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Hard decisions - Views on News from Equitymaster
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  • May 5, 1998

    Hard decisions

    The new buzz phrase in the newspapers is "hard decisions". Everyone wants to make hard decisions these days. The Prime Minister wants to have a chat with other political parties and make sure that the legislative process is not disturbed because of politics. It is a time for nation building, you see. A time for "hard decisions". Of course, the present government was in the Opposition benches last year and they derailed the then government's insurance bill. But that was not a time for "hard decisions", only a time to prove the political vulnerability of a 13 party coalition. Now, this 20-something party coalition government wants the present Opposition to forget about politics and keep quiet as "hard decisions" are being made.

    And what will those "hard decisions" be? Well, let's see. Like every household, the government spends money and earns money. On the spending side, the government spends too much money on guns and interest. Any hard decision on the gun side will mean that this government has faith in the goodness of our neighbours. Given the Hindu-ness of this government and the non-Hindu nature of our neighbours, reducing expenditures on defence is unlikely. That brings us to the interest expense. Interest is a cost you pay for borrowing money. And what is that borrowing caused by? Well, when it costs you 50 paise to generate one unit of power that is given to rural India and when you charge the farmer 25 paise for the power he uses; there is a problem. An expenditure has been incurred, but no income has been generated. That leads to a deficit which, in turn, leads to a need to borrow and, hence, the interest cost.

    Then there is the issue of food and fertiliser subsidies. Here again, the government spends more than it earns and that leads to a deficit, more borrowings, and more interest payments. In FY95, the gross value of output of the agricultural sector was Rs. 294,414 crores of which the total cost to this sector was Rs. 76,525 crores resulting in a value-add of Rs 223,954 crores. For every Rs 100 a farmer earns, his cost of production is Rs 26 and his profit is Rs 74. The costs to the agricultural sector of fertilizers, pesticides, insecticides, irrigation charges, electricity, and diesel was Rs. 16,194 crores - 5.5% of the total value of output of this sector. The subsidy to food and fertiliser is about Rs 15,000 crores. Think about that for a moment. Dwell on it. Would you like to be in such a business? I would. And then, on top of it all there is no tax on your income. Forget software stocks; invest to become a farmer!

    Even if one factors in the poor people living on farms who cannot afford to pay for many of the costs of production, I find it difficult to believe that the farmers do not make huge profits. They should be charged more money for the costs of production. For fertilisers, for electricity, for irrigation. Just as city people should be charged more for roads, water on taps, and parking spaces. And the farmers should pay taxes just as city people pay taxes - or are supposed to. But do you think that this "hard decision" will be made? Hmm, I wonder how the coalition partners of this government would feel about raising the cost of inputs to the vote-giving farming sector.

    And then we have the government employees. They just got their reward a few months ago. Do you think that anyone will take that away? No, that "hard decision" to reverse the Pay Commission awards won't be made by anyone up there in Delhi.

    But many other "hard decisions" could be made. The government gets money from taxes. Mrs. Indira Gandhi's government was stupid to have raised taxes to over 100% on the margin for the wealthy. I remember the late Mr. D. M. Harish, the leading income tax lawyer, telling me many years ago how his clients had to sell assets to pay all their income, estate, wealth, and god alone knows how many other taxes. High tax rates, encourages black money and adds to corruption. Realising this, the trio of Singh, Singh, and Chidambaram cut taxes in their budgets. Those were "hard decisions". If in this budget, the taxes are raised, make no mistake about the fact that it was the easiest decision of all to have been made, not a "hard decision".

    If this government is honest in its own desire not to play politics with the nation's economic affairs, it will leave Mr. Chidambaram's budgets largely untouched and begin doing what every Economic Survey has spoken about for the past 5 years. The Rs 15,000 crore subsidy on food and fertilisers should be eliminated and taxes should be collected from wealthy farmers. Those are the "hard decisions" to be made or else we the voters will have the easiest decision to make when we vote again in 1999.



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