The curse of honesty

Modi Government is honest. But this honesty has become a curse for the people because the government revenues are honestly being used for consumption instead of investment. Wrong policies are being implemented honestly. It is like the homemaker honestly feeding best of pizza to the children. She brought the best of flour and tomatoes to make the pizza. This honesty is leading to bad health of the children. It would be better if she had bought wheat flour of somewhat lower quality and fed healthy dal and roti instead.

The UPA ministers and senior officials were corrupt. They would take bribes and look the other way on non-compliances of the laws. Say, an industrialist was required to install a pollution control unit costing Rs 5 crore. It was possible to give a bribe Rs 5 lakh every year to the minister and continue to run the factory without the pollution control unit. The industrialist would have to pay interest of Rs 70 lakh per year and electricity and labour of like amount to run the pollution control unit. He saved a total of Rs 1.40 crore per year by paying a small bribe.

This led to reduction in his cost of production. He made good profit because his cost of production was less. He invested in new factories. He was producing goods at a low price hence the demand for his product was good. He was making good profits by selling these goods and had the money to invest in a new factory. The economy looked up because of the corruption.

The minister had lots of monies coming from the thousands of industrial units. She invested the bribe money in real estate. I know of a chief minister who made large numbers of partnerships with builders. The builders got easy access to money and were able to complete the building soon. Corruption was working as a lubricant in two ways. It was leading to a lower cost of production for the industrialist. It was providing large amounts of investments both in new factories and in real estate howsoever unholy it may be.

Modi Government has put an end to such corruption at high places. As a result the industrialist has to now invest in establishing the pollution control plant. He is also paying more taxes than previously because the tax collector has also become relatively honest. This has led to an increase in the cost of production. The minister is also not getting grease money and not making partnerships with builders.

The builder is not getting a steady stream of black money. He is not able to complete his project. Thus real estate market is down. The money that was previously flowing into the pockets of the minister is now flowing into the revenues of the government. The impact of this honesty depends upon the use of the government revenues. The government could use the money to make highways, improved distribution of electricity and to introduce e-gateway for tax collection.

The increase in cost of production for the industrialist due to the installation of pollution control unity and stricter tax compliance would then be compensated by government investment. The cost of transport will be reduced from the making of highways. The cost of electricity will be reduced by improvement in electricity distribution system. The cost of tax compliance will be reduced by working through the e-gateway.

However, the economy would do much worse if the revenues were used for increased government consumption such as paying huge salaries to government servants and pensioners. In this case, the industrialist would be doubly hit. The increase in cost of production due to the installation of pollution control unit and stricter tax compliance would then not be compensated by reduced cost of production by the construction of improved highways. Result will be loss of profit and reduced investments by the industrialist.

The flow of black money into the real estate market would also be less. Honesty of the government will deprive the ministers from making partnerships with builders. As a result, the economy will go down. The underlying issue is: Honesty for whom? The purpose of honesty is to provide relief to the common man or to provide more salaries to government servants? What is the purpose of the economy? If the purpose of the economy is to provide relief to the common man then government revenues should be used for investment.

If the purpose of the economy is to provide relief to the government servants, then government revenues should be used for paying higher salaries. The conduct of the Modi government is clearly to provide increased consumption to the government servants. The implementation of ‘One Rank One Pension’ and Seventh Pay Commission is leading to increased consumption. The capital expenditure of the Central government is showing a declining trend.

The government is honestly sucking out the incomes of the 125 crore people of the country to provide increased benefit to the government staff and pensioners. This government is “of the government servants, by the government servants, for the government servants.” The “people” are haplessly being squeezed in this gigantic machine of honesty.

The abovementioned negative impact of the policies of the NDA government is partly nullified by honesty in giving out government contracts. Say, a highway is to be built. Previously the contractor had to pay huge bribes to the ministers and officials. That led to an increase in the cost of making the highway. This increased cost could not be recovered from the revenues.

That led to lesser private investment in highways. Those bribes are not required to be paid to the ministers and officials of the present government. As a result the cost of making the highway is less and investment has become profitable. This is the reason that the economy has not collapsed despite increased payment of salaries to the government servants. The same honesty in giving out contracts would have pushed our growth rate to 10 per cent plus if the government revenues were used for investment instead of consumption.

The bottom line is that honesty is good if the direction is good. Of what use is a driver who honestly takes the passenger to Kolkata when the destination was Mumbai? The government has announced a deadline of September 30 for the businessmen to disclose their black money. The government will aggressively pursue the defaulters thereafter.

This will only make things worse. Businessmen will spend more energy in saving themselves from the noose of the taxman than in making investment plans. Modi must first redirect the revenues into productive areas. Then only honesty will be beneficial for the people. (Author was formerly Professor of Economics at IIM, Bengaluru)

By Dr Bharat Jhunjhunwala