The Hindu Business Line : The e-power shift

E-power has shifted away from the Government to ordinary citizens and firms. The UPA Government must tap the opportunity and show that it will make no compromises in fighting for the well-being and dignity of the people.

ECONOMIC pecking orders have traditionally put government at the top and citizens at the bottom. The Government has always come first, especially in India and other countries with a colonial or communist past. By `virtue' of their employment in the government and its various departments, government employees have been public servants in theory but dominant and manipulative masters in practice. Citizens have come last in this traditional hierarchy. The private firm — the embodiment of enterprise, risk-taking, efficiency and innovation — has been placed in between.

It is not a coincidence that almost all least developed and developing economies have very similar pecking orders. Their governance models are replicas of models put into place by their erstwhile monarchies and dictatorships or by foreign colonial masters. These models have vested enormous and unilateral power in the hands of the bureaucracy. The bureaucracies do not often represent the citizens emotionally and economically. The maximisation of the payoffs to their dictatorial or colonial masters was their sole aim in the past. The maximisation of the payoffs to government is their sole aim in the present.

It is also not a coincidence that the economic pecking order in developed countries puts citizens at the top and the government at the bottom. But the focus is on India, among the world's largest and most `promising' developing economies, and its economic present and future. Some gut-wrenching changes in the economic pecking order are in progress in India. The Government will have to choose to move to the bottom within the Indian hierarchy and enable the citizen to ascend to the top. Else, India will have to move further towards the bottom of the per capita income league tables. Leaders that understand why these changes are taking place and how to leverage these changes will lead India towards development. Those that fail to understand why these changes are taking place or do not know how to leverage these changes will keep millions of Indians firmly mired in poverty.

Four-pronged spearhead

The Government has been regarded as the economic spearhead, especially in India and other poor economies, because of its power to tax and allocate. Citizens have been the economic tails. They have had to remain content with what is allocated by the Government because they are the last in the hierarchy. Moreover, each citizen is so small and powerless that it matters little if the government serves each citizen well enough and motivate him to be more productive. The traditional pecking order of economic power (e-power) is derived from the combination of four sovereign powers. First, the power to collect income, sales, purchase and property taxes, and estate, excise and Customs duties makes government the biggest beneficiary of every individual's and firm's entrepreneurial effort.

Second, the power to engage in pre-emptive, low-cost borrowing makes it the nation's biggest potential borrower and supplier of capital. The third power of the government pertains to its capability to decide how funds will be allocated to citizens and where investments in assets will be made. The power to monetise through the minting of money the deficits of outflows over inflows completes the list.

Self-indulgent spearhead

All four components of the old e-power hierarchy are now under serious threat. When taxpayers are made poor by government policy and bureaucratic indifference, the Government has to remain satisfied with lower tax collections. The Government may indeed choose to remain content, but the bureaucracy will not. It will be up in revolt because its salaries and perquisites will be in jeopardy.

All taxes collected by the Government are paid by the private sector, net-net. And, all taxes paid by the private sector are paid net-net by households that earn their livelihoods in the private sector.

But the modal private household earns about Rs 19.68 for every Rs 100 earned by the modal household that earns its income from the government. Therefore, it is not surprising that a very large part of government's tax revenues have to be applied to make payouts to the bureaucracy. But the large application is insufficient to make these payouts. Government borrows to pay the bureaucracy. That is, it has chosen to front-load its spending. It has chosen to borrow from the future to spend on itself in the present.

Follies of front-loading

The only way the Government can pay for its front-loading of spending is by borrowing. Unfortunately, but not surprisingly, the borrowings do not show up as investments aimed at nourishing the aggregate economy. The borrowings support expenses rather than expenditure. When the Government front-loads its spending, tax inflows may come later but their present value is compressed. The tax-to-gross domestic product (GDP) ratio stagnates or falls as a result. This forces the Government to borrow more.

But the Government is no longer the dominant supplier of domestic capital though it continues to be the biggest borrower. Investments by the Government, especially in irrigation and industrial and social infrastructure, have shrunk in relative magnitude.

The danger of implosion through interest payouts is so real that India's Left parties have recommended deficit financing for infrastructure in place of borrowings. The perils of deficit financing are two-fold. First, it fuels inflation.

It also increases the payouts to government employees since their salaries and pensions are indexed to inflation. The benefits of deficit financing accrue to government and its employees. But it may not improve GDP or the tax-to-GDP ratio.

Therefore, the Government would have to continue to borrow to make payouts to its employees. Second, deficit financing may push up interest rates across the economy. This raises production, manufacturing and service delivery costs. Higher costs hurt the domestic competitiveness of Indian firms; they hurt India's global competitiveness.

The rise in costs and the loss in competitiveness further compress the tax inflows to government. There are no easy salves, but there could be a saviour.

Tailwinds, bottom to top India, its Government and the bureaucracy need the ordinary citizen and the private firm desperately. The Government and the bureaucracy need their effort, capital, taxes, innovation, risk-taking, efficiency, flexibility, frugality and the unceasing learning.

Those outside the Government and the bureaucracy need the private sector so that they can get employed. If ordinary citizens and the private sector were disinterested, scared or diffident, the pressure on the Government's finances would rise.

What would be obvious is that e-power has shifted away from government to ordinary citizens and firms. If the Government knows that it is dependent on the private sector and the citizen, it would learn how to serve them. It would also know how to promote and sustain itself.

If the Government and the bureaucracy continue to think that the private sector and the ordinary citizen are dependent on the Government, they would have missed the greatest opportunity the new millennium has offered India. The United Progressive Alliance (UPA) Government has a great chance to tap the new e-power.

It has to show that it will make no compromises in fighting for the well-being, dignity, honesty and patriotism of ordinary people and firms. It would have then understood the true meaning of e-power. If it does not, it runs the grave risk of becoming an NPA (non-performing alliance) Government.

It has been said in the past that people get the government they deserve. The new e-power structure has changed this thoroughly: Every government gets the kind of people it deserves. A floppy, sloppy and sly government that destroys the well-being, dignity, honesty and patriotism of ordinary people and firms will suppress their hard work, risk-taking, diligence and innovation.

(The author is a financial analyst. Feedback may be sent to indiagrow@yahoo.com

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Making India an R&D powerhouse

Target subsidies

Budget session — Will pending Bills get time?

The e-power shift

Can economy be monsoon-proofed?

Tangled skein

Railways: Making it the beast of burden

Railways: Too much on the track

No budgets for the judiciary