Itís about expenditure, not taxes - Views on News from Equitymaster

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Itís about expenditure, not taxes

Jun 9, 2001

There is a lot of apprehension about India's low tax to GDP ratio. Indeed, as compared to a tax to GDP ratio of 8.6% in 1994, the current ratio stands at 8.8%. That surely is not a significant move. But rather than exploring ways to squeeze out more from what is probably one of the worldís poorer nations, the government should first look at getting more out of every Rupee it collects.

  • Tax collections stagnate

    Ofcourse, Indiaís age old practices are hardly justifiable. Consider this. Income from agriculture is exempt from tax. On some grounds this may make sense. But how is it justified to provide to this already favoured class inputs like power and credit at subsidized rates and in some cases free of cost. Not only this, the government even offers to buy the produce of these favoured farmers at rates (the minimum support price), which due to political implications, have grown significantly. An example of a vicious circle?

    Letís step aside and look at the flow of resources that is taking place Ė obviously, towards the rural sector. Why then has the rural sector lagged behind in comparison with the urban areas? The reason is not far to seek. The beneficiaries of all these subsidies and benefits are a handful few Ė the landowners. By the time these benefits reach the peasants, which constitute the vast majority, they are no more than a trickle. The whole idea of providing a security net for India's vast rural population falls flat. And this is just one example of politics taking precedence over simple logic.

    A look at the Indiaís income statement reveals an interesting picture. Non-productive expenditure i.e. defence, subsidies, administration and interest payments, constitutes 67% of total expenditure and 97% of all receipts. For a country where 40% of the people live below the poverty line and an even greater portion has little or no access to medical facilities, where infrastructural constraints inflict significant costs on businesses and where nearly half the population is illiterate, is such a large spending on these heads justified? In the case of interest costs we have little option in the immediate future. But what about administration? Defence? The wasteful expenditure in these areas is evident. Worst of all, despite the huge expenditure, the effectiveness of the government machinery is in question.

    Letís take the case of power. This is probably the right time to discuss Ďpowerí as half the country is facing a heat wave and power shortages are the order of the day. Why? Well, no one or rather hardly anyone wants to invest in power plants. Such a scenario has arisen because in India power has to be sold to the State Electricity Boards (SEBs), which by the way are knee deep in the red (Rs 260 bn!). So there is a fear of default and therefore most plans for power plants do not get off the ground. That leaves the government to take up this activity. The rest can easily be conjectured. By the way, the SEBs come under the state governments, which incidentally too are running large deficits (cumulative state deficits are equal to the central deficit). When so much is being spent on the administration, why arenít results visible? Another sign of ineffectiveness? From our perspective, another case for reduction in expenditure on administration.

  • Indiaís Balance Sheet

    These are just isolated cases of the taxpayerís money not being spent wisely. There are many other facets to this, one of which is the large investment in public sector units. There is an urgent need for the government to clean its house. The United States and United Kingdom are today witnessing a surplus in the budget accounts. The benefits of these surpluses are already evident in lower interest rates and better standards of living. Ofcourse, the Indian government needs to continue to spend, but on productive activities i.e. activities that will add to the productive capacity of the economy.

    A safe bet would be that it would require another crisis to jump-start the government into action. The Gulf War triggered the first phase of reforms. What will the second trigger be?


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