Kanika Datta: Opportunities from the withering state

SWOT

Finance Minister P Chidambaram told reporters recently that Indians should pay their taxes if they wanted rates to be more moderate.

But here's the thing: most of middle class India are okay paying taxes at current rates. At 30-odd per cent at the margin plus the myriad offsets and exemption, the average Indian's tax burden is not all that punitive "" by one calculation, not more than 10 per cent of taxable income actually goes to the national exchequer.

The point is that more Indians would be happy to pay their taxes if they perceived a true cost-benefit relationship.

To extend the argument a bit more, most would never baulk at paying better service charges for a whole host of state services for the same reason.

Yet, this simple trade-off between government and its citizens is all but non-existent in India.

Given that the average tax-paying urban Indian routinely contends with power cuts, water shortages, bad roads, poor security and appalling public health services, it would be safe to say that the costs of paying taxes (in itself a traumatic experience if anyone has visited the income tax office) are far heavier than any benefits that may accrue from them.

In fact, the ironic fact about our post-nineties unabashedly capitalist Indian state is that it appears to have fulfilled a Marxian prediction, though not quite in the way he would have envisaged: it has all but withered away.

The bigger irony is that this withering away has contributed to the growing prosperity of a host of private sector services that have, with true entrepreneurial vision, cashed in on shortages to provide citizens with services for which they pay taxes or service charges to the state.

Here in the plush capital city of New Delhi, for instance, private water tankers have sprung up as a flourishing business. They have prospered by charging a premium simply because the local government is unable to provide adequate water supplies to its fast-growing citizenry that is nevertheless expected to pay water taxes.

In the fashionable suburb of Gurgaon with its well-heeled business and expat community, local rickshaw services and empty call centre SUVs are able to make a killing because of the absence of local state-provided transport.

Water supplies and local transport, however, are small and localised by their nature. But there are a whole host of businesses that have developed on a national scale "" they would qualify for the label of "organised sector" "" because of the absence or inadequacies of state services.

They range from the private hospitals business that charge exorbitant amounts to provide those who can afford it health services of often dubious quality to courier businesses that benefit from India's inefficient postal services to the private security business, an expensive alibi for the absence of efficient and honest public policing.

Note that all of these are businesses that are not only ranked among India's fastest growing, they've also attracted large amounts of foreign investment interest.

Consider the packaged water business, one of the earliest shortage-driven business opportunities. It is growing at a spanking pace of 40-50 per cent only because publicly provided potable water is non-existent in India.

This was the opportunity that Bisleri's shrewd promoter Ramesh Chauhan spotted well before anyone else "" so much so that his brand has become a generic name for packaged water in India. Today, multinationals Coke and Pepsi vie for this space and even Evian from Danone is trying to build a premium niche in the business.

Five-star hotels are able to extract what can only be called a rent of ten times by charging the health-conscious more than Rs 100 for a Rs 10 one-litre bottle of partially sanitised drinking water.

The genset business is another early bird beneficiary of shortages, dating back to the eighties. Since then, it has "jus' growed", to paraphrase Topsy in Uncle Tom's Cabin.

What's more, it's not going to slow down anytime soon. A recent Frost and Sullivan report predicts that the industry will grow more than 15 per cent between 2007 and 2012 on the back of rapid economic growth and a demand-supply deficit in power.

The point about all these private services is that they are not necessarily optimal in either quality or the cost people pay for them. They flourish in the near-absence of alternatives.

A rich neighbour and small-time businessman once said he never paid income tax because he didn't "believe" in doing so. He's the kind of guy Chidambaram needs to focus on when he talks of better compliance.

For most others, it's not a question of what citizens can do for the country "" but what the country can do for them for payments it receives.