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The Hindu Editorial Analysis | PDF Download

Date: 20 June 2019

What a $5 trillion economy would look like

  • The economy must be evaluated in terms of how much it contributes to the ease of our living
  • At the meeting of the Governing Council of the NITI Aayog last week, Prime Minister Narendra Modi announced the target of a $5 trillion economy for India by 2024.
  • It is necessary to think big when seeking to make a difference, for transformation does not come from modest plans. Hopefully, the Prime Minister will also use the drive to growth to place India’s official statistics on a firmer footing, so that we can be sure that economic policy-making is based on reality. However, getting the numbers right will not ideally end the task. What this task is may be illustrated by a question that was asked some years ago when a high-speed expressway connecting the polar extremities of one of our States had been proposed. A wit had asked what we would hope to find once we have reached our destination.
  • A similar question can be asked of plans for growing the economy. What would we like to see in the proposed $5 trillion economy? Moreover, unlike in the case of an expressway, which can always be built by simply borrowing money and ideas from the global market, a quantum leap in the size of the economy is not so easily achieved. It will require design, funding and governance.

Without investment

  • The importance of funding, and to an equal extent design, may be seen in the failure of the quite sensible aspiration, ‘Make in India’. Though technically applicable to every sector, it was clearly focussed on manufacturing. Articulated very early on in Mr. Modi’s first term (2014- 19), and accorded a certain prestige in the pronouncements that followed, it played out as a damn squib. One of the reasons for this was the absence of commensurate investment outlay. To raise the share of manufacturing in the economy from its present 16% to 25%, an ambition declared by both the United Progressive Alliance and National Democratic Alliance governments, requires a scaling up of investment. This did not come about.
  • Whether this was due to the corporate sector, Mr. Modi’s chosen vehicle, not having the wherewithal or due to it not being convinced of the plan is beside the point.
  • Investment there must be and if the private sector is, for whatever reason, not coming forward to invest, then the government must. This is no more than accounting, but Mr. Modi’s government seems to be unfavourable to this diagnosis, perhaps on ideological grounds. Remember ‘minimum government’?
  • A small digression should clarify matters. The first attempt to make in India was in the 1940s. Finance Minister Shanmukham Chetty’s first budget speech had identified increasing “internal production” as the economic priority. And this was achieved quite soon. Along with the quickening of the economy as a whole, the share of manufacturing had risen, the mocking epithet ‘Hindu rate of growth’ notwithstanding.
  • This had not emerged as part of the moral victory of an oppressed people. The reason was that it had resulted from a surge in investment, led by the government. That resources could have been mobilized on such a scale in so short a time in an economy devastated by colonial rule is testimony to the availability of the three ingredients — design, resources and governance — necessary when contemplating a move to the next level, which is what aiming at a $5 trillion economy amounts to.

The wish list

  • While lauding the efforts of leaders of early independent India, however, we would do well to remember their follies. Principal among them was the failure to articulate, possibly even adequately imagine, the contents of the economy that was being raced towards. If this is repeated now, a moment of triumphalism different in character but nevertheless there, it would amount to not having learned the lessons of history. Something missing from “internal production” and ‘Make in India’ is the difference these intentions would make to the lives of Indians. At least in the 1940s, the priority was to get the economy moving in the first place. This is no longer the issue. Today the economy must be evaluated in terms of how much it contributes to the ease of our living. So what would be some of the characteristics of a valuable economy?
  • First, Indians should feel empowered by the economy. We know that currently they do not feel so. India is placed very low in the United Nations’ World Happiness Report. Happiness, best understood as a sense of well-being, is directly related to empowerment, or being able to undertake the functionings we value. This is, in the first instance, related to being educated and experiencing good health. We are in India facing an education sector that is broken down and the majority are battling with almost non-existent public health infrastructure. The private sector has some worthy initiatives in these areas but they await an effective public presence on a gigantic scale. So, the first attribute of the valuable economy would be access to quality health and education for all.
  • The second attribute of a valuable economy would be equality of opportunity. For over three decades now income inequality has been rising in India. According to some measures, India is today more unequal than China, itself a society widely perceived as highly unequal. Now some part of inequality of opportunity is related to unequal distribution of income but a part of it is not.
  • Gender inequality manifested as women having less opportunity in life is not going to go away with a re-distribution of income along class lines or across social groupings. India is a serious outlier in this regard, and becoming richer as a society may do little to change the status quo.
  • Shockingly, a sex ratio, already unfavourable to women, has shown a secular worsening since 1947. Inequality in India can only be ended by equalising capabilities across individuals. Concerted public action via education is the means to this outcome. Income transfers, pushed relentlessly by policy entrepreneurs, evade the issue altogether.
  • Conserving nature
  • Finally, an economy, whatever its size, cannot be meaningfully evaluated independently of the extent of presence in it of natural capital. Till now, by referring to the imperative for growth, to eradicate poverty, any effort to conserve nature has not just been ignored but treated with derision, by both right and left. This is no longer a credible political stance. Two-thirds of the world’s most polluted cities are in India, when we accept less than a fifth of its population. Air pollution shortens lives and lowers productivity, reducing the capacity to earn a living when alive.
  • The poor are the most affected as they cannot afford to live in gated communities that somehow manage to commandeer scarce natural resources. Some part of environmental depletion in India is due to the pursuit of unbridled growth.
  • This implies that any improvement in the life of the majority would require a realignment of the growth process so that it is less damaging.
  • This would very likely require that we have slower growth but the process can be configured to channel more of it towards poorer groups. We may end up in a situation of less tangible goods in the aggregate than otherwise but one in which more people are happier than in the past. Such an economy is more valuable.
  • The season of filing tax returns brings with it an increased emphasis on the accountability of the private sector towards the government. In this period of accounting and accountability, as citizens, it is equally important to apply the same principles to the working of the government. A key area is the social accounting of the education cess, which is a compulsory contribution made by all taxpayers, both individuals and firms.
  • The difference
  • A cess is levied on the tax payable and not on the taxable income. In a sense, for the taxpayer, it is equivalent to a surcharge on tax. Direct taxes on income are compulsory transfers of private incomes (both individual and firm) to the government to meet collective aims such as the expansion of schooling infrastructure, an increase in health facilities, or an improvement of transportation infrastructure. A cess can be levied on both direct and indirect taxes. The revenue obtained from income tax, corporation tax, and indirect taxes can be allocated for various purposes. Unlike a tax, a cess is levied to meet a specific purpose; its proceeds cannot be spent on any kind of government expenditure.
  • Recent examples of cess are: infrastructure cess on motor vehicles, clean environment cess, Krishi Kalyan cess (for the improvement of agriculture and welfare of farmers), and education cess. To make the point clear, the proceeds from the education cess cannot be used for cleaning the environment and vice versa.
  • From the point of view of the government, the proceeds of all taxes and cesses are credited in the Consolidated Fund of India (CFI), an account of the Government of India. It constitutes all receipts, expenditures, borrowing and lending of the government. The CFI details are published annually as a part of the Union Budget documents. And the approval of Parliament is necessary to withdraw funds from the CFI. While the tax proceeds are shared with the States and Union Territories according to the guidelines by the Finance Commission, the cess proceeds need not be shared with them.
  • To meet specific socioeconomic goals, a cess is preferred over a tax because it is relatively easier to introduce, modify, and abolish.
  • The education cess, at 2%, which was first proposed in 2004, was aimed at improving primary education.
  • In 2007, an additional cess of 1% was introduced to fund secondary and higher education (SHEC).
  • And recently, in the 2019 Union Budget, a 4% health and education cess was announced which incorporates the previous 3% education cess as well as an additional 1% to provide for the health of rural families.

What data show

  • Data from various years of the Union Budget show an increase in the amount of education cess collected via corporation tax and income tax. Initially, the education cess was also levied on customs, excise, and service taxes. When tax proceeds increase, the cess collected also rises. From the inception of the education cess until 2019, the total proceeds have been ₹4,25,795.81 crore.
  • In order to utilise the cess proceeds lying in the CFI, the government has to create a dedicated fund. As long as a dedicated fund is not created, the cess proceeds remain unutilised.
  • The dedicated fund for primary education is the ‘Prarambhik Shiksha Kosh’, or PSK, (created in October 2005, a year after the cess was introduced) while that for higher and secondary education is the ‘Madhyamik and Uchchtar Shiksha Kosh’ (set up in August 2017). It is baffling why the government set up the dedicated fund for higher and secondary education in 2017, 10 years after the introduction of SHEC; it is also shocking that this fund has remained dormant as of March 2018.
  • Moreover, data from the 2017-18 annual financial audit of government finances conducted by the Comptroller and Auditor General (CAG) show that ₹94,036 crore of SHEC proceeds is lying unutilised in the CFI. In fact, it appears that the government finally set up the ‘Madhyamik and Uchchtar Shiksha Kosh’ after consecutive CAG reports, repeated Lok Sabha queries, and newspaper articles.
  • The degree of economic injustice becomes sharper when the unspent account is seen in conjunction with the Central government’s expenditure on education; for example, in 2017-18, the public expenditure on school and higher education was estimated to be ₹79,435.95 crore. In other words, the cumulative unutilised SHEC funds far exceeded the expenditure on both school and higher education for the year 2017-18.
  • Going forward
  • Taxes in democratic societies indicate the presence of a collective socioeconomic vision aimed at improving livelihoods. Just as taxpayers have a responsibility to pay taxes, the government ought to ensure that tax proceeds are appropriately utilised. Since a cess is introduced with a specific purpose, it is completely unjustified when the proceeds remain unutilised for so many years. Moreover, in the current context of selfimposed fiscal discipline and the consequent reduction of public expenditure, the opportunity cost of unutilised education cess proceeds is significantly high. Finally, it is imperative that the government immediately begins utilising cess proceeds and also publishes an annual account of the manner in which they have been utilised.
  • Many times scrutiny on cess proceeds and their unutilized funds comes, Differentiate between tax proceeds and Cess system. How the cess system can be utilized at best and is it proper to have the cess system.
  • Explain in detail with examples.(300 words)