated is that all tax changes should be prospective. The committee implicitly advances it through its advocacy of grandfathering, but it could have been more explicit and assertive. Altogether, it is important that the economists on the committee should live up to their professional duty and leave their stamp on the report. Instead, they have chosen the path of caution so that the boat is not too severely rocked.