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G. Ramachandran

"Governance has been a source of mounting worry in recent years as familiar national entities seemed to dissolve and the polity fragment into squabbling regional segments with no philosophical rationale. As parties based on principles gave way to factions whose sole purpose is to promote personal careers."

— Sunanda K. Datta-Ray, `Challenges of the New Millennium', Manorama Yearbook 2000.

EVEN as a million armed men wait warily on both sides of the India-Pakistan border, the costs of maintaining a warlike situation and the costs of actually waging war have begun to work on the minds of fiscal decision-makers, and Defence and fiscal analysts in India. To be sure, the Finance Minister, Mr Yashwant Sinha, has reassured that all is well with the nation's ability to fund all efforts aimed at protecting its interests. Though Mr Sinha does not wish that war should be waged, he has said that the likelihood of the war-like situation has been factored into the fiscal matrix.

War is so real that it cannot be fought and won on promises and loose rhetoric. Nations that do not or cannot factor costs related to war into their fiscal matrices have to necessarily levy surcharges and special taxes to face the consequences of war. It is `surcharge' even before soldiers charge into one another.

War has to be affordable to be fought. War has to be affordable before a single shot is fired. It has to be affordable during engagement. War has to be affordable to the victor after it is won. And, war has to be affordable to the vanquished after it is lost because nations and societies have to be rebuilt. It does not matter if there is an armistice. War requires resources in the form of people, equipment and infrastructure. Such resources would not be there at short notice to be placed at the disposal of commanders because war cannot be fought with raw materials.

War requires years of diligence, motivation and hard work. It requires budgetary allocations to create the machinery to fight. War requires variable inputs, such as thinking, effort, energy and materials to spur operations. The variable inputs and the refurbishment too require budgetary allocations.

Affordability and governance

Budgetary allocations to defence would necessarily have an adverse impact on the allocations to other public goods, such as education, health-care and internal law and order. Hence, war has to be affordable to be fought. The results come later. Affordability, in such circumstances, is primarily determined by the capability of a nation to minimise the adverse impact on the allocations to such public goods that enable its citizens to be productive and to pay taxes.

If the government has to discharge its minimum responsibility of providing public goods, such as defence, it must collect taxes. People cannot be expected to volunteer to pay for such things. They will be tempted to become `free-riders', calculating that others will pay, and realising that those who refuse to do so cannot be excluded from the benefits. The money needed to pay for defence has to be collected through taxes. If people worked well and were allowed to work well, there would be bigger incomes and larger tax collections. If farms, firms and families do not work well or are prevented from working well, there would be small incomes and smaller tax collections.

The Government and markets have become the principal co-ordinators of the efforts of farms, firms and families in an era of economic specialisation. Co-ordinated effort is a prerequisite for maximising the joint outcomes of the individual efforts expended by farms, firms and families. Governance determines how well people work and how productive they are. Governance determines how well the government plans and prioritises action aimed at maximising the joint outcomes of the efforts expended by farms, firms and families. Governance determines how well markets choose such actions aimed at maximising the joint outcomes of the individual efforts. In order to avoid wasteful effort, markets have to work spontaneously and voluntarily.

The impact of good governance cannot be hidden from public gaze for long. Good governance would show up when incomes rise and when tax collections as a proportion of national income rise. The impact of bad governance too cannot be hidden from public gaze for long. Bad governance would show up when incomes do not rise and when tax collections as a proportion of national income fail to rise. Bad governance, in such circumstances, makes war unaffordable. Wars may have to be funded through surcharges, if farms, firms and families were not allowed to work spontaneously and voluntarily to boost marketable, cash-earning output.

Consider the inter-relationship between poultry and trucking. There would be no marketable, cash-earning output if poultry farmers produced eggs but truckers were prevented from shipping eggs to markets. Declaring trucking as an essential service would be useful in the short run. However, if truckers feared meddling and hurdles in the long run, they would dread as well as ignore opportunities in trucking. That would hurt poultry businesses, and their ability to produce marketable, cash-earning output. That would hurt incomes, taxes and the ability to live in a war-like situation.

If India has to survive through the present warlike situation and be able to engage in a war, it has to have a genuine concern for the inter-relationship between poultry and trucking, and every such inter-relationship between one component of the economy and another. In the absence of chickens and trucks, the declaration of an activity as an essential service would be loose rhetoric.

Home and the border

The question is if India has a set or rules related to national and sub-national governance that makes war affordable. The liberals and the doves among us may dislike the bluntness of the question. Hence, a related but more important question is if India has a set or rules related to national and sub-national governance that makes war affordable but unnecessary.

Nations, like men and women, shun war out of compulsion if they cannot afford war and its aftermath. Men and women may be grieved by the brutality of some that wield power, but may have to acquiesce if the costs of retaliation are too high. It has been reported in the national media that car dealers in Patna were coerced to lending showroom, mint-condition cars to serve the needs of guests at a celebrity wedding, but had chosen to acquiesce since they considered the costs of seeking justice to be high. The costs imposed by the coerced lending would somehow show up in lower taxes to government, and thereby undermine the nation's ability to engage in war, even if by a few paise. Mr Sinha would know the value of each paise of revenue in managing the fiscal deficit.

Nations, like men and women, shun war out of choice if they can afford war and its aftermath. When war can be afforded, war becomes unnecessary. Men and women may deter the wielding of brutal power, and may never have to acquiesce when power is wielded without due process and authorisation if the costs of retaliation are small.

Car dealers in Patna would not have acquiesced if the costs of seeking instant justice were not high. The gains from standing up to the unauthorised exercise of power would somehow show up in higher taxes to government, and thereby augment the nation's ability to engage in war, even if by a few paise.

War offers little room for rhetoric without cash. Cash is gunpowder and more.

The liberals and the doves, as much as the conservatives and the hawks among us, have a stake in making war affordable but unnecessary. War can be made unnecessary if war is made affordable. If poultry farmers and truckers have the freedoms to pursue their activities, we would have made war affordable. Their rising incomes would push tax collections, and the budgetary allocation to defence. If car dealers can stand up to the unauthorised exercise of power, they would somehow augment the nation's capability to make war unnecessary.

What we do at home determines what we could and would do at the national border. If the ability of farms, firms and families to pursue economic activity were not enhanced at home, we would have little choice at the borders. If the ability of farms, firms and families to stand up to the unauthorised exercise of power at home were constrained, they would somehow make war necessary but unaffordable.

Speaking at the annual session on the economy, security and the state at the annual conference of the Confederation of Indian Industry in April 2000, the Home Minister, Mr L. K. Advani, called for a change in attitude towards the economy, security and governance. He urged that there should be a move towards decreasing the dependence on the state as the principal repository of everything in the country.

If farms, firms and families are regarded and empowered as the repositories of everything in the country, we would have begun to decrease the dependence on the State and make our borders more secure. India's national borders are long. The land frontier is about 15,200 km. The coastline is about 7,520 km. We have quite a few neighbours, but not everything is quiet at the borders that join us or separate us. The land frontiers and the coastline have to be guarded with a small per capita income.

We could do better with bigger incomes. We could do better with better governance. What we do at home determines everything. India had to fight three major wars in a span of nine years when war was unaffordable. We could do better if war became affordable but unnecessary. We could do better if the state regarded every assault on farms, firms and families as an assault on the nation. But it does not matter if the State turned a blind eye to such assaults. Tax receipts would decline. The impact of bad governance cannot be hidden for long.

(The author is a financial analyst.)

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