Fiscal deficit is a governance deficit

After a decade of supposed reforms, the fiscal deficit of the Centre and states is almost as high as in 1991, when India went bust. This is not because of ignorance or stupidity. It is because of eroding governance. A collapsing state cannot collect revenue, the most basic function of the state. Bihar has long demonstrated this.

In most countries, fast economic growth is the best way of increasing government revenue. When the economy booms, so do tax collections. Consider the US, which has gone from huge budget deficits in the 1980s to huge surpluses today. Politicians facing large deficits in the late 1980s passed the Gramm-Rudman Act to cap spending.

But political manoeuvres ensured that borrowing and spending caps were evaded by one ruse or another. Yashwant Sinha’s plan to enact a Financial Responsibility Act will suffer the same fate. An irresponsible polity cannot be rendered responsible by mere legislation.

What transformed US finances was the continuing economic boom, which has produced an avalanche of revenue. The current fiscal problem of the US is how to utilise a trillion dollar surplus.

India, too, has boomed in the 1990s. Its GDP growth since 1992 has exceeded 6 per cent per year, the highest rate ever. But while the US boom has produced enormous surpluses, the Indian boom has produced rising deficits. Tax revenue as a proportion of GDP has actually fallen. Why? For three main reasons. First, the share of services in the economy is rising fast, and we have yet to find ways of taxing services.

Second, the share of exports in the economy has risen and this sector bears no taxes (the budget now aims to remedy this). But the third and most important factor by far is that the quality of governance is deteriorating steadily.

Union and state governments are increasingly unable to collect tax dues. This problem plagues every section and department of all governments. Bihar may be worse off than Maharashtra, but the rot is deepening everywhere.

When administration as a whole rots, so does tax administration. A government that cannot provide decent education, roads, electricity, or water supply cannot provide decent tax collection either.

Seen in this light, the fiscal deficit is really a governance deficit. If only tax officials did their job efficiently, revenue would flood into the coffers of Union and state governments. Instead we hear that corruption increases by the day, and nobody can do anything about it.

State electricity boards are losing Rs 22,300 crore next year, almost as much as the country’s entire tax collection. But most of these losses are actually theft of electricity or non-collection of dues. The staff have no inclination to stop theft or collect dues, and instead collect bribes for all sorts of fiddling. Theft approaches 50 per cent in some states including Delhi, under the very nose of the Union government, with the active connivance of the state government. So can we blame tax officials for concluding that the government is not serious about collecting dues, and that collecting bribes at government expense is the only game in town?

The Economic Times ran a series of articles before the budget on corruption in customs. Officials told the newspaper that it cost Rs 25 lakh to arrange a transfer to a good customs posting, and that 75 to 80 per cent of all customs staff are on the take.

Importers claim they pay speed money of Rs 1,600 crore per year, just for expediting clearance. Much higher bribes are paid for mis-declaring imports to avail of lower import duties. M Sivaraman, Indian director of IMF, tells horror stories about his attempts to nab corrupt officials, all of which failed.

The customs chief told ET that of the Rs 16,000 crore paid as drawback to exporters, Rs 6,000 crore was not in order. RBI estimates that 10 per cent of export earnings are not yet remitted, up from 8.6 per cent in 1998, yet the exporters claim duty drawbacks and other entitlements for the full quantum of exports. The list of defaulters of export obligations is long and includes the biggest names in business, including the Tatas.

This is an amalgam of many problems. Staff are corrupt. Politicians arranging their transfers are corrupt. Business who fiddle duty drawbacks and misdeclare imports are venal. But why are things getting worse? Because nothing happens to anybody who breaks the rule. Earlier, a handful of people were caught and punished, and this instilled fear and discipline in others. Today, corruption seems to attract no penalty because of the breakdown of governance; nobody is convicted of wrong doing, suspended officers soon bribe their way back to office with a promotion. So the corrupt are no longer looked down upon, and are even envied as big achievers. The alarming feature of corruption is that it is getting socially acceptable now, according to the chief commissioner of customs, Mumbai.

What is true of customs or electricity dues is true of every form of tax collection. This is a governance problem, and cannot be solved through economic reforms. The solution lies in administrative and judicial reforms to ensure speedy prosecution and convictions.

Once the word gets round that crookery has become dangerous, it will automatically diminish.

Economic reforms are useless without good governance. Look at Bihar. Has liberalisation or globalisation helped it the slightest? No, because good policy is meaningless where no rules are enforced. India is not Bihar, but enforcement is eroding everywhere.

So, let nobody think you can end the fiscal deficit just through new tax rates or incentives, subsidy cuts or downsizing. You must improve governance first. Create a system which speedily jails crooks, and the fiscal deficit will disappear like the morning mist.

What do you think?