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Home > Business > Special


Towards gross national contentment

Bharat Jhunjhunwala | January 16, 2003

In his interview on November 7, 2002, Finance Minister Jaswant Singh had said that the objective of economic policy is to secure an increase in both economic growth and 'gross national contentment.'

Finance Minister Jaswant Singh. Photo: ReutersHe recognises that the two are often posed against each other. One has to find "the right balance between two equally valid and just, but competing, views," he says.

How is this to be done? Singh and Vijay Kelkar want to increase the tax-GDP ratio by bringing agriculture and services into the tax net.

Indeed, every citizen should pay taxes. How should this tax be collected? The growth approach requires that the tax net should be broadened.

Service tax should be imposed on small-time service providers like paanwallahs and mithai shops. Singh has rightly pointed out that the services sector accounts for about half of our gross national product, yet it is lightly taxed.

But the imposition of such a tax in an earlier Budget had brought about a sharp reaction from the 'people.' Their contentment was hit.

So the government should collect taxes in such a way that the taxpayer does not feel the pinch. The correct way to tax the citizen is to impose light, indirect taxes.

The paanwallah may not feel the pinch in paying a few paise as tax on a matchbox, but he might feel harassed in filling the returns for service tax.

Broadening the tax base also spawns a huge bureaucracy and provides opportunities for rent extraction.

Service tax should be imposed on centralised services like insurance, radio and television and so on.

Likewise, agriculture should be taxed through inputs like fertilisers, diesel and pesticides used by large farmers.

Singh wants to simplify the tax system and is determined to move towards value-added tax.

The Kelkar panel has made a strong plea in this direction. Simplification will reduce transaction costs of tax collection and orient business towards genuine production rather than exploiting loopholes.

Singh also intends to reduce customs duties to push Indian producers towards global competitiveness.

Sectors that are globally inefficient will die. Handlooms, for example, are dying because the Sulzer looms can produce almost identical designs at a cheaper cost.

This is the growth approach. In order to secure contentment, Singh should have a two-tier VAT and customs duty structure. Capital-intensive and luxury goods should be taxed at a higher rate.

Textile mills should pay a higher VAT than the handloom producer.

Singh wants to continue apace with PSU divestments. He laments that the 'target' of Rs 12,000 crore (Rs 120 billion) for this year may not be achieved.

In its anxiety to meet the target, the government has created monopolies by selling PSUs to dominant players like Reliance and Sterlite.

This approach is suitable for growth. The government will get maximum revenue.

However, to secure contentment, the government should favour competitors to dominant players even if it fetches a smaller amount. That would spread the benefits of divestments over a larger number of people.

Singh continues to harp on fiscal consolidation. He is committed to reduce the fiscal deficit -- the growth approach.

The logic behind fiscal consolidation is that the market knows where best to invest. The government is thought to be incapable of making correct investments.

Kelkar has followed the same logic. He says the taxpayer should have more freedom to use his money in any way that he desires.

Such a market-driven approach may lead to higher growth, but without proper distribution, it can lead to lower contentment. Latin America shows that faceless fiscal consolidation has created a popular backlash against economic reforms.

The correct way is to provide incentives to contentment-friendly investments. The market will not provide piped water supply or telephones to villages.

Bharat Sanchar Nigam Ltd is seeking subsidies for providing telephone connections to villages. This may not be justified from the standpoint of growth.

But these are necessary to secure contentment even if it leads to the worsening of the fiscal situation.

The government has been paying huge amounts to employees of sick public sector units. There is also talk of introducing a voluntary retirement scheme for government servants.

Again, this thinking is based on the assumption that fewer government servants and a lower revenue deficit is always desirable. That is clearly not the case.

A forest guard, for example, is highly productive. His vigilance can lead to regeneration of the forests. Proper supervision of canal waters can increase the area irrigated substantially.

Currently, farmers at the head capture over-irrigate while those at the tail under-irrigate. Supervision can increase the area irrigated and secure both growth and contentment.

Singh has rightly opened the coffers for investment in infrastructure. But all infrastructure is not necessarily contentment-friendly.

Laying down optical fibre cables by using excavators is growth-friendly. But it eats away the jobs that could have been provided in digging the trenches.

Better communication between Delhi and Mumbai hardly creates any contentment for those in Bihar and Uttar Pradesh.

But government contracts make no stipulation about the use of labour-intensive technologies. Lining slum roads with bricks may create more contentment than by laying such cables. Singh should have a 'contentment audit' done for infrastructure projects.

It is good that the finance minister has recognised that growth per se is not the objective. But he makes a basic error in trying to strike a 'balance' between the two. It should be obvious that growth is desirable only because it leads to contentment.

Gandhiji used to say that the touchstone of every policy should be its impact on the poorest person. By his own admission, Singh should measure every policy on the touchstone of contentment.

Run-up to the Budget 2003



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