India has become a land of daily outrages, particularly its urban landscape. Outrages could be over anything. For e.g. Planning Commission defines poverty line at 32 Rs a day or Farmer suicides. A typical day starts off with the media or the social media picking up any such issue or taking up any controversial statement by a public figure.

What follows usually is non-stop carpet coverage by the Dilli Media. At 8 pm starts the usual TV debates where participants compete with the anchor as to who can shout at the loudest pitch and this continues up until 10:30pm. Next thing that happens is that the issue becomes the talking point amongst the middle-class. Constant status updates on Facebook, sharing of cartoons and caricatures of politicians follows .

One constant common feature across these anger filled statuses is “What is the Government doing”. Our news anchors also constantly shout on every issue “What is the Government doing”.

  • What is the Government doing to tackle poverty ?
  • What is the Government doing to stop farmer suicides ?
  • What is the Government doing to improve law and order ?
  • What is the Government doing for Muslims ?
  • What is the Government doing for Dalits ?
  • What is the Government doing to tackle Pakistan ?
  • What is the Government doing to ensure Food Security for all ?
  • What is the Government doing to stop rising fuel prices ?

This anger continues for a day or two before the issue dies its natural death and we move over to the next outrage. In this constant noise, we tend to forget what is the real role of the Government, or lets us say what is the most important and primary role of the Government. Sadly bulk of the so-called educated middle-class do not even understand this basic thing. Our noisy and TRP hungry media isn’t bothered to explain this either.

What is the primary Role of Government

Let us do a simple thought experiment. How did the Government as an institution come into existence?

Were the Governments created by the creator, i.e. God himself or was it created by mankind. If it was later, why did he feel the need for a Government? The following is the most probable and simplistic answer to the above questions.

Ancient man lived in caves and sustained himself through hunting and gathering. However, as man learnt farming, he moved towards permanent settlements. Permanent settlements created newer problems. There was a constant threat from wild animals attacking mankind. This problem was sorted out by living groups. While living in groups helped in dividing the task of defending, it was still an overhead. Another problem came up was internal conflicts and how to resolving them. How do they divide land, protect their produce, stop neighbor’s animals from encroaching your farm.

It is at this stage, mankind felt the need of some sort Government. This Government , would be responsible for ensuring defending against wild animals and will also play role in resolving internal conflicts. In return the villagers shall each contribute small amounts food for the sustenance of the members of the Government.

Key Takeaway: The primary responsibility of the state is not to provide free food or to provide free color TVs or any other freebies to the people. The fundamental responsibility of the state is to provide security, both Internal Security (Policing and Justice) and External Security (Defense).

This is because an individual alone cannot perform these functions on his own. It is only when the state performs these responsibilities with adequate efficiency should it try and take up more roles like giving free food to all.

By maintaining order, the king can preserve what he already has, acquire new possessions, augment his wealth and power, and share the benefits of improvement with those worthy of such gifts. The progress of this world depends on the maintenance of order and the [proper functioning of] government. Government by Rule of Law, which alone can guarantee security of life and welfare of the people.

Chanakya(Arthashastra)

Different models of Governance in the World

There are different models of Governance across the World. While some models insist on limiting the Government role others call for greater role of the Government.

Investopedia defines Limited Government as one that a limited government is one that levies just enough taxes to provide for national defense and police protection and otherwise stays out of people’s affairs.

Should the Government play limited role or should its role expand beyond its primary responsibilities? This is an extremely debatable and contentious topic. There are enough examples of well running countries with Limited Government. Likewise there are the Nordic countries like Sweden which have expanded role of state with an elaborate social safety net in addition to public services such as free education and universal healthcare.

In this article, I am deliberately refraining myself from comparing these models or to comment as to which one is better. I believe every nation is different and so is India and it may need to chalk out its own model. Rather, I am only making a limited assertion, “As the role of the state increases from a Limited Government to a more Expanded Government, it needs much greater resources to fulfill these roles.Or in other words, Government must raise enough revenues before unveiling more sops.

I have picked 14 countries with different models of Governance; this includes 9 developed countries and 5 developing countries including India. The following table contains the data for Government Revenues (Tax to GDP ratio) and Government Spending as % to GDP. The third column contains the ratio of the two.

  Government Expenditure % GDP Tax Burden % GDP

Ratio

Australia

33.1

27.1

1.22

South Korea

33.1

25.6

1.29

US

42.2

24

1.76

Germany

47.5

37

1.28

UK

51.2

34.3

1.49

France

56.2

41.9

1.34

Denmark

58.4

48.4

1.21

Sweden

55.2

46.4

1.19

Japan

42.8

28.8

1.49

India

29

16.8

1.73

China

23

17.5

1.31

Brazil

38.8

34.3

1.13

South Africa

30.6

23.4

1.31

Indonesia

16.7

11.4

1.46

Average

39.8

29.8

1.34

Source: Heritage Foundation 2012

The above table needs to be carefully analyzed. The Tax Burden % of GDP ranges from just 11.4% in Indonesia to a high of 48.4% in Denmark. But Tax Burden alone does not tell us the entire picture. It is the corresponding figure of Government Expenditure as % of GDP that completes it.

Theoretically, as Government Expenditure increases, it must raise adequate Tax revenues. The above table shows that India’s ratio is 1.73, second only US which has the worst ratio of 1.76. No wonder US is facing a debt crisis with such an imbalance between revenues and expenditure.

A common Left Liberal argument that is given by NAC in favor of Food Security is the example of Brazil, another developing country that has implemented this. The above table clearly shows that Brazil has a Ratio of only 1.13 while in India it is already 1.73 and is likely to become even worse once Food Security and Direct Cash Transfer are implemented.

In the next table, I am comparing these countries on their ability to maintain law and order and providing justice.

 

Absence of Corruption

Order & Security

Civil Justice

Criminal Justice

Australia

0.9

0.86

0.72

0.72

South Korea

0.74

0.82

0.72

0.76

US

0.78

0.83

0.65

0.65

Germany

0.82

0.86

0.8

0.76

UK

0.8

0.84

0.72

0.75

France

0.8

0.84

0.68

0.69

Denmark

0.95

0.91

0.79

0.87

Sweden

0.96

0.89

0.78

0.82

Japan

0.84

0.89

0.77

0.68

India

0.32

0.39

0.45

0.44

China

0.52

0.78

0.43

0.54

Brazil

0.52

0.64

0.55

0.49

South Africa

0.5

0.56

0.55

0.49

Indonesia

0.3

0.72

0.49

0.45

Average

0.70

0.77

0.65

0.65

Source: Rule of Law Index 2012

As the above table shows, India is one of the worst performers when it comes to providing basic rule of law amongst the selected countries. High Government. Expenditure and correspondingly much lower tax revenues also explains why India has so few policemen, so few judges and spends so much lesser on defense.

“All state activities depend first on the Treasury. Therefore, a king shall devote his best attention to it. A king with a depleted treasury eats into the very vitality of the citizens and the country.”

Chanakya (Arthashastra)

If the Indian state has to fulfill its basic responsibility of providing, it has to improve its Tax revenues and also divert some of its needless expenditure towards Defense, Policing and Judiciary.

Increasing Tax revenues

Increasing tax revenue does not necessarily means increasing tax rates. Chanakya in Arthashastra said the following on Taxation:

Chanakya was against putting any excessive tax burden on the people. He suggested, “The King shall protect agriculture from being harassed by [onerous] fines, taxes and demands of labour.” Similarly, he did not want the tax collectors to be overzealous and collect only what was due. He wrote, “He who produces double the [anticipated] revenue eats up the janapada [the countryside and its people, by leaving inadequate resources for survival and future production].”

Moral: The last line is extremely important as it highlights the fact that excessive taxation can endanger future growth and prosperity of the nation. It is not necessarily important to increase the tax rate, what is more important is to increase TOTAL TAX REVENUE.

In the 70s, the marginal tax in India rate was raised to 97%, but that actually retarded our growth. Excessively increase in also leads to tax evasion.

What is important is to increase the tax base and improve the efficiency of tax collections. This is where we need tax reforms such as GST, DTC along use of latest technologies like mandatory e-filing of returns to improve efficiency of tax collections.

What is also important to note is that much of India’s tax collections are not from Direct Taxes but instead from Indirect Taxes, like taxes on petroleum. Indirect taxes are effectively paid by everyone including the poor as opposed to direct taxes like personal income tax. Barely 3% of Indians pay income tax.

Chanakya on Tax Breaks:

  • Any one who brings new land under cultivation shall be granted exemption from payment of agricultural taxes for a period of two years. Similarly, ‘for building or improving irrigation facilities’, exemption from water rates shall be granted.”
  • Subsidised Loans: “[On new settlements] the cultivators shall be granted grains, cattle and money which they can repay at their convenience.”
  • Exemption from Import Duty: “Any items that, at his discretion, the Chief Controller of Customs, may consider to be highly beneficial to the country (such as rare seeds)” are to be exempt from import duties.

     

Moral: Chanakya emphasised the need for tax incentives to encourage investment. However, those were very few and only for a very short duration.

As a recent article in Indian Express also said “Those who earn over Rs 20 lakh a year, in contrast, comprise just 1.3 per cent of the taxpaying population but ended up paying 63 per cent of the total personal income tax collections in FY12“.

The best way forward is growth and to widen tax base.

Recent Outrages

In this ocean of daily outrages, I have picked two of the recent outrages – the outrage over Delhi Gangrape and the recent barbaric killing of two Indian soldiers by Pakistanis. The reason for picking these two should be pretty obvious by now.

Both these essentially related to the primary responsibilities of the state, i.e. providing security to its people. The first outrage literally shook the nation. What was remarkable was that it was the normally apolitical middle-classes that took to the streets. Even more encouraging sign was the large scale presence of youth and in particular women.

Second outrage over Pakistani barbarity was more muted. There weren’t any major protests or candle marches but the anger was pretty much visible on Facebook where even normally apolitical folks felt the grief and anger over the unprovoked actions of Pakistani military. If we rewind ourselves to four years ago after 26/11, there was similar anger and middle-classes took to streets.

But then we must raise the question, did those protests four years ago change anything, is the Indian state much more secure against terrorism? Even after such massive protests, can we really expect anything to change with respect to security, both internal security and external security?

It is here that the so-called INDIAN MIDDLE CLASS needs to understand power and politics.

Understanding Power and Politics

Power comes from two factors – MONEY and NUMBERS. The rich have the money power. Lack of internal security does not matter to the rich. The rich can buy their way out. The rich can hire private security guards; they can bribe the police or judiciary if need be.

The poor have the numbers. But they are more concerned about how to get two square meals rather than worry about security. They can be bought by politicians through freebies like Direct Cash Transfer or Waiving of Loans. They are susceptible to be polarized into voting along caste or religious lines.

Middle-class on the other hand has both – they have the numbers (much more than the rich), at the same time they also have the money. Yet the middle-class is largely powerless, there is hardly any political group that speaks about middle-class. Off late, only Narendra Modi has spoken about the Neo-middle-class, i.e. the first generation middle-class.

The principal reason for this powerless middle-class is that they are largely indifferent to whatever happens around them until it actually it hits. Delhi Gangrape was one such incident which shook them. 26/11 was another. After 26/11, barely 40% of Mumbaikars actually turned up for vote. No wonder nothing has changed and most probably nothing will change until middle-class rises.

To capture power, middle-class must increase its power. Increasing power means increasing middle-class wealth and its numbers. This means more poor must rise to become part of middle-class. That can happen if and only if the middle-class whole-heartedly supports ECONOMIC REFORMS. The beauty of middle-class is that it is by and large casteless. A middle-class led India would take us away from caste politics towards development politics.

The problem with the middle-class is either they are indifferent towards politics or they are leftists. Far too many in the middle-class want Government to provide free food to the poor. Most of them do not bother to question where the money would come from. The money would be raised by raising the taxes on this very middle-class.

Final Thoughts

Every revolution in the world has been led by the middle-class. It is only the middle-class that can bring change. But do they want change?

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Sandeep

Sandeep is an IT services consultant, currently based out of North India. He holds Libertarian views and is deeply interested in Economics, Politics, Indian History, Defense and Geo-politics. He also tracks the Stock Markets and Pakistani politics. He has been greatly influenced by Arun Shourie, Ambedkar and Chanakya.

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