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Posted on 31 December 2011 |
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Economic twists of the year
Bharat Jhunjhunwala examines how India backpedalled in a busy year
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Illustration: Tim Tim Rose |
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ECONOMIC REFORMS have been turned on its head under the leadership of our prime minister, Manmohan Singh. Purpose of the reforms was to reduce the role of the government, whittle the bureaucracy, put the economy on a high growth trajectory and create enough jobs to secure people’s welfare. The logic of reforms has been twisted, however, that role of the government is being increased and people are being taxed to support the bureaucracy. Here are three examples that make the point.
DISINVESTMENT OF PSUs: Most of the PSUs were established between the 1950s-70s. Private businesses did not have the capacity and experience to establish such entities then. They did not have the necessary capital or the technology, neither a risk taking ability. It was necessary for the government to step in and jumpstart the process of industrialisation. But, those circumstances have changed since then. Private corporations like the Tatas and Reliance can now put up plants as large as those in the public sector. While PSUs are ridden with corruption, its officials in are appointed and promoted at the beck and call of the ministers, and PSUs are raking up mammoth losses. To sustain these losses, the government ate levying taxes on the citizens, so that they provide monies to the PSUs to meet the deficits. A loss-making PSU, Air India is being salvaged by carving out a package a bailout. A PSU meant for the welfare of the people have become a burden.
The straightforward method of overcoming this problem was to privatise the PSUs like Air India. Why doesn’t the government sell the majority shareholding to private businessmen, and give its control over the management, as was done with Videsh Sanchar Nigam Limited and BALCO during the NDA regime. The capital raised through the sale could be used to reduce the burden of tax off the people. As a result of these disinvestments the total tax share of GDP had declined. The prime minister has wholly reversed the process. He is propogating disinvesting of minority shareholdings of the PSUs instead of privatising them. This has lead to the deepening of the government role instead of reducing the same. Ownership of majority shareholding with the government means that control over key policy decisions such as appointment of a managing director would continue to rest with the ministers. The proceeds of disinvestments would provide larger money to the government for making expenditures. Privatisation has lead to reduction of government role also tax burden on the people. But the government has twisted privatisation to maintain its position and power so that they can continue to impose more taxes on the people.
GOODS AND SERVICES TAX (GST): The centre today collects excise duty and service tax under varying rate slabs and on different commodities and services. This has led to disputes between businessmen and the tax collector. The way these two entities perceive taxation is always at a loggerhead. Businessmen contend that a particular commodity should be taxed at, say, 8 per cent; while the tax collector pegs it at 16 per cent. Such disputes lead to litigation and diversion of people’s energies from productive works. The government has proposed to tax nearly all commodities and services barring few exceptions at a single tax rate under the GST regime. Idea is that this will remove roadblocks to economic activity, increase rate of economic growth and create further jobs.
What is likely to happen is quite different. Litigation will reduce and economic activity will become smoother. However, there is another side of the story. The other side is that goods consumed by the poor and the rich; and goods produced by labour and capital-intensive technologies will be taxed at the same rate. This will lead to the increase in rate of taxes on goods consumed by the poor and produced by labour-intensive methods. For example, the rasvanti and bottled soft drinks; and handloom and powerloom will be taxed at the same rate. This increase in tax rates would have a negative impact on the poor which in my assessment be much greater than the beneficial impact of increased economic activity.
That growth will lead to people’s welfare. But growth needn’t translate into jobs. Between 2000 and 2008 only 11.8 lakh jobs were created in the organised sectors. This amounts to 13.6 per cent increase. However, the GDP rose by 109 per cent in the same period. Therefore, economic growth may not translate into jobs. Plenty evidence of increase in inequality is available. Therefore, GST may lead to anti-people growth. The pro-poor tax policy has been contorted that has morphed into the opposite.
WELFARE STATE: There was widespread illiteracy and lack of schools at the time of Independence. The government decided to establish schools in distant villages to make education accessible to one and all. Fees were kept low to provide incentive to the poor to send their children to school. Similarly, government expenditures were increased on health services. These measures were entirely laudable and had a positive impact on the people. However, circumstances have changed dramatically since then. People have understood the importance of education. Private schools can now be found even in remote villages. Results of private schools are often twice better than government schools, even though, salaries of teachers are about one-fourth. Government schools are in tatters. Pass rates are about one-half of private schools because teachers have no motivation to teach. Ministers are reluctant to take action against inefficient teachers because they fear the electoral might of the teacher’s lobby. Poor children go to government schools as tuition fees are low, but that more than often produce poor results, often children failing year after year.
A straightforward solution to this problem is to disband the government school system other than in the remotest villages; and distribute the money being spent on government teachers to school-going children through vouchers with which they could pay the fees of school of their choice. Such policy would have provided good quality education to the poor students without imposing additional financial burden on the government. Instead of implementing such a policy, the government has a twisted sense of logic and provides for enhanced inducements to the poor who continue to send their children in non-performing government schools. Children attending such government schools are provided with ration, mid-day meals, free books and uniforms. By providing a string of such sops, the government ensures that children remain uneducated.
Manmohan Singh should recognise that the true objective of the economy is welfare of the poorest person. Twisted logic advocated by him will soon get exposed with corresponding results.
Bharat Jhunjhunwala is a former economics professor at IIM Bengaluru.
bharatjj@gmail.com
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