Race to the Middle

Race to the Middle

The economic differences between the principal national parties is unintentionally narrowing. Witness the new reformist push from the Government at the fag- end of its tenure. And look at the declared and proven market- friendliness of the NDA’s tallest leader Mr. Narendra Modi.  If Mr.Modi heads the next GOI, we are sure to see fast- track development. Rashtrapati Bhavan, under President Pranab Mukherjee, is moving to the Right too, judging from the swift thumbs down to every murderer’s mercy petition.

Though the relentless rise in the retail price of diesel, petrol and LPG only shows that the Government is unable to sustain its subsidy regime. And the Assembly elections coming up should prove to be a referendum on the vast price rises that have resulted. But subsidies are a failed socialist idea that is of a piece with Welfarism. However, human nature being what it is, you cannot blame the public for getting used to benefits.Nor blame the people for being upset when those privileges are withdrawn.

But from a macro point of view, it is fortuitous that both sides seem to be racing towards the middle. Because it is only right- of-centre economics that has any chance of promoting the growth in GDP we need for our very survival. A survival narrative which is under threat from a retro-revival of the “garibi hatao” politics of the seventies, riddled nevertheless with a very UPA II style corruption in its delivery.

The split-personality, economically speaking, in the UPA II economic thinking, may be emanating from populist regional  parties in the coalition, but also the powerful,  if unelected, and somewhat extra-constitutional, National Advisory Council (NAC).

The NAC is allegedly filled with die- hard Communists, and welfare economists of the Amartya Sen type. They are credited with thinking up the Food Security Bill, for example. But implementing a scheme that will give subsidised food to nearly a billion people, with a 2% rate of growth in agricultural output per annum, is not at all realistic. And this combined with a 5% GDP rate of growth overall is simply unsustainable.

Where we can grow the economy substantially, in infrastructure and defence production, we are going very slow because of the political dangers associated with the allocation of mega projects. On Welfarism however, we are going much faster. But how do we pay for the bounty without a corresponding growth in earnings or are we prepared to go bankrupt?

Our income tax base is narrow, and the only people trapped in its rigours are corporations in the organised sector and its employees. Owners and entrepreneurs, farmers and the unorganised sector, have multiple options on their tax treatment, as do professionals of every kind.

On the eve of probably the last full budget before the country goes into general elections the Government is again thinking on how to grow the income tax base. But the fact is, income tax itself is not cost-effective in terms of administration.  A flat annual tax, modest in its ambition, no more than a few thousand rupees annually, on every citizen who is bank account holder, would probably yield more money in aggregate in a highly populated country like ours, than the immensely complicated tax provisions do.

But we have inherited our tax thinking from the British when they were dominated by the Labour Party post WWII, with its Socialist attitude that the rich should be brought down to more equitable levels. But, in the UK, people became tax exiles instead, because the rich always have options.

As for indirect taxes, we already have some of the highest incidence of it in the world. Practically all goods and services are taxed multiple times from the raw material stage onwards making them uncompetitive compared to imports. And yet, all this money in a large domestic  economy does not suffice. The reason is that we have a very inefficient fiscal administration, full of leaks and corruption. In addition, we refuse to let in foreign capital and methods on an unfettered basis in most areas of business. So, we end up practicing a negative, stick- in- the- mud policy, that continually makes matters worse. Meanwhile, the size of our inefficient Government keeps growing.

Our financial regulatory institutions, such as the Finance Ministry and the RBI in particular are often at loggerheads, and muddle policy direction at the best of times. Bold new ideas to break out of a chronic “poverty mind-set” are missing in action.

The next general election must bring about a drastic change in our economic thinking, or we can forget about becoming a developed country until we do so.  

(769 words)

February 17^th, 2013

Gautam Mukherjee