Thursday, June 08, 2006

Realities of Governance I

There is a strong reality in governance. This reality our governors face is same, whether it is LDF, UDF, NDA or UPA in the helm. The charismatic power of this reality is so powerful that it is a major factor why opposition parties flip, 180 degrees, once they come to power. It is also what forces ideological parties to take a realistic approach on their economic policies, communist China to turn capital, India to open up its economy in the early 90s, Buddhadeb to declare he is a realist, etc..

It is important that as citizens of a democracy we should take the effort to at least understand pieces of this reality before exercising our god given right to blame our governments.

A big piece of this reality is the emptiness of governments’ pocket (aka ‘Gajanave’). What is the reality of governing a state (read Kerala) thats 86% of tax receipts is spent just on salaries/pension or interest? (6 years ago, the same ratio was 104%!). Is there any financial flexibility left for the executive to carry out its mandate in such a situation? Every new government is given a mandate to do the best, better than the previous government and people have very high expectation of them. But the question is without adequate funds how can they expected to deliver on these high expectations?

If it wasn’t for the international development agencies/banks and foreign government aid, there wouldn’t be any major development initiatives going on in Kerala currently. Take a look at the following list of foreign aided projects in kerala which ranges from making sure people wash their hands after using toilet to changing the organizational set up of the government itself.

World Bank Kerala State Transportation Project.
ADB Urban development project.
WB Kerala Fostery Conservation Project
ADB, Dutch Modernizing Government Program
WB,ADB, Swiss Local Government Decentralization Program AKA janakeeya aasuthranam
Japan Drinking water project
World bank Rural Water Supply project
WB toilet paper promotion project
WB health project

This list by no means is complete and excludes a number of domestic lending organizations GoK regularly rely on for day to day activities. It makes one wonder whether keralites should pay more attention on the elections for the board of governors of these lending institutions than that of their own elected representatives.
Generally, financial leverage is a good thing, up to a point, but unfortunately GoK has crossed that limit decades ago. It is purely selfish to make future generations pay for the present expenses of the government other than the cost of long lasting infrastructure projects.

The obvious but ignored reality is that governments need to have resources to act on its promises. In the world of development ‘resource’ is the key word. Don’t get me wrong, India is blessed with lots of natural resources, we also have an abundance of human capital. Nevertheless, Indian Governments lacks the resource in its most liquid form- Cash (aka Tax Revenue). If tax revenue is low, next logical conclusion is well demonstrated by usefulness of Indian governments to the people! In fact, this is the reality of developing countries across the globe. Our governments has enormous task in front of it, it has to adhere to very high expectations without having the liquid resources to make it happen.

India needs billions and billions of cash to spend on modernizing our infrastructure (an estimated 172,000 Cr over the next 7 yrs for roads alone.) The government needs thousands of Crores to fortify our defense capabilities and to assert ourselves as a major global power. It needs to spend at least 3 times more on the social sector than it does currently. To assure reasonable quality in primary education billions more needed. Even to reform our institutions and government bureaucracy to reduce corruption to a reasonable level, a large sum of money needed to be pumped in to the system. To modernize our police force and to create a law obedient civil society 1000s of Crore more Ruppees are essential. Resource aka Money is everything. There is no doubt that the quality of government services is directly related to the tax revenue. We get what we paid for.

Yet, the focus of the country is seldom on resource accumulation front. India’s tax base is pathetically low. Only 3% of the population pays income tax in our country! The need of the hour is to come up with a plan to widen the tax base to at least 10% in short term.

India’s Tax to GDP ratio is half as much of an average developed country. That means Indians have to pay twice as much tax than they do currently for India to be in par with the taxation levels of developed countries.

For the fiscal year ended in 2005, only 8 lakh people from Kerala paid their income taxes to the central government. Their collective payment was merely 1,724 Cr. In comparison recent hike in kerala government employees compensation did alone cost state govt exchequer an additional 1,600 Cr.

I am sure any top level political executive who has a shed of statesmanship in his/her blood has experienced this reality and forced to think with common sense. But the problem is those who aren’t able to experience this reality, which include overwhelming majority of politicians and influential citizens, ignores these obvious but crucial facts of governance.
Unfortunately, those few elite politicians who experienced it are hesitant to convey it to the masses because of the very nature of their profession and our media’s vested interest is better served by looking away from it. End result of this 'trap' is the continuation of the same old politics of fooling people, and substandard economic policies that undercuts the maximum potential of the country.
India has to bravely implement smart tax and economic policies that will double and triple the governments’ revenue- that can be used for development projects. But the challenge for the policy makers is to make citizens appreciate reality based governance as opposed to populist idealism so that the resistance against intelligent reforms will be in the low end.


Myna said...


(Btw, whatever I write below has nothing against you or the post. Some thoughts triggered by your post)

It reminds me of those who evade the customs duty at the airports. Those who try various routes to avoid paying more taxes or no tax at all. The most affected are the ones who earns less because even the smallest of reduction in taxes reflects as a big percentage of their gross income.

How many of us have shown the 'guts' to tell a customs officer that we have a taxable item and wish to pay the proceeds to the government? A bribe of 100Dhs or 20$ or the name of a relative/friend who is a customs officer or a refusal to examine the luggage and a nod towards outside saves the situation which indirectly puts the burden on the poorest of poor. Yes! There are bigger fishes out there, but that is no justification. There is no difference. Are we ready to change? To make a difference by setting a standard? If everybody else change, if the whole system change, then I will, eh? Why should I if others are taking advantage? What about a 'Save Kerala' forum that shows a badge and disclaimer that we don't pay bribe and are willing to pay taxes? Not many volunteers? I know, blogging is much easier!!!

Mind Curry said...

very good thoughts babin.

in my opinion, the central government is quite successfully implementing a solid taxation system. and most importantly they have the education, sense and knowledge to FIRST strengthen the economy and generate adequate resources. this way the system ensures the wealth finally reaches the poorer population.

on the contrary, in kerala the rich are becoming poor, and the poor poorer. thanks to the communist ideology, it is all about "robbing the rich", "if i cant have it why should anyone else have it" and other such policies. what they dont realise is, there has to be a source of income for someone even if all they want is to eat without working. but they dont realise the so called haves have what they have because of hardwork and not because money dropped from heaven into their homes.

about myna's comments again, it sounds ideal. but its easier said than done. when you are faced with a difficult situation you and i would bribe our way out too. why talk about bribe, take brijesh's last post: we are forced to pay goons of CITU to survive in kerala. or to pay political parties "pirivu", or else you get bashed up.

regarding taxes and bribes, most of us must be paying taxes regularly for sure. taxes in india were at some point too high and that too at a time when we were still economically weak. today things are quite different. about bribes, i dont think we are all running around bribing people. and anyway its not that most of us enjoy doing it either. the only way to get rid of bribing in india is to ensure we have a transparent and efficient government service. if we didnt have to wait in the queues, or run after permissions for years and such things, there will be lesser NEED to bribe.

if "save kerala" included 50% of the population of kerala, yes if we decided something it would make a significant impact. and i am sure some day we will be able to do that :)

Babin said...

Myna, I guess another oblivious reality is that people really hate paying their taxes whether they are rich or poor! I think the best strategy to make people to pay our taxes will be STRONG Coercion coupled with reasonable and simple tax rate/policy. I don't think anything else will be effective. if the people are selfish about their finances,then the governments should be too. Developed countries that provide decent services to the citizens are also ruthless tax collectors. It is no coincident.

Mind, yea India's tax policy has changed considerably for better within the last decade or so and the tax revenue for the central govt has been increasing by around 20%, thanks esp to the booming economy. But yet international ratio comparisons are telling us Indian governments (all levels of govt) haven't yet exploited even the half of its revenue potential presently. It is one thing both IMF and Leftist agree on about Indian economy!
Absolutely, the main focus of a resource accumulation strategy for any government should be strengthening of its economy. Tax policy should be evolved around this objective. Simply, the more people who are employed in the economy and more commercial activity there are, the more taxes it can collect. This is the whole reasoning behind providing tax holidays and free land for employers so they will create more employees whom govts can tax the hell out of..
Apparently, it is a hard concept for ideological leftists to understand:(

Jiby said...

dang previous comment got errored out...lemme write that down again!!!

why cant we take the path to e-governance and cut down on our mammoth sized govt employees and make sure revenues dont filter away thru their corrupt fingers.

but then in their eagerness to build their social base our two main parties cpm and inc have two ginat sized tradeunions of the govt employees holding a huge bargaining chip in their hands(arent they called ngo association) or something!!!)

i think they have taken the step of freezing new appointments as a way to cut down on our govt size but as ur figures state that just isnt enuf to cut them down from eating away our revenues...

i still cant understand why we still dont have a institutionalized fund to collect money from rich nrk's and use it in funding development projectrs.

and finally hope thomas isaac who is supposed to be an economist first and politician second can bring in some sweeping reforms but in the compromises our politicians have to make i guess he will fail too!!!

keep writing more posts babin...ppl like u open the eyes of many ignorant malayalis like us.

Shinu Mathew said...

To say the current tax system is better than that of a decade back, is an understatement. But th truth is, our taxing system is still a long way to go. I don't know much about the Kerala system, but I can give you a simple example which I faced, and facing every March End.
Those who have an annual income of 1 lakh, just escape the tax net. 1.5 Lakh is taxable FROM 50,000, at a rate of 10%. But those who have 2 Lakh, must pay 15% from 50,000!!! So in effect who earns just 2 Lakh has to pay 50% tax more that of who earns 1,99,999!! It is just symplified math. But I face it every year!!
When corporate bigwigs evade tax by the crores, the salaried class is being squeezed! Strangled may be the best word.
Just take the price of petrol these days!! out of 50 Rs per Litre, the Oil companies get ony 25 Rs. The rest, 50%, is in form of central & State taxes. When the petrol price hiked, the prices of essential commodities, like milk, has shot up. Where is this money going? Look at the railways now! I have become an ardent fan of Lalu Prasad lately. The way railways turned around the fate is a case study of top management institutes. What are the rest of cabinet doing?
And yet, Babib suggest they increase the tax?

Babin said...

Jiby, thanks for your persistence in commenting here:)
I guess the dark force of special interest groups/unions are too powerful in kerala. It is funny even when 9 out of 10 groups favor a particular reform, there will one 'odakke' group guaranteed to be up in arms against our gutless government - who is more than happy to appease them. God save us!!
It is certainly a welcome move by the government to freeze new appointments but I am afraid if this is just a ritualistic thing for the new commers. Antony govt did the same thing in its beginning stage, only to derail completely from the downsizing plan when actual implementation stage come.

I think the best possible way for the state to tax rich NRKs is through local Property Taxes (PT) since they own lots of lands, Mani malikas and flats. Unfortunatly,PT system in India is very very weak.. From what i can gather from the net, Kerala haven't increased PT rates for the last 15 yrs or so. Even though local governments collects PT, it don't have any power to adjust the rates according to their needs. our property assessment and collection systems also sucks.. I guess whoever copied the three tiered local panchayath system from USA forgot to copy the tax system:P

@Shinu, I am not suggesting to increase Income Tax rates. Fortunately after reforms IT rates are quite reasonable. It is for the experts to decide if current rates are optimum or not. lots of times decreasing the rates do actually increase the absolute revenue because of the higher compliance from tax payer.
The problem with Income Tax in India is compliance. even though we said to have 300 million+ in middle class, only 30 million pay IT out of 1000+ million total population. Majority earns income outside of governments eye and govt is too weak to demand compliance from them. also, i think the exemption limit is too high(but i am not an expert to assess this properly)..
Shinu, Trust me..even if you think you are paying very high taxes, it is relatively low under international standards. If you are a single young worker in USA, you wont even get to see 30% to 40% of your pay check! It will directly go to the federal and state governments kitties. The taxes to the local governments (if you own property) and sales taxes will probably deduct another 15% from your total income. Swedish and a few other scandinavian citizens pay back 50% of their total income to the government as taxes. So, I would say you are lucky to be payin taxes in Ruppees.

Slabs i think is necessary to simplify the tax code.. yea its not fair.. When ever the govt has a choice between fair and simple.. it always opts for the later one! grr
Corporate tax concessions is usually good policy when it meant to strengthen the economy. Ponmutta edunna tharavine kollunnathe sheriyallallo?

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