From Business World of 10 August 2004.
Why wait till next year?
Any major innovation in our labyrinthine government requires courage, grit and persistence; these are the qualities the finance minister possesses. But when you are dealing with the fate of millions, you cannot afford to make mistakes. Your policies must be robust. Bureaucrats are supposed to ensure this: they are supposed to warn the minister about all possible ill-effects of what he proposes to do.
Unfortunately, our bureaucrats are not very competent. They take central services examinations after graduation at the age of 20-22; and our college education is not a great preparation for administration. Many of them fail services examinations. But it does not matter; they can take the examinations time after time until they pass. If their caste is one of those occurring in some schedule, they can go on taking the examination even longer. If they are bright, they get into the prized Indian Administrative Service, and get others to do all the work. The dumber ones end up in the revenue services, and run finance ministries. They are the ones that advise the minister; and the advice is often of poor quality.
One thing they do learn early in their careers is to please politicians, for politicians can make or destroy their careers through transfers and promotions. It is not always a bitter lesson, for cultivating the right – or lucky – politicians can also bring good fortune – like a job in the Fund or the Bank, or the post of Chief Commissioner of Customs in Bombay. And one subject they find virtually impenetrable is economics. They are invulnerable to a simple concept like elasticity of demand. Excise officials simply do not believe that if you reduce tax on a product and make it cheaper, it may sell more and revenue may go up. They make budget projections on the assumption that however much or little you tax a product, it will sell the same.
That such officials would not be good in dealing with the public is not surprising. If they go into a market to inspect shopkeepers’ books, they are likely to be beaten up. Many people lobby against a tax not because of it is onerous, but because they do not want to be ensnared by a taxman.
At the time of independence we had a perfectly good system of agricultural taxation. Thanks to the settlements made personally by British district officers, it was generally fair – especially in the ryotwari areas of the peninsula – and it brought states a decent revenue. But the tax officials were oppressive. Early in my career I was doing research in Haryana villages. The drill was to find the village patwari (who kept the land records) and ask him to take one to representative farmers. When I went with him to a farmer, the farmer would put out a charpoy for us and serve tea. As the patwari left he would take free vegetables with him. That is why, when farmers got the power of the vote, they forced politicians to abolish land revenue.
In preparation for introduction of taxation of value added – which requires the taxation of everyone on the basis of the value he adds – Jaswant Singh last year brought into its net all textile producers and processors. That included the numerous handloom and powerloom owners, dyers and printers. Their encounters with the excise officials were not happy, and they lobbied their MPs to persuade the finance minister to free them of the tax burden. And Mr Chidambaram, now minister of a populist government, obliged. He exempted the entire production chain based on cotton from taxation, and confined taxation to producers of synthetics and blends.
That would raise the demand for cotton goods at the expense of synthetics and blends – even though some of the latter are cheaper and hence better suited for the poor. It would slow down the growth of synthetics, whose supply can be increased more than of cotton goods. But these are economic effects about which his officials would not have educated the minister.
Now he realizes his mistake, and has promised to remove the discrimination next year. But why next year? The budget is still to be passed; all he has to do is to delete the relevant amendments he has proposed before he pilots it through the final vote. What is worth doing next year is worth doing now. He will find that in Thirukkural, verse 673 – give or take a few.