In recent times an increasing attention has been paid to the problem of economic development of underdeveloped countries. The most important aspect of such development is the pursuit of a proper fiscal policy. Unfortunately this aspect has not received the attention that it deserves. Our fiscal policy is based on ideological and sentimental cobwebs and unless these are removed, it is difficult to achieve the objective of economic development by means of planning.
Our national government, with (Jawaharlal) Nehru at its head, has adopted state planning to achieve a rapid economic development of our country, and according to him, there is no other alternative than planning to achieve that objective. If we examine our plans and their working, which have been in vogue for the last eight years, we find that planning, instead of being a path to prosperity, has actually become the path to poverty for the lower and middle classes. It is assumed in official circles that the First Plan is over and that it was a great success.
But what is over is the plan period and not the plan target. So far we have not achieved the objectives, namely, raising the standard of living of the people and increasing the level of employment. When Ministers make speeches they eulogise the First Five Year Plan, but when the people ask them a simple question why the Five Year Plans do not become successful, they argue that there is a rise in population. But this argument is baseless, for were the planners not aware of the fact of increasing population? They should have prepared the plans keeping in view the increase in population.
Second, it is not the population growth that hinders the economic development but the wrong fiscal policy adopted by our government. In this connection professor Lewis says: “It is not true that population growth, actual or potential, is the principal reason why their levels of living are not rising. …but the principal obstacle to raising output per head in these countries is not the rate of population growth but the fact that their rates of CAPITAL FORMATION AT ABOUT FIVE PER CENT IS MUCH LOW.” This is mainly due to the muddle-headed policy of our government.
Planned expenditure
The main object of our planning is to achieve a rapid economic development and, with that end in view, the government is going to spend Rs 4,800 crores in a period of five years, ie Rs 960 crores per annum, or Rs 80 crores per month, or Rs 2.66 crores per day. The present population is 37 crores and Rs 66 crores per day means expenditure of one rupee per day for fifteen persons, i.e. one anna per head per day.
Out of this one anna expenditure, there will come into existence development of agriculture, industry, transport, social services, etc., and on this basis Nehru wants to build a new India on the socialistic pattern of society.
He says: “The time has come when our people could no longer live from hand to mouth. We want higher standards of living for our people; we want to reduce disparity. We want to give a more or less equal opportunity to everybody in India.” This he wants to achieve by spending one anna per head and bringing prosperity to our country only through planning. Unfortunately, economic development has not taken place pari passu with this huge expenditure, and this is mainly due to the fiscal policy.
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Objects of a tax policy
The objectives of a tax policy are not the same everywhere. In industrial countries, the objectives of a tax policy are intended to stabilise the economy and raise revenues for the efficient administration, but these objectives cannot be applied in toto to underdeveloped countries. But our administrators adopted methods which even advanced countries are not bold enough to adopt. In a backward country, the main objective of a tax policy is to encourage capital formation and direct the course of its development.
The tax principles most appropriate to the conditions of underdeveloped countries must be based on productivity—that is, the capacity to raise production required for economic development. Revenue should be related to the effect it will have on private investment and initiative and, lastly, on the fair distribution of taxes among different individuals, on the principle of ability to pay. If the incomes of the higher groups are taxed very heavily, as is done at present in our country on the grounds of establishing a classless society, then the capital formation would be retarded and there would be more need to impose indirect taxes.
One must say with regret that our government has not realised this simple fact and has imposed various direct and indirect taxes with the result that marginal propensity to save and invest has decreased and, as a consequence of this, we have to rely on borrowing from foreigners to implement our unrealistic plans. If our aim is to achieve rapid economic development of our country, then there is a need to reduce direct taxes.
Taxation on industry has already reached the level of diminishing returns, the yield having reduced with increase in rates. The tax structure is now lopsided, with excessive burden on trade and industry. The key to economic development lies in the provision of incentive to private investment, so that the saving can be maximised and can be used to achieve balanced and active development programmes. Without an increase in real investment, capital formation cannot take place.
In this connection Professor M H Gopal, in his presidential address at Lucknow, said: “If, therefore, capital formation is the major objective of the tax policy, if such savings and investment are likely to be done in the private sector, if the saving potential is in the upper income groups and institutions, it follows from the angle of development that the tax policy should tone down the effects on decisions to make risky investments. That is, tax reliefs must be in the direction of higher income groups and institutions.”
Unless our present fiscal policy is completely rationalised, there is no denying the fact that economic development will not only be retarded, but it will also lead the country to the point of bankruptcy. So it is the fiscal policy which is the main hurdle in the path of our economic development, and population growth is a secondary cause.
No plan can succeed if it is foisted on the people. Planning is only a means and welfare is the end of every plan. The plan is for the people; the people are not for the plan. So far our government has failed to secure the fullest co-operation of the people in the execution of the plans. This is mainly due to the fact that plans are not formulated for the well-being of the people. Planners give the people stones when they ask for bread. What is the use of planning when thirsty do not get water when they require it?
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Market economy is the only remedy
If we want to build true democracy in our country, we shall have to develop our economy on the lines of a free market economy. It is by adopting a free market economy that West Germany was able to achieve a miracle within a short period. Planning means chaos and poverty. It is in a Free Market Economy that individuals are free to develop the economy to the fullest extent.
“In the market economy consumers are supreme. Their buying and their abstention from buying ultimately determine what entrepreneurs produce and in what quantity and quality. It determines the emergence of profits and losses and the formation of the rate of interest. It determines every individual’s income. The focal point of the market economy is the market, i.e., the process of formation of commodity prices, wage rates and interest rates and their derivatives, profits and losses. It makes all men in their capacity as producers responsible to consumers. The market adjusts the efforts of all those engaged in supplying the needs of the consumers to the wishes of those for whom they produce—the consumers. It subjects production to consumption.”
The market is a democracy and it is an illusion to believe that a system of planned socialism could be operated according to democratic methods of government. Democracy is linked up with capitalism. It cannot exist where there is planning. If we wish to develop our economy and enjoy prosperity, then competition, and not State monopoly, should be adopted.
In this connection L Erhard of West Germany, in his book Prosperity Through Competition, says: “The most successful means for the achievement and retention of prosperity is competition.” He rightly lays stress on the importance of giving first consideration to the freedom of every citizen to live according to his financial circumstances, personal desires and values.
The resolutions passed at Nagpur and repeated statements made by the top leaders clearly show that the public sector has to grow not only in extent but also in importance. These statements have vitiated the atmosphere for the private sector. It is true that the public sector should establish heavy industries, but even here it should explore the possibility of working in partnership with the private sector, as this would be conducive to better and quicker results.
If the government really wants to achieve the economic development of the country, then the only sensible course open to it is to adopt a free economy and not planning. Planning will not solve our present problems. Private enterprise can do the job in a better and more efficient manner than planning can achieve. Eight years of planning clearly prove that planning has brought more miseries to the people than prosperity.
This essay is part of a series from the Indian Liberals archive, a project of the Centre for Civil Society. This essay is taken from the Indian Libertarian Supplement of the Indian Libertarian with the title “Fiscal Policy & Economic Development” published on March 1, 1959. The original version can be accessed here.
(Edited by Saptak Datta)