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Memo to FM: Pamper Mumbai, not Delhi

R Jagannathan

Soon after taking over from Yashwant Sinha, Jaswant Singh talked about putting money in pockets to bring back the feel-good factor.

He will find no shortage of people in Delhi willing to line up outside the North Block to take whatever he is willing to offer. However, I would suggest Mumbai as the place for some handouts. Not Delhi.

I am, of course, using Delhi and Mumbai as metaphors, not as two cities that go by those names. One stands for dirigisme and the other for liberalisation.

Delhi represents the constituency of pork-barrel politics and poor economics; Mumbai represents the constituency of investors, the financial sector and business.

A rupee spent in Delhi may or may not fetch the politician his votes, but a rupee doled out to Mumbai will probably go a long way in rescuing the economy. A rupee spent in Delhi will probably be soaked up by the rich in the name of the poor; a rupee spent on Mumbai's rich will probably develop a multiplier effect and trickle down to those who need it.

There are three things Mumbai needs from Jaswant Singh. One, he must free the financial sector from the deadening hand of Delhi. Second, he must send a signal that Delhi cares for investor sentiment and the markets. And three, Delhi must get off the backs of taxpayers even while pursuing sensible fiscal policies.

As the financial capital of India, as home to the country's two main stock exchanges, and as the country's largest taxpayer, Mumbai has a right to demand this of Delhi.

Let me dilate on these ideas, starting with the financial sector. Large segments of the Indian financial sector have one foot in the grave, and another in bankruptcy courts. IFCI is a basket case. IDBI is half-way there. UTI is already on IV drips.

And some 15 nationalised banks have neither the money nor the gumption to survive in the emerging competitive scenario. All of them are where they are because banks have been run on the whims of Delhi's babus, not Mumbai's bankers.

The result: politically influenced imprudent lending, excessive exposures to groups that fed off the licence-permit system, and plain fraud.

It is time Delhi did something more than just offering reluctant dollops of bailout money; the financial sector needs freedom. This means three things. Banks and institutions must be on the fast track to privatisation and strategic takeovers.

Before that, there must be immediate recapitalisation of banks considered viable, with restrictions being placed on the growth of the rest ("narrow" banking). And, finally, Delhi must add muscle to asset recovery laws.

Jaswant Singh needs to amend his recent statement on reviewing the Ordinance that strengthens the asset recovery powers of lenders. The key to industrial rejuvenation and banking sector reforms lies in a law that allows for easier asset recovery and euthanasia for sick units.

Delhi has done the reverse so far, under political pressure from old economy businessmen. It must lay off.

When it comes to investor sentiment, Delhi knows zilch. The fact is, Dalal Street always asks for more, but market sentiment has very little to do with what is actually doled out. The trick is to give the market a reason to smile without necessarily giving much away. How can Delhi do that?

One suggestion: abolish short- and long-term capital gains tax for this financial year. From the next, have a flat 10 per cent tax, for both short- and long-term gains. Most investors are unlikely to make major capital gains this year, given that the Sensex is at fairly low levels.

So the abolition of capital gains tax will not exactly dent tax revenues too much. It's almost a free lunch: improved investor sentiment, an improved wealth effect, very little tax downside and a huge simplification of procedures.

To add to the general cheer, Singh could team up with Shourie to speed up divestment in almost all sectors - from petroleum to banks to telecom.

A good secondary market will be aided by a good IPO market for public sector equity. Savers are looking for avenues beyond bank deposits. If reasonably priced-PSU equity offers are available to the public, they will lap it up.

If banks can earn better margins by lending money for buying this equity, they could improve their returns as well. This could reduce Jaswant Singh's need to bail out more banks. It's a virtuous circle anyway one looks at it.

Maybe, Jaswant Singh should whisper a few things to Bimal Jalan to ease up bank lending to investors.

As for the taxpayer, this is where Mr Singh has to repair sentiments. Yashwant Sinha, despite having some good ideas, botched the job by failing to explain his initiatives. I will take just two examples.

Dividend tax and the restriction of tax rebates to the rich. His decision on dividend tax was criticised as a return to double taxation. Rubbish.

The only thing Sinha did was shift taxation away from the company end to the individual. Reversing this will improve taxpayer sentiment without affecting tax collections too much.

As for the near abolition of Section 88 (another good idea botched by Sinha), Jaswant Singh needs to be clear that exemptions ultimately have to go away.

Here's a neat way to do it: raise the basic tax-free limit to incomes up to Rs 100,000 per annum, and then abolish Sections 88 and 80L totally. My guess is most taxpayers would be thrilled with this tradeoff.

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