April 13, 1998

North Block proves American economist Arthur Laffer wrong.

Mani Shankar Aiyar

It was around this time last year that the media went mad. With income-tax rates slashed to 30 per cent and dividends exempted from tax altogether, every journalist in the country saw his net income rise. And most newspaper readers also saw their incomes rise. Little wonder then that in a cosy tango for two, journals and those who buy them concluded that paradise was round the corner.

The Interim Budget has just brought us down with a bump. There has rarely been a fiscal disaster more desperate than the one that overtook us last year. At kissing Rs 90,000 crore, the fiscal deficit is close to twice what it was when Yashwant Sinha, then a Chandra Shekhar socialist and now a saffron swadeshi but still minister of finance (some guys have all the luck!), took the fiscal deficit in 1990-91 to what was then thought to be the whopping figure of Rs 45,000 crore. So humungous is the deficit now that it is a cool Rs 21,000 crore more than it was projected to be. A schoolchild would be failed for getting his sums so wrong.

When lonely voices like mine had pointed out last year that the budget forecasts bore no relation to reality, the mainstream media was simply not prepared to listen. I was scorned for disturbing the sweet dream. The future apparently lay in what a minor American economist, Arthur Laffer, had sketched on a paper napkin when Ronald Reagan, then the US president, chanced upon him at a cocktail party. The lower the rate of tax, drew Laffer with a curve, the higher the tax receipts.

We were, therefore, told that by reducing the marginal rate of tax, our treasury would start overflowing at the brim. In the event, the 10 per cent reduction in the income-tax rate has lowered collections by 14 per cent, that is some Rs 3,000 crore. Laffer's had the last laugh.

Indeed, with the lowering of rates, tax collections have plummeted in every sector: excise collections are Rs 4,500 crore below estimates; corporate tax is down by Rs 500 crore; customs collections by a mindboggling Rs 12,000 crore. Put another way -- and whichever way you look at it, the last fiscal year was the pits -- the primary deficit which was projected to decline by Rs 2,000 crore actually rose by more than Rs 20,000 crore. Or, to put it yet another way, we were fed lies last year and the media swallowed the lies hook, line and sinker.

The minister responsible for this has been punished by losing his job. Alas, the media cannot be punished. So, it is some comfort to know that the media barons who run this ship of fools have also had a rotten year. The economy has not been in such doldrums since Sinha was last spotted as a secularist.

There is, of course, an explanation for the mess. There always is. So, the revenue secretary informs us, "Investments have to pick up, imports must happen and industry must revive for collections to materialise." Why tell us now? Should he not have been whispering this to his minister last year?

Sinha cannot be faulted for pointing out that by November 1996 -- six long months before the last budget was presented -- the economy was spinning through a vortex. Every indicator of consequence -- industrial production, exports, imports -- was careering downwards. That was the time to kick-start the economy.

While a highly developed, largely market economy like that of the US can be pulled out of business cycle recessions by listening to Laffer and cutting taxes, the still-developing, mixed economy of our country can be kick-started only by determined "pump-priming", the expression deployed by John Maynard Keynes, a rather more distinguished economist than Laffer, for government spending on productive ventures.

That is why, as soon as last year's budget figures were released, Manmohan Singh pointed an alarmed finger to the precipitous decline in plan expenditure, amounting to no less than Rs 10,000 crore below budget estimates. His plea for a substantial increase in government expenditure on development, specifically infrastructure, went unheeded. The consequence was an aggravation of the downward spiral, which has now landed us with the worst budget deficit since reforms began.

We cannot solve our problems by becoming a pale imitation of others. No more can India become a Singapore than an elephant can become a flea. As Amartya Sen has underlined, we not only have the world's largest middle class, we also have the world's largest poor class. Our economic policy may, to please the World Bank, be founded on capitalism for the rich; actually, it has to be founded on socialism for the poor.

Therefore, before we make a mantra of the fiscal deficit, we have to first see what must be earmarked for the poor. And if that is too large, the answer cannot lie in cutting down the share of the poor. It must lie in cutting the share of those who are better off, even if "better off" begins just above the poverty line.

Journalists do not understand this as none of their readers falls below the poverty line. The media mirrors the middle class; it also moulds the minds of the middle class. So, along with its readers it applauds when foreign role models are lauded and grows delirious with delight, hysterical with happiness when east Asian tax rates are introduced. Can that possibly be the way forward?

Issue Contents | Write to us | Subscriptions

© Living Media India Ltd