After my morning chore and before leaving for college I like everyday checked news updates in my mail, and found a wonderful article from Boston Globe. Though article is about US and their economy but like always there can always be few parallels drawn out between India and US. Present problem of global downturn is more serious for India than US, reason being that India is still in developing stage and the amount of infrastructure in India is far less that what US has got and adding to that we have larger number of lives to support.
General perception among public and few economists in US (for US economy) to tackle current down turn is to minimize government and lower the tax. But the situation in India is slightly opposite, government is inflating in size and hunger and taxes are also increasing with new forms or other. Burden is as usual falling more so on middle income group [poor chaps- papa lets be rich 😉 ] as income tax never reaches mega heights for those with mega bank balance. India in case of its economy is still some 20-25 years behind US, I am talking in terms of net worth, and we should thus keep an eye on history of developed nations to avoid mistakes, which they committed, or those, which they didn’t. In 1980 presidential elections of US, Ronal Regan put it in a nice way, “We don’t have inflation because the people are living too well. We have inflation because the government is living too well.” So is it time for us to look retrospectively in spending of our governments?
The underlying economic argument is persuasively simple: Higher taxes undermine incentives to work and invest; a bigger government pushes aside private enterprise and siphons money from private investment; social programs are inefficient and make people dependent. All these cost the nation valuable gains in productivity. But there are also some counterviews that I will discuss slightly later on.
While at the same time we must also look into the logics of Mr. FM behind higher taxes, India is in dearth of infrastructure and additional taxes are required to meet national requirements. We as a nation is lacking in terms of education, basic amenities, health and energy, so our Mr. FM thinks that and I also feel rightly so that we need to put in more money for that. Another factor which induces such an action is staggeringly low investments in industrial sector, and this is the reason due to which govt. is still not able to pull its hand off from public sector units. But the other point of Mr. Regan, the size of government, does it really matter, there are enough economical researches to prove otherwise. Most of these researches were undertaken in developed nations, the problem in India with the pinch of added corruption is that the added size government slows things down, which we, with many social and economical problems are in no position to carry on out back. So rather than harming the economy, the evidence shows that government spending, when done well, contributes critically to economic growth.
Coming back to first problem, and there are evidences to show, that higher taxes will not halt economy. But with that there is a catch, and the catch is that spending pattern should not be adversely affected with raise in taxes. So if you now look at the picture comprehensively, you can look at three things, increased taxes, higher government spending (less private input); that is heavy and bulky government, and the present problem of inflation, and with all these three problems there are mighty chances that spending pattern of public will alter, public in general would like to save much and work less as there are heavy taxes to pay. Static money is of no use, that aphorism you can take from me.
Contrary to any romantic claims there is no nation, which sticks to one ideology throughout, so government even in a highly capitalistic nation like US has to some time, intervene into activities related to national importance and development. There must be some streamlining of government in whole for smoothening the process of development, it is high time to speed up the investment and that too without spillage. This unromantically means that there must be some tightening of state and local governments. This also means that India at present cannot turn to laissez-faire economics.
Coming back to tax and government and putting them in present scenario, one thing clearly embosses out, and that is, with high as prefix (tax and inflation) the result will be lower spending and lesser private infrastructure, which according to my argument will not argufy nicely with growth. All we at present need are some flexible economic policies and through spending, whether by government or by private partners and adding to that a strong government at centre.
Disclosure: Some part of this posts are taken directly from http://www.boston.com/bostonglobe/ideas/articles/2008/09/07/growth_factor/. Humble apologies for that.