This article is the first of a new series: Jadu Economics. A close relative of the voodoo economics (sometimes) practised in the West.
What makes it particularly different is its Indian character -- we are like this only.
Jadu may mean magic, but like many Indian words, the nuances hint more. This series will help identify the magical nuances in our economic thinking.
Jadu is very much part of our history. We have practised it for centuries, so it should not be any surprise that Nehru also used it for his development plans.
The world progressed, while Nehru and his disciples were busy constructing the (dirty) modern temples of India. The jadu failed, as it inevitably does, and starting in the early eighties, perhaps because of Rajiv Gandhi's youth, India started to show ever so slowly its back to superstition, socialism, and jadu.
The Nehru-Gandhi (Indira) bargain with jadu idealism lost India three decades of growth and development.
But many of us still believe in magic. Representatives are to be found in all political parties, and across most of the economic spectrum.
But contradictions are galore. There were Vajpayee and Shourie, but the NDA [National Democratic Alliance] had to contend with Advani and the swadeshi band.
There are the flag bearers of jadu, the so-called Left, but Buddhadeb Bhattacharya, chief minister of West Bengal, the longest serving Communist government anywhere in the world (China may be totalitarian but it left the Communist jadu long ago), is increasingly sounding more real and less magical.
Within the present United Progressive Alliance, and especially within the Congress party, the jadu torch bearers are reviving faster than any previous virus.
Unless this virus is expunged, it can wreak havoc on Indian aspirations, and this decade, which rightfully belongs to India.
The virus has the following raison d'etre. The NDA lost the election, to the surprise of everybody.
The people had spoken against economic injustice. Economic reforms were oriented exclusively for the rich; the poor hardly gained.
Reforms diminished the role of the public sector in both the economic (agriculture, infrastructure investments, urban job creation) and social (expenditures on health and education) spheres.
So the obvious policy now is to undo the reforms of the past. Therefore, and this is the first bit of jadu reasoning, the voters brought back the very party that had institutionalised the economic reforms in the first place -- the Congress!
The touching belief in socialism and the public sector's ability to deliver has been a hallmark of all Indian governments, especially that of the 'noblesse oblige' Congress-led governments.
Only two governments have significantly departed from this mantra: the 1991-96 Congress led by a non Nehru-Gandhi dynasty member and the 1999-2004 NDA governments.
And they both lost the political battle for re-election!
Hence, the new economic political wisdom: go forth and multiply the public sector if you want to be re-elected.
Make profitable the old and sick public sector corporations, whether they are producing airline pilots or fertilisers; provide employment to the unemployed, food to the needy, health care to the sick, education to the illiterate, equality to the discriminated, and infrastructure for all.
Announce to the world that the torch has been passed to public sector-led India -- the new destination for the poor, huddled masses of not only India but the world.
Can these noble ambitions be fulfilled? Yes. Intellectual support is provided by 'facts' peddled by the World Bank, IMF, and their acolytes: India taxes too little of its GDP; and spends too little on poverty reduction, education and health.
Our socialist ambitions do not require a realignment of expenditures, let alone reduction.
India can easily tax another 2 to 3 per cent of its GDP, and this money can go towards serving the people.
The UPA government has also been quick to implement this ideology; an education cess was introduced within days of assuming power, an employment guarantee act, costing about 1 to 2 per cent of GDP, has been tabled in Parliament, and infrastructure investment is to be boosted by the 'free,' and to be made freely available, foreign exchange.
Under-taxation is considered the root cause of our fiscal problems. At 'only' 30 per cent of GDP, our expenditure share is just right, while our tax revenue at only 15 per cent of GDP is considerably lower than it should be.
So the road to fiscal prudence does not involve expenditure reduction, but rather an increase in tax revenues. Social reforms like the Employment Guarantee Act require that we increase expenditures and finance such expenditures via increased tax revenues.
Fiscal deficit reduction (from 10 per cent of GDP) should come much later.
How true is the 'fact' of too little taxation, and just correct, if not too low, expenditures? Now the jadugars do not believe they are doing jadugiri -- instead, they believe, because the cause is just, their economics is right.
So Jean Dreze, architect of the EGA, and one who never met an expenditure he did not like, believes that our tax/GDP ratio is lower than it 'should' be.
What is 'should' -- the tax share (37 per cent) observed in the richest countries of the world. True jadu. But there are more sophisticated versions of this jadu, one that was wielded recently by noted economist and tax expert Indira Rajaraman.
Unlike Mr Dreze, Ms Rajaraman has never met a tax she did not like. At the recent meeting that the Finance Minister P Chidambaram had with economists, I offered evidence that the Indian tax share was actually just right, given our non-rich country income levels.
Our problem is that we aspire to be Scandinavian in our expenditure when our income levels were comparable to sub-Saharan Africa.
The messianic zeal of the tax and spend experts is quite extraordinary, though. My tax and expenditure share evidence was not only pooh-poohed by Ms Rajaraman, but she emphatically asserted that my numbers were at best a product of my 'hunches,' and worse, of my imagination.
In yesteryear, before jadu economics, I would have challenged her to a duel -- now, I can only try to expose her extravagant lies, albeit lies for the great cause of increasing taxes to increase expenditures for the poor.
The data on my 'hunch' have been painstakingly gathered from three different sources: the World Bank, IMF and OECD.
For the year 1999 (the last year with the maximum number of country observations--82), and regardless of selection (poor, rich, small, large, and all combinations in-between) the graphs document the simple reality.
The Indian tax ratio is right on the predicted line. Notably, most of East Asia (and America) tax much less than suggested by their income levels; all of Scandinavia and most of formerly Communist Eastern Europe tax more than indicated by their income levels.
But it is vis-à-vis expenditure that the Indian rope trick is truly exposed. We are in a class of our own with a predicted expenditure share some 7 percentage points below our actual share of expenditures (30 per cent of GDP).
Most less developed countries have their aspirations in check -- they only want to be like Scandinavia in due course, and not yesterday.
Does this mean that India cannot increase tax revenue?
Of course not. The next article will delineate how (through a flat tax). But what these pretty tax and spend pictures show is that any increased tax and non-tax revenue should go towards decreasing the fiscal deficit and decreasing wasteful expenditure, of which there is plenty.
But then, that would be logical, not magical.
