Have we crossed a new threshold in government-citizen trust? And is it in thanks partly to the wrecking ball Donald Trump is taking to the US-India relationship?
It would be unfair to credit only Trump for the drastic reductions in goods and services tax (GST) rates, now reduced only to two slabs of five per cent and 18 per cent, barring some exceptions. Reason: Work on the GST revamp was begun much earlier, and the Modi government also cut income-tax rates substantially in the February 2025 budget, long before Trump entered the global China shop (pun intended) with hob-nailed boots.
However, what stood out for me was not the cuts themselves, but what the Finance Minister said about them. In a Times of India interview, she pointed out that revenue loss was not a major consideration, since not just states, but even the Centre could lose money in the short run. She is quoted as saying: “This was the same dharma sankat during the time we reduced income tax—the fear of losing revenue. But when money flows into the pockets of the people, then should I bother only about my revenue? That is not possible.”
This is a significant shift in government attitudes, if it sustains and expands to all government thinking. A rupee left in the hands of ordinary citizens is better than handing it over to the most inefficient spender of them all—the government. This does not mean the government doesn’t need revenues, given the umpteen challenges the country now faces, but it does signal that the government’s first job after external defence is to enable economic activity. This may deliver higher revenues much later, and with much less heartburn. Reform is not about cutting this tax or that regulation, but to trust your citizen to do the right thing with what is left in her hands.
Also read: GST is not just an economic measure, it’s also a moral one. New tax slabs show that
Regulatory cholesterol
Thanks to Trump’s sudden decision to target India rather than any other country with massive tariffs, many things that ought to have been done earlier are now falling into place. China and India are seeing a thaw in relations, which will see trade return to an even keel. India is beginning to see the importance of building its own defence and manufacturing capabilities, from shipbuilding to fighter aircraft. Apart from tax cuts, there is talk of reducing regulatory cholesterol by getting a task force to identify areas for reform and rejuvenation.
One can only wonder why such a task force should have come only 11 years after Narendra Modi came to power. This task force should be permanent in nature because the goalposts for regulation and taxation keep changing, not only due to internal changes but external conditions too. Reform and deregulation (or re-regulation, when occasionally required) should be a continuous process. One can also point out that some “reforms”, the four labour codes, for example, remain on paper. Land and agricultural reforms appear to have taken a back seat again for political reasons. “Tax terror” has partly returned through the largely inexcusable use of the enforcement directorate (ED) to target alleged corruption. Corruption should be tackled with patient institutional reforms, and not merely through the use of coercive action. This means steadily reducing the discretionary powers of politicians and civil servants, one sector at a time.
The problem of slow or underwhelming reforms comes from the widely accepted mindsets created in our first-past-the-post electoral system. One, we have accustomed our people to believe that all solutions lie with the government. Hence, we have unsustainable “khatakhat” welfarism—politicians freeloading on taxpayer funds to woo voters. Two, the government itself—till recently—has believed that improving the lot of citizens means extracting more revenues from taxes inflicted on those generating jobs and higher economic activity. Three, reforms are good, even if done at a glacial pace. Four, reform means economic reform only. Five, atmanirbharta is the same as the old import-substitution policy that failed so badly before 1991. These mindsets need a drastic overhaul, if not complete elimination.
Mindset 1: Solutions lie with the government and not the people. Thus, whether it is garbage on the streets or the threat to human lives from feral dogs, the issue goes all the way to the Supreme Court, which then gives a solution that seems worse than the disease. This is a problem to be solved by local governments, bleeding-heart NGOs and local communities working to find reasonable solutions, not panaceas.
Even at the macro level, we are now told that the state has to create jobs, when governments can only enable, not actually create jobs. But politically it makes sense to hand over meagre government job offers to the armies of the unemployed, when these are only placebos.
Mindset 2: Tax revenues must keep going up in order to fund “development”. As already noted above, the modern state is the most inefficient spender of every rupee earned, having given itself more and more powers after each economic, social or political crisis.
The right way to think is: “Can we achieve the same public goals with less tax revenues?” Here is a radical idea: abolish income taxes for all except those earning very high incomes, say over Rs 50 lakh a year, and leave the rest to spend their incomes as they will. The money will at least partially come back through indirect taxes and private spending—which is like replacing income tax with an expenditure tax, which is less painful.
An alternative, equally radical, idea: Retain the current tax-free level of Rs 12 lakh and levy only a flat tax of 15 per cent on incomes above that. Not only will tax administrations improve, but harassment will taper down. People talk about the desirability of a single rate GST, but why not a single rate of income tax with no exemptions? Don’t the same arguments in favour of simplicity versus complexity apply to income taxes?
The same logic should work with GST (and we are getting there), with super-high rates only for non-merit goods (including petroleum, cigarettes and alcohol). Any loss in short-term revenues can be funded through a slightly higher fiscal deficit and recouped later when the economy rebounds. States which lose money in the short term can be partially compensated by the centre, and not through further extensions of the compensation cess. Also, empowering local bodies to create new forms of income may help: If cars are going to be cheaper, why not levy congestion surcharges or annual road taxes to generate local revenues? Nobody will complain if this revenue is used to improve urban infrastructure, now in a complete mess. The simple point: Visible charges and local taxes must result in visible evidence that they are working for the people.
The worst reason for taxing people more is to say that this is needed for “development”. Barring defence and internal security, where there can be no compromise, most other jobs can be done by the private sector or public-private partnerships. Or even by local bodies and private non-government organisations with donations from the rich.
The Modi government has made tax administration more efficient today, but an even better idea is to move away from the obsession with enforcing tax compliance and extracting more from the most productive segments of the polity.
Mindset 3: Reforms are good, even if done at a glacial pace. While it is true that reforms are good even if they come in homoeopathic doses, there is the law of diminishing returns if done too little, too late. China is far ahead of us because it reformed decades ahead of us, and much faster. It took an axe to regulations, not a shaving blade or tweezers.
Take our own reforms. Labour flexibility is important in order to grow jobs, because employers will not liberally hire fresh workers if they can never be laid off. But if you put off reform for too long, employers will find other ways to manage with fewer workers. Ask yourself: Why is almost no congregation of industry leaders asking for labour reforms anymore, when this was a staple a few years ago at every FICCI or CII conclave? Answer: Today, with digital technology, artificial intelligence and robotisation, labour is not required in the kind of numbers it was much earlier. Labour is an optional extra, and not essential, for the production process, except at highly skilled levels.
Here’s another thought: Job quotas are going to be made redundant by AI, for 80 per cent of what humans can do now can be done by algorithms and automation five to 10 years from now. And job quotas in government will do nothing to improve employment options for the OBCs or SCs and STs, for government jobs are (ultimately) as vulnerable to technology trends as private sector jobs. The parties demanding higher quotas are essentially leading the poor up the garden path and setting the country up for a skill-less disaster.
The only way to create jobs is to enable startups to rise and fall, and allow those willing to learn quickly to upskill and improve their incomes. Rhetorical question: Will employing more OBCs/STs/SCs in government in relatively low or moderate skill areas be better than focusing on teaching the same people skills to use AI? Why not promise these classes a subsidised route to use AI? AI tools do not need high technical skills, only a willingness to learn to use them. Put more hapless people in government jobs using old technology, and what you will get is more regulatory cholesterol. A peon or errand boy sitting in a government office at an above-market salary will create more friction for businesses and citizens.
Mindset 4: Reform means economic reform only. Reforms have got a bad name because people associate the term with job losses and other hardships. But the real reforms that need to be done are political, social, and non-economic. They will only inconvenience the ruling classes, not the masses. Police reform will not cause hardship to any member of the public, nor will judicial reform. Reducing regulations and taking discretionary power away from politicians and bureaucrats will make land cheaper and housing more affordable. It is the arbitrary nature of building permissions that makes housing and infrastructure costlier.
Mindset 5: Atmanirbharta is the same as the old import-substitution policy that failed so badly before 1991
The truth is that free trade is never truly free, and countries make rules that enhance their own interests at the cost of others. If this isn’t the case, why would the world’s largest proponent of free trade now double down on tariffs with a vengeance? One can, of course, blame this on one man—Trump—but the fact is that even the world’s largest economy cannot provide a market for everybody and then balance the books by borrowing heavily from those same people. Something had to give, and it has. The only point is whether Trump could have done it better, without destroying everybody’s faith in the reliability of the US as a trading partner.
The point about atmanirbharta is that trade and service deficits cannot be sustained indefinitely, and when these exceed a certain level, both trading partners must make course corrections. Also, countries need some level of control over their own core economic assets and productive forces. It is foolish to believe that one can depend endlessly on China for rare earths or manufactured goods, or on America to provide a market for our labour-intensive software services.
A balance is required, and if Trump did not precipitate it, someone else would have done so. Hopefully, what Trump has done is force governments to think more clearly about how to serve their own people with fewer resources and by building trust. And that is a good sign.
R Jagannathan is the former editorial director, Swarajya magazine. He tweets @TheJaggi. Views are personal.
(Edited by Theres Sudeep)