Rich Indians and poor Government

In my recent trip to India, I couldn’t keep my mind off the vivid disparity in the purchase power of people in India. I must entertain the shouts of “cliché again” by the readers at the opening line itself. But if the readers may persist for a few more minutes, I may be onto something. So, what I saw was a clear case of what some economists call increasing Gini Coefficient, an indicator of income disparity/polarity in a society. On the one hand, I observed a lot of Indian eking out a meagre living by what some call a respectable profession while others call begging. On the other hand, I could not take my eyes off the over fed, over paid, and obviously overweight Indians, who had no embarrassment in exhibiting their newly acquired wealth.

These disparities were made even more vivid in my visits to the rural and inner most parts of India, Chattisgarh. Lack of proper infrastructure such as roads, electricity, drinking water, and even clean air has become a national problem. Of course, rich people cannot remain unaffected by these inconveniences. But they can minimize their discomfort by buying expensive cars, electric generators, and living in better houses (equipped with all the comforts of the world). Poor people are the ones who face music everyday and need to put up a fight for the essential resources. If you have kept up with the story so far, I must introduce my point of the narrative.

The Government of India needs to fill the gap to improve the sorry state of affairs in our infrastructure. Why doesn’t that happen? Now, I am not tempted to follow the approach taken by others to oversimplify the issue at hand. But, I am not going to delve in this rather short piece about the details of inefficiencies in the Indian Governance. I will concentrate of one of the causes of Government’s failure to address these burning issues and that is: TAXES. Government implements the entire social and community programs through taxes or by borrowing, which is also known as budget deficit. India has been running deficits of the order of 7-10% of the GDP in the last few years. It cannot afford to borrow further (will be discussed in the upcoming blogs). Therefore, Government has resorted to the only tool available at hand to increase its revenue: Taxes.

Government of India has decided to levy a Goods and Services Tax (GST) on its citizens starting April 2010. Before I overlay my opinions on this topic, let me give a small background on why world’s fourth largest economy fails to generate enough taxes. First, due to lax law enforcement and corruption, the Government of India gets its tax revenues from only 50-60 million tax payers. Rest of the some 1.15 billion individuals do not show up in any tax records. Second, the corporations and high net worth individuals hire tax consultants and partake creative accounting to evade taxes. Last, most transactions in India are never recorded and/or done through underground routes, decreasing the tax revenue quite significantly for the Government.

Government of India’s decision to introduce GST is seen as positive towards improvement of infrastructure and development of India. But three issues call for our attention to ensure the success of this proposition.

1. Poor Indians can hardly afford any more taxes. Over 400 million people in India subsist with less than Rs 100 a day. To tax 10% of their income will be denying them a stomach-full meal.

2. GST can be collected if the transactions are recorded. There is no guarantee that the transactions will be documented effectively. Given our citizens’ creativity (in the detrimental methods), one has to be a sceptic in the proper extraction of the taxes.

3. Will the appropriated taxes be allocated properly? Another billion dollar question that I do not even desire to attempt!

Being a mere mortal and of limited capacity of the grey matter, I will leave at the description of the problem here. What I believe is that a carpenter may change his tools as much as he wants, but the final outcome of his effort will also be dependent on the quality of the wood he utilizes. Similarly, Government of India can change the methods of tax collection, but inefficiency and corruption will not yield the desirable outcome of such policy.