“Just the place for a Snark! I have said it twice:
That alone should encourage the crew.
Just the place for a Snark! I have said it thrice:
What I tell you three times is true.”
The Hunting of the Snark
These thoughts come after my attending two mega meetings, on ‘Own Source Resources’ in the last few weeks, one in Delhi, sponsored by the World Bank, and the other in Hyderabad, organised by the Ministry of Panchayati Raj (MOPR).
The discussions in the field of public finance in India today have coalesced around a single theme: own source resources, charmingly called ‘OSR’. Seminars are being organised on ‘OSR’ across the country to emphasise its importance. The share of OSR in total expenditure in other countries was sometimes as much as 10%; in India it was around 1%. We could do a great deal by improving this ratio.
The first one was a typical World Bank bash. Located in the national capital, it was undoubtedly a national seminar. The ambiance of the Oberoi Hotel, the presence of ex pat experts, the invitations to VIPs, the attendance of senior civil servants from both the Union and State governments, and a few odd ball consultants gave it an unmistakable air of majesty. The work sponsored by the WB on budget accounting reforms, the impo[r]tance of OSR was the focus. The participants—and there were quite a few of them, were to learn from this wisdom generously served up by the Bank. The ‘we have something important to teach, and you have something important to learn’ tone wasunmistakeable; no need for any subtlety here.
In contrast, the MOPR seminar was held on the campus of the National Institute of Rural Development—to whose name Panchayati Raj has now been attached. NIRD–&PR! The campus was lush. Green lawns in the June Hyderabad summer. The rooms were modest, the auditorium ‘modern’. There was a babble of vernacular tongues. While comfortable and adequate for a seminar, the Oberoi ‘angrezi’ ambiance was missing. No World Bank participation; probably much less spent from the public exchequer. Prices are signalling devices, not indicators of efficiency. While I appreciate the importance of collecting local taxes, I do not think the reason they have so far been unimportant is because of either lack of understanding, or simple inefficacy in administration. A country that can improve its average life expectancy from 30 years in 1950 to 67 or so in 2015 is not really an inefficient one. Such taxes are important for demonstrating an equitable ethic—larger properties must pay more proportionately. Rates for services must encourage desirable behaviour without depriving the vulnerable of access. Prices are signalling devices, not indicators of efficiency.
What neither seminar discussed—and this was an eloquent silence—was the assumption that total tax revenues the country can collect were fixed—and at the maximum possible. There was no question of increasing direct tax rates, nor even of removing the many exemptions in the law that finance ministers pontificated about with boring regularity. The size of the cake was fixed. If therefore local services were to be provided, OSR had to increase, as other demands on the government fisc were as important, and almost nothing could be cut down. This was beautifully expressed with an allusion to architecture. In the nation’s ‘fiscal architecture’, there was no ‘fiscal space’ for such services. OSR was the answer.
Simpletons like me were perplexed. Yes, the modern auditorium in NIRD had a fixed capacity. Once 250 people were inside, an extra one could only enter if some one went out. True! The size of the auditorium was fixed. But did this apply to the direct tax:GDP ratio? The use of terminology from architecture does not make the subject of public finance architectural. It remains a field of economics. The tax:GDP ratio is not rigid; it is subject to policy changes. It can both increase and decrease. Without ever saying so, the discussion was conducted on the basis of this unstated, unquestioned, unambiguous assumption. ‘Fiscal space’ is both fixed and limited.
And how do we collect OSR? Property tax must be collected. Capital Value must be the basis. The system must be transparent, non-discretionary. The State may set a band within which Local Bodies—they are always LBs, never Local Governments—can collect tax. Or the State can fix a floor, leaving LBs to collect at least that much. The pros and cons of which took up a lot of time in many languages.
There was absolutely no confusion over tax and rates; it was ‘tax’. What the officials collected for drinking water was a tax. Economists may quibble on rates and taxes. But this was treated as a tax and it had to be collected. It could be Rs 10/- a month, or Rs 40/-. People could use what they liked. This tax was to be collected. There were a few brave voices that used words like ‘regressive’ or ‘block pricing’, but these were lost in the silence.
One reason that OSR collection was low was because of low capability. There was a consensus that capacity building was not quite an accurate word in this context [I agree completely]. So it was a debate on capability enhancement. The role of the MOPR, the SIRDs and others were discussed. Those unfamiliar with such abbreviations were clearly lacking capability, and had little to contribute.
The discussions were rich. Those speaking had plenty of knowledge, and the diverse experiences of the States presented opportunities to learn. I learned much from these seminars, at the level of detail. But no one answered the basic question: why is there no ‘fiscal space’? Who fixed it? Why are we not seeking advice from economists, rather than architects? Has the country at some time agreed that direct taxes are only to be lowered, thus limiting fiscal space? If the direct tax:GDP ratio could go up from the present [approximately] 10% to even 12%, we would be using different terms and asking different questions.
Yes, OSR is an answer, but is it the answer to our Question?
And that question is: Why cannot we increase the tax:GDP ratio to 15%?
[Disclaimer: Views presented above are those of the author and do not necessarily reflect those of CBPS.]