Sunday 8 January 2012

Give the middle class a break (Sunday Guardian)

Jan 8 2012

Manmohan Singh

lthough this is disputed by those nostalgic for the days when there were only Ambassador cars sputtering on the streets, a few admit that the liberalisation of the economy begun in 1991 by Narasimha Rao and Manmohan Singh was necessary. Indeed, such policies have helped damp down social tensions, especially the battles over caste and communal quotas. However unfair these may seem to those excluded from their benefits, as long as quotas are confined to the state sector, the tensions created by such policies are within manageable bands. Once the role of the private sector expanded since 1992, the "upper caste" agitation against the Mandal Committee recommendations died down, now that options to government service had become more plentiful. However, in the minds of the political class, the 1996 defeat of the Congress party at the hands of a hastily-cobbled together coalition headed by V.P. Singh created toxicity around the term "economic liberalisation". Since then, any additional (and usually inadequate) reform has mostly been carried out by stealth, through government edicts, rather than through legislation.
There is a reason why "Manmohanomics" is unpopular with broad swathes of the population, and that is the PM's reluctance to extend to the domestic economy the benefits showered on external players. He refused during 1991-96 to majorly cut personal income-taxes, thereby losing the support of the middle classes for the rest of his reform measures. Again, it was Finance Minister Singh — just as it is PM Singh now — who encouraged the Governor of the Reserve Bank of India to raise interest rates repeatedly and painfully, because the textbooks that he had relied on in the 1940s spoke of such measures as being the best cure against inflation. Unfortunately for the country, Manmohan Singh has an excellent memory, a trait he shares with then RBI Governor C. Rangarajan and the present and previous (equally disastrous) incumbents, Yaga Reddy and D. Subbarao. They seem to remember every nostrum in their 1920s-based economics textbooks, which is probably why the three have pushed policies that ladle carrots to foreign funds and investors, while reserving the stick for domestic investors and enterprises.
Manmohan Singh refused during 1991-96 to majorly cut personal income-taxes, thereby losing the support of the middle classes for the rest of his reform measures.
Of course, although following a monetary policy that is the polar opposite of that adopted by central bankers in the US and the EU, the Manmohan-Rangarajan-Subbarao trio is the toast of Wall Street and the City of London, not to mention the Gnomes of Zurich. That none of these admirers has a vote in elections in India, unlike the Indian middle class and corporate sector whose interests have been ignored by the UPA's economics brains trust, does not seem to have dawned on the UPA's economic managers. Sixteen years after the 1995-96 slowdown caused by high interest rates and continuing high tax rates caused the Congress party to collapse at the polls, a second collapse is likely in the next general election, now that the trio's repeat of the 1994-96 policies have begun to bite deep into growth and employment.
A check into the list of in-laws, parents and close relatives of several Indian executives working for foreign financial enterprises could double as a Who's Who of VVIP India. Small wonder that successive governments have followed a policy of giving preference to foreign rather than to domestic interests. India has become an easy source of profits for foreign speculators and financial institutions, whose personnel have morphed into key advisers of the establishment. Indeed, working in a foreign institution and getting frequently promoted there (presumably by backing its agenda) seems to have become almost mandatory for induction into the Planning Commission and other policy formulating groups within the UPA governance system. Small wonder that any sphere that the state obtrudes in, it destroys, usually for the benefit of a foreign entity, which is ready with imports. India's defence ministry is an example. Had its babus genuinely opened the sector to domestic enterprises, and spent 50% of the money now being spent on acquisitions from Russia, the US and France on giving orders to domestic industry, by now there would have been a powerful defence industry within the country, one that could have met most of the needs of the armed forces as well as earned huge dollops of foreign exchange through exports. Today, apart from the destructive policies of the RBI, a key factor behind the continuing fall in the value of the rupee is the slew of expensive purchases from abroad made by the Ministry of Defence, when the strongest defence is a growing economy. If China is today far ahead of India in defence preparedness, the reason is because that country gave emphasis to domestic production and growth for two decades beginning 1981 before it began to modernise its forces. In the meantime, it relied on its diplomats to keep the peace. In contrast, our own MoD clearly has very little faith in the ability of the Ministry of External Affairs to keep the peace with India's neighbours, as observe the scorching pace of foreign purchases being made by a ministry whose previous civil service head has taken over as the country's "anti-corruption czar", aka the CVC. Certainly his stint in the Defence Ministry would have given CVC Pradeep Kumar substantial insight into the ways in which government procedures get tweaked so as to serve individual pocketbooks.
f P. Chidambaram still has a few admirers, it is not because he cut back on taxpayer rights in favour of Stalin-era powers for the Income-Tax Department, or developed a snoop system that creates extra bribes far more than generating taxes. Had Chidambaram followed his own 1997 example and reduced income-tax rates substantially, at the same time simplifying the tax administration, he would have secured much greater compliance than he has with the post-2004 regimen of raids and covert investigations that he brought back into the tax administration of the country, after such police methods had been discontinued since the 1992 reforms. However, neither Chidambaram nor Manmohan Singh seems to favour lower tax rates for the citizens of India, even though these would lead to greater revenues through better compliance. Instead, they are steadily pushing the country back towards the high tax regimen of the 1970s. Their toxic policies are creating a backlash in the mind of the Indian voter, such that the attraction of a "Strong Man" (such as Narendra Modi) becomes ever more potent. Of course, Manmohan Singh can yet save the day for his party by abandoning his aversion to lower taxes for the Indian people (as distinct from lower customs duty on imports) and by declaring an amnesty scheme for money held abroad that would bring at least $150 billion back into the country, or less than half what the recent amnesty declared by Italy did. Surely what's kosher for Rome must work for Delhi as well!

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