Growing Government Revenues

Growing Government Revenues

India is now at the top of the heap globally in terms of GDP growth at 7.5%, a full percentage point higher than the six times bigger economy of China.

And yet, even with a PPP rating of $7.5 trillion ( $2 trillion, in flat dollar terms), we seem to be much too poor to finance our own development, let alone take our proper place in the comity of nations.

The prime minister is frantically looking for, and fortunately succeeding at, garnering unprecedented levels of FDI (enough to wipe out our CAD by itself), during his hectic foreign travels.

This, even as China uses its deep pockets as a potent instrument of its foreign policy in many parts-Nepal, Pakistan, Sri Lanka,  several countries in Africa, just to name a few.

India has no earthly hope of keeping up with Chinese largesse or developmental work, even though we too, make modest contributions in places like Afghanistan and elsewhere in the SAARC region. Our role in the UN is also constrained by our finances. All of it put together affects both our credibility and stature in the broader international arena, and even in our immediate neighbourhood.

Whatever gains we have made is because of difficulties being faced by the developed world making our relative buoyancy stand out as a ‘beacon of hope’ in a troubled world. And then there is the relatively calm domestic security situation that is attracting even West Asian countries like the UAE, Saudi Arabia and arch rival Iran, towards India.

But is it really intractable poverty, or a paucity of good policy that is keeping India down?

The Current Account Deficit (CAD) is wiped out, thanks also to vastly lowered oil bills, and the fiscal deficit too is tightly controlled at 3.5% of GDP, but our revenue deficit is immense and the biggest economic dampener in our national balance sheet.

We cannot, it seems, generate enough money and resources to fund ourselves, let alone our aspirations and ambitions.

The finance minister allocates inadequate amounts to a hundred things in every union budget, in almost token recognition, because  that is all he can afford. The States are always complaining, and even our defence budgets are not supported properly.

Our indirect taxation, which the actually government survives on, is too high. It hampers commerce and industry when combined with rampant petty graft and corruption that add to costs. And our direct taxation applies to too few in the population. Also, our inadequate and antiquated infrastructure mars our efficiency, quality and competitiveness.

What is in the way is a lack of political will, to grasp the nettle and solve this gross imbalance.

Still, we may be heading in the right direction, not so much because 0f empty government threats to bring back black money and arrest capital flight, but because of more modest but extremely far reaching structural initiatives.

We are indeed trying very hard to improve our roads, ports, airports, railways and freight corridors. Along with alternate sources of energy such as nuclear power and solar, we are also clearly headed towards becoming electricity surplus soon. This, just as we became food surplus after the concerted efforts of the Green and White Revolutions.

We remain essentially food surplus even today, despite a much increased population. But again our food storage/processing, material handling abilities, etc. continue to be largely primitive, leading to vast wastages and spoilages. 

Financial inclusion at the bottom of the economic pyramid via the Pradhan Mantri Jan Dhan Yojana  has garnered 200 million new bank accounts of the poor and an aggregate of $ 4.8 billion in deposits as of February 10, 2016. Perhaps this $4.8 billion was essentially in cash, from India’s parallel black economy. It has now entered the formal banking system. Distribution of subsidies directly into these very same bank accounts by linking it to the bio-metric processed Aadhar cards, is another step to keep the white money subsidies paid by the government white and productive in the economy.

And now with the launch stage reached for the 10 new small banks, the 11 new payment banks, licensed over 2015 by the RBI, more deposits, loans and payments will be made through the formal banking system.

These will not involve the big players and banks struggling with scandalous levels of NPAs. It is directed instead to millions of  heretofore unbanked small traders, micro, small and aspects of medium-sized enterprises, a good deal of the unorganised sector, small farmers, migrant workers etc. Loan sizes will be in the region of Rs. 25 lakhs each for at least 50% of them.

While most poor people fall below the radar when it comes to Income Tax, their money too is now going towards enriching the nation, even as they are provided deposit/credit facilities and insurance, via millions of new branches in places that had no banks.

The payment banks will operate in collaboration with post offices, mobile telephony operator networks, supermarkets and so on. Together, it brings the financially invisible, anywhere up to half the population, both in urban and rural areas into the formal grid.

Most of these people are in no danger of being brought into the tax net via stealth, because they do not earn more than the current exemption limit. In fact, only 3% of our 1.2 billion are actually PAN card holders. Income Tax and its cousin Corporate Tax therefore need to see a vastly increased footprint in the interests of equity and justice, or be done away with.

So either more people, currently exempt, such as the rich farmers and companies catering to the agricultural space, need to be brought into the tax net, or the Income and Corporate taxes need to be abolished in favour of a near universal Expenditure Tax instead.

 This Expenditure Tax idea has been mooted in the run up to the general elections of 2014. It was suggested that it be applied to all bank transactions above a minimum threshold limit, and be miniscule in size, in the order of 0.2% of the value of each transaction.

With rising costs of big government that is the norm here, and the relentless pressures of awakened aspirations, the old methods and thinking will neither suffice nor sustain.

 It is true that a reliance on technology will reduce operating costs in many instances, but grow our revenue base, we must.  We cannot keep flogging the same 3% and expect adequacy!

So revenue generation too must become more inclusive, of the many who can afford to pay a small expenditure tax. This will painlessly set right the nation’s chronic revenue deficit and unleash unprecedented double digit growth.

For: The Pioneer

(1,106 words)

April 12^th, 2016

Gautam Mukherjee