Cut tax burden on the poor: Lord Desai

Thursday, January 19, 2006 21:11 IST]
http://www.dnaindia.com/report.asp?NewsID=1008430&CatID=4

At a time when the Left is attacking liberalisation as being anti-poor, eminent liberal economist Lord Meghnad Desai argues forcefully for reducing the taxation burden on the poor and pushing it on the rich. In an interview with Seetha, Lord Desai talks about what kind of a budget a liberal economy needs.

What should be the priorities of the Budget?

The most rapid elimination of the revenue and fiscal deficits. A good husbanding of public money and avoidance of deficits is not a reactionary idea.

How is this to be done?

Expenditure has to be cut to the bone. Have a 10-year freeze on public sector recruitment. Any pay commission settlement should only be in the form of indexation of public sector salaries. There should be no upward drift. Then cut some taxes and increase others. I would cut commodity taxes. I am a great believer that whatever taxes fall on the poorer sections should be cut. The poor consume more than what we think they consume. As far as possible on the non-luxury end, cut tax, put it on luxury, on things like capital gains from property transactions.

But isn't that a somewhat socialist solution?

No. Even for a liberal, I don't see why one should tolerate excessive income inequality when it does not contribute to further growth.

I do not buy the Keynesian argument that we need consumption. We're not in a Keynesian situation. It is quite possible to say we don't want to stop anyone from buying anything, but we're going to tax. Especially on capital gains from land and property deals. The United Kingdom has it. There are certain concessions, certain thresholds.

The Left has been talking about tax on five-star hotels, discotheques, malls, inheritance tax etc.

Well, they don't want to cut expenditure. Just put a VAT on all this. Inheritance tax is a separate issue. It will be very complicated in the Indian context because of the Hindu property laws etc. Very often this burden falls on the salaried, who cannot avoid by creating other shelters. Overall, I would like expenditure to be cut, some taxes to be raised and others to be lowered.

If you are in favour of reducing indirect tax, then that would involve raising income tax and corporation tax.

Increase in tax rate does not increase the tax intake. The right approach is to increase the base. This issue of taxing agriculture. The government brings in so many constitution amendments at the drop of a hat, they should bring something to make taxing of agriculture possible. They should be able to tax wealth and capital gains arising from land transactions. A lot of urban income is being disguised as agriculture.

Services are undertaxed. That's another big area. Consumption taxes have to be justified on grounds of equity and contribution to growth. Because the poor don't have certifiable income they pay other tax. I am really very concerned that the very poor buy something, they don't know they are paying tax. Why are we robbing them all the time by making them pay taxes.

We need to examine the incidence of tax by income classes and try and see how we can reduce the burden of tax on the poor. What we need is more compliance and easier implementation. Why not have self reporting. It is done in the United Kingdom. You should trust people. It will work.

What about expenditure?

The government machinery has to cost less. The cabinet is too large. The government should get out as far as possible from productive activities and privatise as much as possible. Instead it should spend on purchasing health and education.

'Growth doesn't trickle down, it pulls up'

Saturday, January 21, 2006 22:14 IST
http://www.dnaindia.com/sunreport.asp?Newsid=1008893

India's post-1991 development strategy has been criticised by the left for being obsessed with growth and that the trickle down strategy doesn't work. Jagdish Bhagwati, professor of economics and law at Columbia University, has little patience for such criticisms. Bhagwati shines an optimistic spotlight on making India's growth sustainable in the long run. The growth strategy is not about trickle down, he says in this interview with Seetha, it's about pulling people up the economic ladder.

Is the Indian growth story on track and sustainable?

Growth is now more or less on track. That doesn't mean you won't get ups and downs. You can't say it's going to be sustainable over 15-20 years. The internal economic policies are moving in the right direction. Certain changes have been made; others still need to be done, but I'm optimistic. The present government is moving as much as it can in the right direction. This is a coalition with the communists and I'm particularly worried about the socialists inside the system. Everybody thought they were displaced, but they've all come back because of the 2004 elections being misinterpreted as a vote against reforms.

Wasn't it?

It was a vote for reforms. Once people see they can get more, they want to ask for more and they do it politically through the suffrage system. The fact that the incumbent government was pushed out was itself a sign of major changes in the system, that people are not going to sit around and relying on some exogenous, paternalistic events doing things for them. The demand for reforms from the poor, everybody, will continue. I don't see any reversals taking place. It's just a matter of adding to reforms than subtracting from them.

So, the effects of growth will trickle down with the right kind of reforms?

It is wrong to look at this particular growth strategy as a 'trickle down' strategy. That only the big fat guys grow and somehow when they're eating at the banquet, some crumbs will fall down to the poor and people who are not part of the growth process. That suggests it is a very conservative, neglectful-of-the-poor kind of strategy.

I prefer to call it an activist, pull-up strategy. When you have growth, it pulls up people. You go out on the streets and there is so much activity everywhere. That is good. And who is coming there, working in all those stalls and service sectors? It is the poor. You and I don't go there. They get possibilities. It translates into their income and that's what you're getting in the statistics.

But the fact that growth works doesn't mean that you can't argue for the other things that you believe. In my view, you need supplementary measures to draw more people into employment.

But how do you ensure that they don't become paternalistic and how will the kind you want be different from the present ones?

Some element of paternalism is inevitable. Take the employment guarantee scheme. We know from the experience of Maharashtra that muster rolls can be captured.

That's because employment is both input and output. It can be easily cheated upon, despite the panchayati raj. Focus on infrastructure. If you are building roads, you have the possibility of monitoring something. A road has to be built. We will have to keep experimenting. The experience will be different across different states.

There are a variety of things we can do. Like adjustment assistance programmes if poor people are going to be thrown out of employment because of restructuring. And they work reasonably well

....but there is also a lot of corruption.

Ultimately everything is subject to corruption. Politicians get into politics for altruistic reasons but because of the patronage which always goes with it, they will do something wrong.

We had a relatively high integrity system in the 1950s. But with this licence raj and so on, we created so many opportunities for wrong policies that now it's hard to reverse it.

But you shouldn't just put up your hands and say nothing is possible. You have to keep trying. Now you have panchayati raj, which is a little better than before. We can think of other monitoring mechanisms. We have the press, the non-government organisations, public interest litigations. You have more checks and balances now than 30 years ago.

Should government spending be focussed on the social sector?

We always wanted spending on the social sector. Look up the first and second Plans. We just didn't have money to spend on it. That we've neglected social sector spending is a fact of life.

Isn't it getting more neglected post-liberalisation?

On the contrary. The constraint on being able to spend was always money, not the fact that some people were wilfully neglectful.

You have to think of the direct impact of pulling people into gainful employment and then the indirect impact because you then earn the revenues that you can then spend on social sector. For that we need the reforms. You have to build up your economic strength and success.

End poverty? Growth alone can do it

Seetha

Wednesday, January 18, 2006 21:14 IST

http://www.dnaindia.com/report.asp?NewsID=1008260&CatID=4

MUMBAI: Taking on the critics of a growth-centred development strategy, eminent liberal economist Jagdish Bhagwati reiterated that growth is the only way to end - or at least reduce - poverty.

At the same time the professor of economics and law at Columbia University, acknowledged that supplementary policies are also needed to ensure that the laggards also move forward. He was delivering the Sukhamoy Chakravarty Memorial lecture on "India's development strategy: which way out," jointly organised by the Sukhamoy Chakravarty Foundation and the Indian Council for Research in International Economic Relations.

Another liberal economist, Lord Meghnad Desai, speaking at a different forum - the sixth editor's conference on social sector issues - hit out at the idea that only the state can provide protection against the market. A lot of this is based on aggrandisement by whichever group has captured power, he said.

"The bulk of India's workers live in the free market. They have no protection and submit themselves to market forces every morning."

While admitting the need for supplementary policies, Bhagwati wasn't about to concede any ideological points to the socialist economists.

Refuting the criticism that the strategy of obsession with growth didn't care for the poor, he argued that no one was pushing for growth as a target or objective.

Economists were always treating it as a way to achieve the other objective - to remove poverty. "It is very insensitive not to have it as an objective," he said. If poverty didn't get reduced, it was because there was no growth for decades and not because growth was seen as a target.

"Growth strategy is the clear instrument of doing the job," Bhagwati said. He strongly defended liberal economics against criticism that it was elitist and did not care for the poor. The fact that additional variables and policy instruments were needed were always understood, he said.

He also took on the charge that social sector spending had been neglected. The first two plans, he pointed out, were full of proposals to increase spending on health and education. If spending got neglected, it was because there was no money.

He made light of the suggestion that governments should spend less on defence. "Everybody says they can spend less on defence, but they don't." There will always be a security issue that comes up which will make out a case for increasing - or at least not reducing - defence spending.

Desai, for his part, felt the state could only be an enabler. "We have to see the human development budget as removing constraints on families," he said. "Whatever development happens, happens because of the way households spend. Development will not fall from the sky. It is not a function of capital-output ratio."

He was also impatient with the criticism that rural distress had increased because of liberalisation and globalisation of the Indian economy. "Rural distress is not a new or a purely Indian phenomenon. It is necessary to understand whether such behaviour is specific to certain areas or crops." He was also not sure if changes in interest rates could address the problem.

A blackmail a day won't keep the BJP at bay

The Left is back to what it does best - blackmail. The latest relating to the Indian stand on Iran's nuclear programme. According to the Indian Express, at a joint rally in Lucknow on November 12, the Left parties, the Samajwadi Party and the Janata Dal (S) warned the government to change its stand. Or else, Prakash Karat, the middle-aged firebrand of the CPI (M), warns "if the government does not listen to us and see reason, we will raise the issue in Parliament and force the government to change its stand."

I am not getting into the merits of the Indian government stand on the issue. There can be endless debate on it. What's more important is how the Left is constantly threatening the government on issue after issue. No issue is sacrosanct or out of bounds for them. After having successfully stalled all economic reforms, they are now turning to foreign policy. Not for a moment are they bothered about embarrassing the country.

The Left is entitled to live in its outdated world and swear by its antiquated ideology. It is entitled to air its bizarre views. Because the left parties are supporting the government, they are entitled to persuade it to listen to them. But they - a minority partner in the coalition and one which is not even in the government - cannot keep resorting to threats and blackmail. If they are so unhappy with the government, let them withdraw support.

The Congress cannot be happy with this situation - the grand old party with a national reach reduced to being a bit of a puppet in the hands of a group of five parties with sizeable clout only in two states.

So complete is the hold of the Left over the Congress and the government that anyone with a grouse against the latter promptly runs to it for help, alleging that the United States is behind the problem. Look at the Left's shameful defence of Natwar Singh. The same Left which wanted finance minister P Chidambaram's scalp because his hugely successful, taxation law specialist wife had accepted a brief from the income tax department! Clearly, corruption is to be condoned, even forgiven, if you oppose the Americans or the BJP. But if you believe in free markets or share thoughts even remotely similar to the Americans, or are seen as being soft to the BJP line of thinking, you deserve to be thrown into the dustbin.

And if you think that is ridiculous, listen to this. Students of Jawaharlal Nehru University protested against Prime Minister Manmohan Singh unveiling a statue of Jawaharlal Nehru, because Singh is following neo-imperialist policies. The current Congress Prime Minister is unveiling the statue of another Congress Prime Minister and the left parties will have none of it!

It's high time the Congress calls the bluff of the Left. Or else dump it before it is reduced to a laughing stock.

And the Left should realise that the more it indulges in this kind of mindless blackmail, the only gainer will be the BJP. It was also subject to all kind of pressures of coalition politics when it led the National Democratic Alliance government. But the NDA never became a joke the way the United Progressive Alliance has. If things continue this way, the BJP may well succeed in coming back to power, this time on its own steam.

Allah, save the Indian Muslims

In all this drama over Iran and the left's blackmailing tactics, something more outrageous - and downright foolish - has got ignored. Karat, in trying to drum up support for the Left stand, says there is a close Shia link between Lucknow and Teheran, according to a report in the Indian Express. A Shia leader, Mukhtar Anees, says that after Ayodhya, Iran is the biggest issue for Muslims. It is not poverty; it is not education; it is not jobs; it is not even Gujarat (the other issue on which the left brigade turns apopletic); it is not any other issue affecting Indian Muslims within India. It is Iran.

At a time when Indian Muslims are constantly fighting the image that the rabid right is trying to give them - that they have extra-territorial loyalties - is this the kind of statement that is needed? Does the ordinary Indian Muslim really care about Iran's nuclear programme? Do Messrs Karat and Anees really think that the Muslims will thank them for this statement? Not only are these worthies playing into the hands of the Shiv Sena-sangha parivar, they are also exposing the Muslims to more taunts and jibes. Allah, save the Indian Muslims from the politicians who claim to speak on their behalf.

Saying it like it is

Here's a wonderful straight talking piece from the Indian Express

Terror's Jeru-Salem

Why in India, unlike in Israel, a terrorist means more than those he murders

SAUBHIK CHAKRABARTI

Posted online: Monday, November 14, 2005 at 0000 hours IST

http://www.indianexpress.com/full_story.php?content_id=81918

Abu Salem looked good in Saturday's Page 1 photographs. The security officials accompanying him looked a little bedraggled. For the families of the 257 Mumbaikars who died in the 1993 bomb attacks, that would have seemed wholly appropriate. For them, the extradition of Salem is not, as it is for the Indian establishment, proof of the state's persistence and cleverness. It is a reminder that the Indian state is soggy soft when it comes to responding to attacks on Indian citizens.

This may seem unfair not only to security agencies but also to neutral observers. There was after all months of patient, often hard-nosed diplomacy that got Salem out of Portugal. There is also the continuing efforts to get Dawood Ibrahim, who is a bad guy for even the Americans now. Didn't we also send a list of 20 most wanted mischief makers to Pakistan? Didn't we catch the chaps who attacked Parliament and then massed our army along Pakistan's border? Hasn't Manmohan Singh called Pervez Musharraf to express his strong displeasure at indications of "external involvement" in the pre-Diwali Delhi blasts? Aren't security agencies already hot on the trail of LeT terrorists thought to have planned and executed the pre-Diwali attacks?

All this and more surely don't indicate a soggy soft state? It does because all this is not the point. The point - this is the easiest to understand when any of us is a direct victim of terror and not a sympathetic observer - is how does the state fundamentally view an attack on its citizens.

How instinctively outraged is the Indian state when a bomb kills 40 holiday shoppers in a market? How deep is the feeling that such an attack is utterly unacceptable because it holds up to ridicule the state's primary remit - protecting citizens? To what extent does the state accept the argument that no matter how important the relevant policy/political constraints and strategies, the horror that follows the death of innocents and the compulsions that follow the challenge to authority must be the first inputs in any response? In short, does the Indian state have moral capacity and pragmatic courage? To put it even more briefly, is India like Israel?

This is, of course, an awfully politically incorrect thing to say. But the point here is not Israel's many sins of insensitivity towards the Palestinian cause. Just as the point about examining the Indian state's DNA is not this, that or the other investigative action. The Israeli state may really push the envelope when it comes to ignoring the suffering of another people, but it is almost matchless when it comes to empathising with the suffering of its own people. The moral capacity to feel deeply outraged and the pragmatic courage to do something about it is in the Israeli state's DNA. The Indian state lacks that particular trait.

It is fashionably "liberal" (a misnomer, as we shall shortly see) to say that the lack of this trait makes the Indian state a better entity. But those who are forever arguing that we must search for the roots of terrorism and not search and destroy the perpetrators of terror forget, or don't care, or don't know, that the state's moral and practical incapacity in the face of thugs-with-a-cause is symptomatic of a greater failing: The state doesn't respect citizens, it doesn't respect their liberties.

If the state that governs us doesn't deeply care if we die because of a terrorist bomb, how can it care if in our lives so many rights are circumscribed. Think about the callousness you have encountered from so many representatives of the governing class. Think about the boorish cop, the arrogant bureaucrat and the venal politician. Almost none of them subscribe to the foundational principle of a civilised society - that every individual and his rights count. That is why a state that is soft in its response to terrorism is not liberal, if we take liberalism to principally mean the recognition of the individual.

That is also why the state's responses to natural disasters are so horrendously ineffectual in India. We are not a sub-Saharan basket case with meagre resources and zero institutional capacity. The Indian state doesn't do as much as it easily can because the people are on its radar screen as an undifferentiated mass. Two thousand killed in an earthquake, 20 killed in a terrorist bomb and two killed in a hell hole of a public hospital - they are all, in the most dreadfully apt meaning of the word, statistics.

The only thing that has changed, although partially, in the state's treatment of its citizens is the scope of economic liberty. This is not a heartfelt change - as politicians and bureaucrats prove daily when they take decisions or talk reforms. But it's a change that was forced by a crisis and is perhaps irreversible.

The state may not particularly like the fact that a phone, a cooking gas cylinder, a car, or a home, is no longer an unattainable fantasy for many of us. But the cost of reversing the process that made these things possible scares it.

There in lies a clue about a possible corrective to the Indian state's responses to terrorism. The state has to be apprehensive about the cost of treating dead Indians as dead sheep. Who can scare it? We can. How can we scare it? By getting angry.

Treated for decades as a big blob of humanity, we have lost most of our capacity for anger. Sure, we get angry when power bills go up and when law suits threaten live cricket telecast. Sure, we get angry sometimes during elections. But we don't get angry at the quotidian reality of the state's brutal indifference to us as individuals. If we did, the day after the pre-Diwali blasts, Delhi would have been seething, not shopping. The pundits called it Delhi's resilience. Resignation was more like it.

No wonder Abu Salem looked so cool is those photographs. He knows that he means something as an individual to the Indian state. The 257 Mumbaikars he allegedly helped murder meant nothing.

When the capitalists wooed the comrades

Here's something I wrote about in DNA, put off as I was with the way Mukesh Ambani, Swraj Paul and L N Mittal went to pay their respects to the CPI (M).:

Currying favour with the comrades
Seetha

Monday, October 24, 2005 20:11 IST

http://dnaindia.com/report.asp?NewsID=7003&CatID=19

When all those business barons descended on AK Gopalan Bhavan (the headquarters of the Communist Party of India-Marxist) were they really, as we have been told, attempting to understand the Left position on various economic policy issues? Or were they merely trying to buy peace with a party that is being seen to increasingly influence - nay, dictate - the economic policy of the United Progressive Alliance (UPA) government?

Going by the past record of corporate India, the latter assumption wouldn't be too far off the mark.

Take the case of the Swatantra Party, the only party to champion the cause of free enterprise at a time when socialism was the dominant ideology. One would have thought the party coffers would have been flush with funds from all the big business houses. Perish the thought. The Swatantra was always strapped for cash. Businessmen did contribute to it; but in dribbles.

The bulk of the funds went to the Congress Party, the party that was driving all those socialist policies. Even the Tata group - among the few business houses that supported the Swatantra openly and wholeheartedly - gave only one-third of its political contribution to the party. The other two-thirds went to the Congress. No wonder, a chronicler of the party's history, Howard Erdman, commented that this was a rich man's party which no rich man was willing to give money to.

Little seems to have changed over the years. As Indira Gandhi steered the country's economic policies further and further to the left, Indian businessmen preferred to operate under the table and shovel funds into party coffers and to individual politicians to get their work done. So much easier, isn't it, to swing a licence here and a permit there than compete fairly.

Businessmen across the world may make noises about being stifled by government interference in the economy, but all of them prefer a situation where they are in a position to tweak policies to their benefit.

Interesting that Mukesh Ambani, in his meeting with CPM heavyweight Sitaram Yechury, should have appreciated the party's stand on certain aspects of globalisation and have commented that there is no need for the country to go in for "mindless foreign investment". It would be interesting to know what Ambani meant by 'mindless'. Something that adversely affects the interests of the Ambani empire, perhaps?

Remember the Bombay Club that came up when the Indian economy was being opened up in 1991? The group lobbied against foreign investment, using the specious argument of the need for a level playing field for Indian businesses. Many of the worthies behind that campaign changed their tune when they realised their businesses could also benefit from globalisation. But the lobbying against competition never ceased.

When the automobile policy was being revised around 2000, many of the foreign car manufacturers who came into India when the sector was opened up in 1994, were at the forefront of lobbying against the import of second-hand cars. The current campaign against foreign direct investment in the retail sector comes as much from organised Indian players as by politicians.

When Arun Jaitley was information and broadcasting minister for a brief period, he used to recount with glee how owners of newspapers which used to carry scathing editorials criticising the government for various restrictions on foreign investment would come to him to lobby against foreign investment in the print media. Take any sector of industry - even those like telecom, which benefited hugely from the liberalisation of the economy - and tales abound of players manipulating government policy to stymie competition or incumbents ganging up against new entrants.

But how sustainable is this, from a business point of view? Wheeling-dealing and lobbying are hardly cost-less transactions. There is a price to be paid - in cash, cheque or some other favour - especially around election time. It definitely won't show on the books of companies, but surely such unrecoverable costs will impact bottomlines in some manner? Wouldn't there be a larger cost to be paid somewhere, by someone?

Also, is it worth it? Business environment keeps changing and today's gain may not be of much use a year later. That time a competitor may be more successful in getting its way on something. Remember, the intense lobbying in the telecom sector in 2002 over WLL and fixed line services was sparked off by new technologies completely transforming the playing field. Sneaky lobbying only vitiates the policy-making environment and has an adverse pass-through impact on the economy as a whole, as inefficient players manage to negotiate preferential treatment and protection for themselves. The country has paid a price for that. Can it continue to do so?

It might be far better for the industry to stand up and take a stand against mindless and short-sighted populism. Let them generate informed public debate and build up awareness on issues. Decisions affecting their operations have an impact on the entire country, and people have a right to be informed. Clearly, it's time to jettison what Minoo Masani called the "cowardly and supine attitude of big business in India."