Independence from PSUs for the taxpayer

• Follow

India as a civilisational state has existed for many centuries, however, as a republic it is relatively young – both in terms of the post-independence years & demographic composition. Aspirations of people have also increased just as the size of India’s economy – and the expansion of opportunities.

It is only natural to reflect on some emerging issues that are important from the perspective of a common man, especially the honest Indian taxpayer. Monika Halan captured the situation of the Indian taxpayer the best as she pointed out at how they are pulling hard for those who don’t. This is indeed true as India is yet to achieve a much more broader tax base for our direct taxes and therefore, the burden of taxes falls on a very small set of the population. Part of this is also by design as agricultural income is tax exempt, and a major part of our workforce at present is employed by the sector. There is, hope that as an outcome of economic growth, there will be lower proportion of workers in the primary sector thereby expanding the tax base over the years. In some ways, this has been the trend since the 1991 reforms — and perhaps the pace of the shift of excess labour may be faster over the coming decade than in the past.

The discussion of the narrow base of taxes is important as it reflects a challenge in terms of the resources available with the government for spending on critical areas of the economy. However, it is equally important to discuss how the government spends its existing resources. Prudent allocation of resources at a time when tax base is narrow and thus, resources are scarce is critical for growing the economy. Besides, public expenditure in key areas also plays a role in augmenting the standard of living of people and ultimately, the most basic aspiration which is near universal would be to improve their existing standard of living.

Diminishing role of PSUs

This is precisely why there is a need to revisit the priorities of the public expenditure programme, more so with the backdrop of the pandemic. One of the cardinal sins committed by policymakers has been the chronic focus on using taxpayers’ money to fund businesses, ranging from hotels to what not. Public Sector Undertakings became the norm across most sectors during the initial decades of the republic. Private sector was tightly regulated and its entry was restricted across industries. However, in 1991, the government finally decided to open the economy -and with it, a dynamic private sector emerged. Subsequently, the role of the public sector began to reduce in the economy.

This discussion is important as the public sector was largely financed by the taxpaying citizens of the country. The funds could have been utilised elsewhere for the purpose of creating more schools, hospitals and construction of roads — each of the three constitute as classic public goods. Such investments would have resulted in richer dividends for the people of India as they would have enabled us to create a robust public healthcare and education system comparable to leading East Asian economies. However, instead of building hospitals, we were busy using taxpayer funds to build hotels in expectation of profits from the enterprise to fund further investments in healthcare. Neither were there any profits, nor did any subsequent investments happen.

The increasing role of the private sector after 1991 should have automatically served as a signal to the government to gradually exit from managing public enterprises. However, due to various reasons, successive governments have avoided the same. The sole exception to this so far was the NDA government between 1999 and 2004.

Burden on taxpayers

Unfortunately, even today many, including taxpayers, do not recognise the importance of privatisation as they are yet to realise that these public sector enterprises, their employees and their entitlements are all funded from their taxes. The money could have been better spent on areas such as making quality healthcare affordable, or ensuring better schools etc. What makes the situation worse is when we have numerous loss-making enterprises in the public sector. Air India happens to be a good example of this — as every year Air India costs roughly Rs 7,000 crore to the taxpayer. Even profit-making public-sector enterprises should be privatised — as the public sector lacks the necessary incentive structures to create efficient enterprises. Indeed, in the past we have witnessed that several PSUs became much more efficient post privatization as new management was geared towards improving efficiency. Consequently, these PSUs added more jobs, paid more taxes and created more economic value for the country.

Privatisation push

Ultimately, the common man must recognise the limitation of the government. Governments can do a lot of things right – such as provisioning for public goods, etc — but it cannot run anything. Therefore, privatisation is important from the perspective of freeing up critical resources that are stuck in low productive or loss-making enterprises. As the PM famously said, “the government has no business to be in business”.

This would also result in greater funds with the government which could be subsequently utilised for ensuring more police personal, more fire fighters and expanding other government services. Only when the government focuses on its role of governance and ensuring public goods can we create a much better investment environment, which will usher in a new era of wider prosperity.

This Independence Day is therefore the opportune moment to give the taxpayers independence from funding our PSUs. Luckily, the government did announce a new privatization policy – however, we are yet to see privatization take place. Here’s hoping that the process of privatisation begins soon and that the taxpayers will finally recognize how this is essential for using their tax money in a more efficient manner.