REFORMS GONE HAYWIRE - A wholesale repudiation of progressive taxation

Ashok Mitra
The Telegraph
November 29, 2004

The word, ?comprador?, of 16th-century vintage, has its roots in the Portuguese language. It has, however, travelled far and wide since. It originally meant a native house-steward, at least so suggest the dictionaries. Gradually, in the heady colonial days, comprador came to connote a native servant employed as head of the native staff, and as agent, by European commercial and business houses. In the course of the past century, particularly in the context of Latin America, the expression has assumed a more pointed significance. A comprador is now an individual who not only acts as agent representing foreign interests, but who, in addition, almost as a matter of principle, places the interests of foreigners above those of his native country.

Political economy in Latin America is full of rich debates concerning traits and symptoms of compradorism as well as stages and phases of the comprador epoch. The reverberation of these debates has not quite reached India. This is understandable, for Indian scholars have greater respect for pucca Western strands of thought. That does not mean though that the practice of compradorism has lagged behind here. The decade of the Nineties is for India about as important, one is almost tempted to say, as the final decades of the 18th century were for the advent of the Romantic era in Europe. Indians have learnt in the course of this decade that to be gracious to foreigners is the quintessence of economics; that is to say, the interest of foreigners must precede national interests. Which is why in 1994 the American consultancy group, Enron, was allowed to float a power-plant company in Maharashtra whose equity was to vest one hundred per cent with the Americans, while the bulk of the investible funds needed for it were to be provided by Indians.

The Indian authorities also agreed to sign a power purchase agreement which accepted as commonplace the notion that the Enron corporation would sell power to the natives at a price much, much higher than the price paid for per unit of power produced by plants installed by Bhopal?s Bharat Heavy Electricals in several places in the country. Intense debate took place in parliament over the wisdom of the deal struck with Enron, but all questions raised by doubters were brushed aside.

Foreigners, the nation was informed, know better; foreigners are ipso facto efficiency personified, and we must, for efficiency?s sake, pay them through the nose. There was some gossip that, to facilitate the adoption of such a stance by the ministry of finance and the ministry of power in New Delhi and the state government of Maharashtra, some money had passed hands. Even if the gossip had some basis, that was, however, an integral part of comprador culture. Native agents are ? foreigners take it for granted ? entitled to some bucksheesh for services they render, services that most of the time go against the native country?s interests. It is a different matter that Enron was soon found out to be, in the United States of America itself, a crooks? opera, and the projected power plant at Dabhol came to an ignominious end.

The recent hullabaloo over the legitimacy or otherwise of subsidies for oil and gas supplied to domestic consumers tells a story which has a grotesque overlap with the Enron incident. The terms of the power purchase agreement signed with Enron amounted to offering a hefty subsidy to the foreign firm. Such a subsidy was then considered to be a noble act. A different tune is now being sung over the persistent public demand that the domestic price of oil and gas supplied to domestic consumers be subsidized through a reduction in import and excise duties. Such slashing of duties is akin to subsidy, which the public is being told, is sin; one must not charge for a product a price lower than its cost, such practice allegedly retards economic efficiency.

It is all great fun. Those in authority are aghast at the suggestion to subsidize domestic consumers. There could be greater sins. Forget Enron. Barely a couple of years ago, exactly such a sin was committed by the government of India when, following directives from the World Trade Organization, it lowered import tariffs on 500-odd farm products, including wheat, cotton, tobacco, copra and rubber. In effect, by lowering the tariffs, the Indian authorities offered subsidies to foreign producers and exporters so as to enable them to lower their prices and thereby eject the home produces from the Indian market. In consequence, hundreds of Indian farmers experienced indescribable hardship; some of them were driven to commit suicide. Tariffs were lowered and subsidy offered to foreigners at the cost of Indian farmers; the government was not at all concerned if, in the process, domestic interests were adversely affected; comprador ethos was in uninhibited flow: sin is no sin if committed to further foreign interests.

The dictum has gradually attained respectability. Subsidies are all right if they promote foreign interests; they are otherwise if they promote a domestic cause. Lowering excise duties on oil and natural gas is resisted by the authorities because such a reduction will offer relief to domestic consumers. This, according to the authorities, is impermissible; domestic consumers are not foreigners.

Come to think of it, the country?s taxation policy, already incorrigibly pro-rich, has gradually undergone a comprador tilt as well. This is only natural, since taxes and subsidies are aspects of the same phenomenon: a tax is a negative subsidy, a subsidy is negative taxation. Since 1991, while direct taxes have been continuously lowered for companies, including foreign companies and upper income groups, indirect taxes have been raised. Lowering direct taxes is equivalent to offering subsidies to affluent citizens and foreigners. On the other hand, a stiffening of indirect taxes, the incidence of which falls mostly on the relatively poor, is akin to lowering subsidies for the poor.

Indian economic policy has therefore evolved into a compound of two principal objectives: first, promoting the interests of foreigners against those of the native crowd, and second, furthering the interests of the rich by putting an increasing squeeze on the poor. This is economics made easy, and is being religiously put into practice by the craftsmen at work in New Delhi.

Examples of how far the government has proceeded in the pursuit of these twin goal are indeed galore. Consider, for instance, the Central Electricity Act 2003. Subsidy, the act echoes, is sin; cross-subsidy is equally so. The state electricity boards have been enjoined by the act not to charge affluent consumers at rates higher than costs and use the proceeds of such higher charges to offer lower rates to poorer consumers. Cross-subsidy of this nature is supposed to be bad economics. The act, passed last year, has the vociferous support of the government of India and its various institutions, including the Planning Commission.

Nobody seemingly bothers to consider that abolition of the principle of cross-subsidy is really a wholesale repudiation of the structure of progressive taxation, the centrepiece of public finance in the Western world since the middle of the 19th century. According to the doctrine of progressive taxation, the rich have the ability to bear a higher rate of taxation compared to the poor, and therefore deserve to be taxed at a higher rate. Receipts from tax-payers in upper-income ranges, taxed at higher rates, have, over the past 150 years, provided the funds in country after country for essential social services specifically aimed at ameliorating the conditions of the poorer classes. The Central Electricity Act 2003 and its proponents have gone on record defying this basic canon of public finance. And we are supposed to accept all this in the name of economic reforms.