The pesky priests

Jet-borne economists are very much like the Victorian priests who invaded India in the 1870s and hugely influenced legislation

Will no one rid me of this meddlesome priest?” said Henry II of England in 1170 when he got irritated with his friend Thomas Becket who was also the Archbishop of Canterbury. 

The priest was giving the king impractical and unwanted advice.

In modern India this can be said of NRI economists who swan in and out of the country dispensing advice like agony aunts to NGOs. The latest advice is that taxes must be increased to pay for the socially necessary — but fiscally disastrous — Nyay project of the Congress.

Nothing wrong with that except just the one thing: these guys don’t earn Indian salaries and pay Indian taxes. I call these jet-borne economists and the India-based Jesuits amongst them the 21st century Salvation Army. Their approach to public finance is exactly the same.

They are very much like the Victorian priests who invaded India in the 1870s and hugely influenced legislation. As a result of their interference, a different morality was imposed on India’s laws.

But before proceeding with these NRI economists, let me dispose of a fallacy, namely, that Indians are undertaxed. That statement is true if — and only if — around half the population is earning enough to be taxed, which it is not.

Second, even those who don’t earn enough to pay income tax, do pay a lot by way of indirect taxes. So, please let us stop this nonsense about being undertaxed once and for all. It’s boring.

The real problem, which the NRI economists don’t seem to know, lies in the way governments use tax revenues. Take  pensions, for example. No one wants to talk about them.

So let me ask: Why should an employee of the central or state government get a fully inflation-indexed pension? Why should they all get 50 per cent of the last pay drawn? Why not fix the pension at 50 per cent of first pay drawn for Class One employees and then gradually go down to the Class Four level where the pension can be 50 per cent of the last pay drawn? What sense does it make to spend so much on those who have often saved enough to have two, if not more, houses?

If some grand Rawlesian notions are driving these NRIs, why not look at unrequited transfers to the 

underserving? I look forward, keenly, with bated breath, in prolepsis, for just one of these guys to endorse my proposal.

If they won’t, they should shut up because being a contextually clueless bunch they should understand the contexts first.

Contextually clueless

Basically, the issue is this: If compassion has to underpin politics — which it must but doesn’t — what is the best way to transfer some of this sentiment into fiscal policy?

The easy way is to tax the rich and hand over some money to the poor. I call this the Robbing Hood approach. It converts a political need into an economic obligation, dripping with moral gulab jamun juice.

But the fact is that this obligation is better met by leaving more money in the hands of the well-off than less. In economics, lest the compassionate NRIs have forgotten it, this serves two ends.

One, it increases aggregate demand for non-wage goods and two, it increases the savings rate. Both are necessary for investment, which is necessary to create work for the poor.

India’s problem since 1957 — thanks to Sir Nicholas Kaldor whose ideas were rejected in Britain — is that we have done the opposite. We have taken money from those who can use it most productively and handed it over to those who use it least productively. This includes the government which uses the money for consumption rather than investment.

The results are there for all to see — overwhelming poverty and the growing moral need for direct income transfers. But if it hasn’t worked when it was indirect via subsidies, why should it work now?

Let me put this another way. You don’t solve either the economic problem of poverty or even the moral one via income transfers. You only solve the political one.

A larger question is whether economists should be concerning themselves with moral issues. Reading Adam Smith’s Theory of Moral Sentiments may be necessary but it is not sufficient. His principles of taxation should be read as well.

They will open eyes and minds.