The Road Ahead: Can We Create An 'Electoral Majority' For Growth?

Growth benefits all people, and improves lives in the long-term. A rising tide lifts all boats; growth too makes everybody better off. But growth benefits the skilled and productive people much more than those with low skills. Similarly, those with access to credit and capital, and those who enjoy full economic freedom and rights, benefit disproportionately from economic growth. In a society divided by caste, the circumstances of birth determine the future of majority of children. Government’s failure compounds the lack of opportunity. While growth improves lives of all, inequalities increase.

There is increasing rhetoric of high taxation, inheritance and wealth taxes and other failed ideas in our political discourse. We tried all these policies and did lasting damage to our economy and perpetuated poverty. In the early 1970s, our top income tax rate was an unbelievable 97.75% for those with income above Rs 2,00,000 per annum (85% income tax + 15% surcharge on tax)! We had inheritance tax until 1985, and wealth tax until 2015. Both taxes yielded very little revenue, and the cost of collection of taxes was higher than the revenue! But high tax regime gave rent seeking opportunity to officials, incentivised concealment of income, and gave rise to vast unaccounted (black) economy.

Perhaps the most important word in economics and public policy is “incentives”. If you make laws and policies that pervert incentives and promote unproductive or even socially debilitating behaviour, then no amount of regulation will help. In fact more regulation in such circumstances only leads to rapacious corruption.

Take inheritance and wealth tax, and high taxation in general. If a person cannot enjoy the fruits of their labour and ingenuity, then there is no incentive to work hard. If entrepreneurship dries up and work ethic disappears, innovation and growth suffer and poverty is perpetuated. A lot of energy and skill would be deployed unproductively in concealing income and wealth, and facilitate transfer of assets to the next generation without formal inheritance. And in this day and age, there is nothing that prevents a successful entrepreneur and innovator, or a high net worth individual, from moving to a low tax territory which is more hospitable to business.

Reckless taxation will not yield revenues; it will stunt growth and will end up in disaster. Cutting the nose to spite the face is a bad idea. Idi Amin’s Uganda, Mugabe’s Zimbabwe, Venezuela, North Korea, East Germany, pre-Deng China, the Soviet Union and many other territories carried out this experiment of distribution and forced equality of outcomes on a grand scale, and the results are there for all of us to see.

The answer does not lie in reverting to pre-1991 policies, ruinous taxation, excessive regulation and trusting the state to distribute efficiently and honestly. But the idea of equality of outcomes is a powerful one, and envy is a more powerful political weapon than hope. What is missed in this debate is rational examination of data. In the three decades since 1991, the bottom half of India saw their real incomes rising four-fold. There is almost no Indian family which has not been touched by higher income, better roads and electricity, mobile phones and television, and internet and digital transfers. But real poverty remains, and many millions are on the margins of survival. In such a climate, more short-term individual measures have a strong appeal. Welfare measures, however, have to be fiscally sustainable. We cannot borrow recklessly for today’s short-term expenditure without creating assets for the next generation. And welfare should be combined with infrastructure, investment promotion, innovation, competition and high economic growth. Only then will incomes rise for the poor on a permanent basis, poverty be eradicated and quality of life improve for all people.

The central challenge, therefore, is not “how to tax more and redistribute”; but “how to enhance the productivity of the poor and give them a real opportunity”. Until the bulk of the poor can see themselves participating in wealth creation and benefiting from growth in a perceptible manner, our politics will run counter to growth. Only when the opportunity to grow is manifestly available to the bulk of the population will there be an electoral majority for economic growth. The next 10-15 years are therefore critical for our democracy and our economy.

We need to do everything possible to accelerate economic growth. While growth alone is not sufficient, per capita income is still the most important determinant of the things that matter to most people. In order to maintain high growth, we need relentless focus on fiscal prudence, infrastructure, investment promotion and deregulation. In addition, we need to focus on four key areas in order to accelerate growth and give opportunity to the poor to partake in growth more equitably. First, we need to remove all needless fetters on the key factors of production — land and labour, so that more investment will flow in and more employment is created. And we need to have at least minimal conditions of rule of law to facilitate growth — contract enforcement, speedy settlement of disputes, and protection of private property.

Second, there should be a massive national effort to enhance the productivity and earning capacity of our people. Quality school education outcomes, not mere enrolment and infrastructure, should be the mantra. And there should be quality healthcare — especially at the primary level — available with public-private partnership without out-of-pocket expenditure.

Third, we need to promote organic growth of about 3000 small towns which will become engines of growth and employment. Such in situ urbanisation will absorb millions of low-skilled workers locally without forcing them to migrate to distant big cities with no social support system. There should be a rural-urban continuum, and once government builds infrastructure and ensures town planning, private sector will invest in housing, businesses and industry. Finally, we should modernise our agriculture by compressing the market chain, and promoting retail chains, storage, processing, contract farming and exports. All these are necessary to promote growth with inclusion, and create a majority that is vested in growth and prosperity.

The author is the founder of Lok Satta movement and Foundation for Democratic Reforms. Email:drjploksatta@gmail.com / Twitter@jp_loksatta