Policy-makers, don't run scared

Policy-makers, don't run scared

The prospect of an "employment guarantee act" strikes terror in the heart of many fiscal experts. A full-fledged employment guarantee programme is likely to cost between one and two per cent of India's gross domestic product (gdp). This might be a small price to pay to protect the bulk of the country's rural population from hunger and insecurity. But for the fiscal policy-maker who has to cope with many competing demands -- often backed by powerful lobbies -- one per cent of gdp is likely to sound quite forbidding.

One way of meeting this challenge is to raise additional taxes -- as Maharashtra has done in order to finance its own "employment guarantee scheme". There is some merit to this proposal. In fact, India's current tax-gdp ratio (the ratio of tax revenue to gdp) compares quite poorly with many countries: about 15 per cent (for the centre and states combined) compared with nearly 40 per cent in high-income countries. The ratio of central taxes to the country's gdp has actually fallen from 10.6 per cent in 1987-8 to 9.3 per cent in 2003-4. In recent times, a number of expert committees have recommended ways to improve the tax- gdp ratio. Introducing value added taxes, extending indirect taxation to services, using information technology to broaden the income tax net are some of the measures that have been proposed. In addition, experts also suggest cracking down on tax evasions, and putting an end to arbitrary exemptions and other forms of erosion of the tax base. If these opportunities are well-utilised, India's plan expenditure can easily be raised by much more than one per cent of its gdp in the next few years -- this can finance the employment guarantee scheme.

The dominant mood among tax reformers today is to eliminate exemptions, reduce differential tax rates and even strive for "uniform" taxation. For instance, the Report of the Task Force on Implementation of the Fiscal Responsibility and Budget Management Act, 2003 advocates a single goods and services tax. Though the report proposes three rates for this tax, the variance between the rates is very little -- in fact, the standard rate of 20 per cent is applicable in most cases. No doubt, it is a good thing to simplify the tax system, and to reduce the scope for arbitrariness by avoiding differential taxes where there is no justification for them. But this concern should not override other traditional goals of rational public finance, such as promoting social equity and correcting allocation of resources.

Introducing a "green tax" on commodities and activities that are harmful to the environment -- or, more generally, on commodities and activities with an "anti-social" character -- can be a more apposite way to finance employment guarantee. The present taxes on petroleum products can be seen as a green tax of sorts. Other prime targets for green taxation include polluting industries, motor vehicles, plastic products, timber products, parking, advertisements, liquor consumption, gambling, air conditioners and tobacco. It would not be very difficult to make a list of items suitable for a green tax, and to devise appropriate tax rates, without opening the door to the rampant arbitrariness and special interest lobbying that has given a bad name to differential taxation in India.

In fact, the complementarity between green taxes and an employment guarantee programme becomes quite evident if we note that -- in many areas -- the largest potential for labour-intensive public works lies in the field of environmental protection: watershed development, land regeneration, prevention of soil erosion, restoration of tanks, protection of forests and related activities. Thus, an employment guarantee programme financed (partly at least) by green taxes would be a powerful way of addressing two major national concerns: rural unemployment and environmental degradation. Using green taxes as its major source of funds would also ensure that the programme has a secure and sustainable financial base.

Ultimately, financing the employment guarantee programme is not just a matter of economic viability but also one of political acceptability and social equity. Seen in this light, the case for a public policy initiative linking green taxes with an Employment Guarantee Programme cannot be overstated.

Jean Drze is with the Govind Ballabh Pant Social Science Institute, Allahabad, Uttar Pradesh 12jav.net12jav.net