From Business World of 28 February. Chidambaram is so intelligent that he often underestimates the intelligence of others. They are stupid on the whole, but not all are as stupid as he thinks.
The budgetary process
The finance minister seemed really surprised when the
somnolent House erupted in protest on his announcing the tax on withdrawals of
cash from banks. The irate members struck him as dumb and obstinate; “they
don’t understand”, he said, and he kept asking them to listen to him.
Unfortunately, he failed to impart his own conviction to anyone in the media.
The tiny tax on withdrawals was an issue on which he was extensively
questioned; and none of his talk of audit trail seemed to convert people.
He must be thinking that this country is full of black
moneybags. He could understand that members of parliament should be upset at a
measure to curb black money. After all, on their own admission to the Election
Commission, so many of them have become crorepatis having started from scratch.
In elections, black money flows like water. So he might shake his head at the
MPs’ contrariness, but he would find it perfectly comprehensible.
But journalists do not usually handle bags of cash. Their
tax is deducted at source by employers whether they like it or not; and they
fall well within the ambit of one-in-six. They would not mind leaving an audit
trail, whatever that might mean. But even they could not see his point.
The budget is made by about half a dozen senior
bureaucrats presided over by the finance minister. The real question is, how
did such a crackpot idea pass by them? Did none of them say that trailing black
money would be a lot easier if the victim did not know that his cash withdrawal
was being trailed? Did none of them point out how easy it would to evade
surveillance – all one has to do is to withdraw Rs 9999 a day? Did none of them
think of how many wrong fish would be caught in the net – for instance
businesses which have to pay their workers in cash? The finance minister is
advised by the more powerful group of economists in the history of the
ministry; but none of them could rightly work out the cost-benefit ratio of
this measure.
However, if the finance minister had polled a hundred honest
bank account holders, they would have overwhelmingly rejected his idea, and
told him why. A suggestion arises, therefore, that the process of consultation
that precedes each budget has something missing. The finance minister sits and
patiently listens to farmers, workers, economists, industrialists and other
carefully selected sycophants; but he never consults them, and he never tries
out an idea on them. His ministry receives and works through so many memoranda
from chambers of commerce and industry; but no one outside a small group ever
sees these memoranda, let alone discuss publicly the robustness of their
proposals.
Compare this monarchical process, in which his subjects
humbly petition the finance minister to tax this or subsidize that, with the process
of consultation followed by modern regulators. Before they make policy, they
float consultation papers, hold debates, and give concerned people to give
their reactions. Thus when they actually make policy, they have already had the
benefit of the widest critique.
But how can the finance minister disclose his tax
proposals and invite responses? He would surely be accused of indecent
disclosure; he may even have to resign his job. For tax changes are matters on
whose advance knowledge punters can make millions. Just look at the trouble the
Prime Minister has got into for telling his party leader what promises the
government was going to keep.
The way around this problem of disclosure is to throw open
for consultation many more proposals than would be accommodated in the budget.
The public can be confused by having before it so many proposals that it would
never know which of them would be embodied in the budget. The process should be
something like an examination consisting of multiple-choice questions: while
all right answers are given, they are buried in a sea of wrong answers.
An even better way would be to attain a perfect tax
structure that needs to be changed very infrequently. If people cease to expect
tax changes, they will cease to be interested in leaks. The finance minister
has certainly advanced some way towards such a tax structure; one only wishes
he would go faster.
