The Big Picture

Vision as India’s Biggest Export

MR P Chidambaram’s new budget has vision. Most budgets make niggling tax changes to meet the limited challenges of the coming year. But Mr Chidambaram is thinking way beyond next year. He has a vision of India’s place in Asia, and indeed in the world community . He has not simply cut taxes to win cheap popularity or appease vested interests. He aims to align India’s income and corporate taxes with those of the miracle economics of South-East Asia. While cutting customs duties too, he has said he aims to get these down to ASEAN levels by the year 2000. The message is clear. Watch out, Asia, India is coming to join you and your prosperity.

Big Transformation

Too many commentators in India are missing the wood for the trees by looking at the impact of the budget on exports, stock markets, electronics or other such sectors. What really matters is the big picture. India is finally bidding to become a fully paid up member of the Asian economic miracle. Even if it only half achieves that goal. It will still be a huge transformation.

Mr Man Mohan Singh has a similar vision in 1991. He called for an India that integrated itself with the global economy, abandoned its reliance on foreign aid and sought commercial capital without any concession: and India which stood on its two feet and looked the world in the eye. However, those brave words carried little weight when he was deep in hock to the IMF. And India’s tax rates and controls were so stratospheric that Mr Singh’s graded reductions looked less than visionary. Yet his is the broad vision that is now being put into sharper focus by; Mr Chidambaram.

While Mr Chindambaram has cut tax levels to those prevailing in ASEAN countries, they apply at much lower incomes. In Malaysia, the 30 per cent rate applies to incomes above RM 160,000 (Rs 22 lakh). In Singapore, the peak 28 per cent applies to incomes above S$400,000 (Rs one crore). But in India, the peak rate comes at an income of just Rs 1.5 lakh. Besides, ASEAN countries have no wealth tax and little or no capital gains tax. So Mr Chidambaram is still some distance away from truly ASEAN levels. But he is getting there.

Critics say Mr Chidambaram has pandered to the wealthy by cutting their taxes. This is the old malaise of looking piecemeal at individual parts of the budget instead of its overall vision. If India can replicate the ASEAN experience even very approximately, its poor will benefit enormously. ASEAN countries with low tax rates have reduced poverty for more dramatically than socialist India. Indira Gandhi’s garibi hatao phase raised income tax to 97.75 per cent, yet the poverty ratio did not go down at all. She, as well as ASEAN countries, have proved that high taxes have no connection with reducing poverty. In dynamic ASEAN economies, the interests of the rich and poor are not opposed to each other but move upwards together.

However, these countries have not reduced poverty simply by cutting taxes or attracting foreign capital. They have done infinitely more than socialist India in education and health, and attained far higher agricultural growth rates in their take-off stage. Mr Chidambaram has raised allocations for social spending, but this matters little. Primary education, primary health, rural development and agriculture are all state subjects. And most state governments today are bankrupt and unable to provide decent sums for these vital areas. Corruption and inefficiency mean that little of the allotted money reaches the poor.

In these circumstances, India cannot become an Asian tiger, no matter what Mr Chidambaram does in New Delhi. India is not going to reach its potential of 10 per cent GDP growth per year. However, even a partial move towards ASEAN performance levels will achieve for more than the old socialist vision.

Attractive Place

Indeed, India has already done enough to become an attractive place for the world to park its money in. The most dramatic evidence of this comes not from foreign investment but remittances pouring in from Indians abroad. In the 1980s, remittances were around $3 billion per year. But after our reforms, the figure shot up to $6.2 billion in 1994-95, $7.4 billion in 1995-96 and could touch $ 9 billion this year. The entire trade gap last year was $ 8.94 billion, so that remittances plugged virtually the whole gap.


Why are these dollars suddenly pouring in? The answer is that India has finally become a country into which Indians feel it is worth putting money. This was not so in the socialist decades, when Indians did their level best to take money out of the country through hawala deals and invoice manipulation. An estimated $ 4 billion a year went out as capital flight. Today some capital still flies away, but a much bigger sum flows in. Some of this is the return of flight capital. The best evidence of this is that the share of Gulf labourers in remittances has fallen from two-thirds in 1991 to 40 per cent today, and the massive new flows are coming from Europe and America.

Earlier, India was not country worth putting money into. Income tax rates exceeded 60 per cent, pervasive foreign exchange controls made it profitable to accumulate dollars abroad and an overvalued exchange rate rewarded capital flight.

New Avenues

But since 1991, the maximum income tax rate has come down to 40 per cent and will now fall to 30 per cent. Foreign exchange controls have been eased so much that you; can easily get dollars for travel or education. Foreign goods earlier unavailable in India are available at moderate prices after import liberalisation. A competitive exchange rate means dollar holders can no longer hope for huge windfalls from devaluation, and can make more by putting money into India at the higher interest rates prevailing here. The reforms have opened many new avenues of investment within India.

And so people have decided it is more profitable to bring money into India than take it out. This is the result not of a tax change here or an incentive there but a new vision of what India is about and where it wants to go. India at last looks serious about going the ASEAN way, and people are willing to invest billions in that vision. It matters not that the vision is constantly opposed by interests that flourished in the old regime—politicians and bureaucrats seeking kickbacks and patronage networks, trade unions determined to protect unproductive workers, inefficient businessmen wanting to milk suffering Indian consumers.

These interests blur the new vision, yet cannot wipe it out. And that is good enough to attract $9 billion of remittances per year. This far exceeds earnings from our biggest export item, gems and jewellery ($ 5.2 billion). In effect, vision has become India’s biggest export.

What do you think?