The Hindu Business Line : Stupid Johnny's smart thinking

WE ARE at that time of the year when almost everyone has a view on what the Budget should aspire to accomplish. The massive participation that the Indian Budget evokes is remarkable. Everyone has a useful idea on how the Budget could be made purposeful and acceptable to all. The tidal wave of pre-budget ideas shows how deeply the roots of democracy and public accountability have penetrated in India.

The pouring in of new ideas is a refreshing sign of hope, trust and faith. The hope is that the Budget that lays out the case for taxes and the claims on people's incomes will also serve the people. Everyone trusts the Finance Minister, Mr P. Chidambaram, to pay some attention to what they have to say about the taxes, claims, future cash flows and economic growth.

The experience since March 19, 1990 — Professor Madhu Dandavate's first and last budget — shows that budgets have not belied the hope and trust. Finance Ministers may have become experts at putting their ears to the ground! As a result, public faith in budget-making and the massive approval ratings of India's Budgets have increased over the last 15 years.

Go down to go up

There may be many secret formulae that go towards making a budget acceptable. But nothing works like a tax cut. Consider the corporate income tax rate. Professor Dandavate slashed it from 50 per cent to 40 per cent. Dr Manmohan Singh raised it to 45 per cent in July 1991 but restored it to 40 per cent in February 1994. Then came the `dream budget' of Mr P. Chidambaram. The rate was brought down to 35 per cent in February 1997.

The orthodox view is that tax cuts squeeze the inflows into the exchequer. But empirical evidence shows that they do not squeeze inflows. The corporate tax rate cuts since 1990 have turned out to be remarkably and enormously beneficial to the exchequer. The ratio of corporate tax paid to capital employed by the 250 companies that constitute the Business Line 250 Index rose from 1.38 per cent in 1990 to 7.24 per cent in 2004. This is an unprecedented surge of 425 per cent.

Quite clearly, India Inc. has not let the government down. Tax collections went up when tax rates went down. India Inc. has redeemed the government's faith in economic reforms. It has emerged as the government's faithful partner in making tax reforms work wonderfully well. India Inc. could not have become government's trustworthy partner in tax reforms without the vigorous co-operation of the citizens — India Inc.'s customers. Consider this. The ratio of corporate tax to net sales rose from 1.68 per cent in 1990 to 5.54 per cent in 2004, a surge of 230 per cent. The truth about all taxes is that citizens and customers pay the taxes, net-net. Companies are merely collection and payment intermediaries. Thus, a further cut in the corporate tax rate and all other taxes and duties is wholly justifiable.

Less is more

The magic of tax cuts is best narrated by a story that does the rounds in Sydney's boisterous eating and drinking establishments. The story: Stupid Johnny is now 12. He has after nine years of gross misery won the admiration of his tough-at-work, tough-at-play parents. Things were not like this until now. Stupid Johnny had been an embarrassment since he was three. He was so stupid that Johnny's parents sank all thoughts of having more children. Stupid Johnny did not care to make out the difference between the size of a coin and its value. Let us switch to India for a moment. The five-rupee coin is smaller than the two-rupee coin. A stupid kid might pick the two-rupee coin instead of the five-rupee coin when a family friend offers the kid a choice of one. The parents may be aghast that the dumb choice makes the kid worse off by three rupees.

Stupid Johnny built his reputation by doing exactly this. Every time family friends came to his home or entertained him at their homes, the head of the friend's family would have, say, a two-rupee coin in the left palm and a five-rupee coin in the right palm. Johnny would be invited to pick one of the two coins. He would pick the two-rupee coin. Every one would acknowledge with glee that Stupid Johnny had been stupid once again.

The glee had become so addictive that Stupid Johnny and his parents became regular guests at all family parties. Johnny's parents could not say no because they were tough-at-work, tough-at-play parents. They could not leave Johnny with the nanny. If they did, the party invitations would stop coming. But Johnny's parents would sink in depression every time he picked the two-rupee coin. They would go to great lengths to teach Johnny the difference between size and value. Johnny ignored all such efforts aimed at doing smart things. Johnny's parents could not live with the depression and with the proof that Johnny had chosen to remain stupid. They called Johnny over for a straight talk. They wanted to send him away from home so that he would learn how to become smart. Money is everything, and Stupid Johnny had to become smart.

Johnny accepted the suggestion. He went to his room and lugged several sacks out. He opened one sack. The sack was full of two-rupee coins. He said that the sack had, say, Rs 1,00,000. He had 40 big sacks earned over nine years. Johnny calmly told his stunned parents that he had known the difference between size and value all along. But if he had picked the smaller coin with the greater value, their friends would not have invited them to the rave parties. They would not have played the coin game more than once if he had picked the five-rupee coin.

He told them that no one likes losing, but everyone likes some entertainment, even if it required putting down someone. So, he took all the two-rupee coins that were on the left palms of his hosts and from the guests that came home. The two-rupee coins kept coming because Stupid Johnny amused everyone.

The payoffs have been considerable. Stupid Johnny now owns and operates `Smart Johnny', a fresh fruits and fruit juices parlour on a white-sandy beach. He is his own boss. He has asked his tough-at-work, tough-at-play parents to let their hair down, and enjoy retirement without guilt.

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

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