The welfare mafia

People pay taxes and the government servants make merry. Perhaps the UPA leaders know this reality.

The government treasury is empty from the payments made to government servants for salaries, perks, pension and leakages. Treatment of this chronic disease is beyond the capacity of the present UPA government. Head of the government, Dr Manmohan Singh has himself been a government servant the whole of his life and taking action to whittle down his ‘caste brothers’ is not palatable to him.

 One-half of the revenues of the government are consumed in direct payments to the employees in the form of salaries and pensions. More monies are extracted by them out of government expenditures through commissions. Yet more monies are extracted by them through corruption. Condition of the state governments is worse. One report says that 75 per cent of the revenues of state of Kerala are used up in paying salaries and pensions. The pay commissions have continuously increased salaries of government servants.

It was necessary for the government to increase revenue receipts to bear this increasing burden of government servants. This step has been taken by finance minister Pranab Mukherjee in the budget by raising the rates of excise duty and service tax. Therefore, the government must be criticised for not reining in the payouts to government servants more than for increasing taxes.

The budget is not so bad if we set aside the matter of increase in tax rates. Especially beneficial for the common man are the steps taken towards direct transfer of subsidies in cash. Experiments have been made for direct transfer of subsidies on kerosene and LPG in Alwar and Mysore respectively. The finance minister has indicated that these direct transfers will be expanded to 50 districts in the coming six months. It would have been ideal to distribute fertiliser and diesel subsidies and even government health and education expenditures in the same manner. That said it is good that the finance minister has taken a small step in the right direction.

The farmers and poor people stand to benefit from the interest subsidy scheme. Farmers and women self-help groups will continue to be given loans at a subsidised rate of 7 per cent. They will get a further subsidy of 3 per cent for timely repayment reducing the effective interest rate to 3 per cent. This step is welcome. However, this will fail to raise the incomes of the farmers and SHG members. Main problem faced by them is of low prices for their produce. Interest subsidies will surely lower the cost of production but profit obtained from this reduction will, in all likelihood, be transferred to the consumers through a parallel reduction in prices of the produce. The real objective of the government is to keep prices of goods produced by the poor low so that the urban middle class remains pacified. Nevertheless, interest subsidy is better than no subsidy.

Something or nothing

In addition to lower prices of food items, there is more for the middle class in the budget. Basic exemption of income tax has been raised from Rs 1.80 lakh to Rs 2 lakh. This is inadequate. Inflation of 7-8 per cent means that the people don’t stand to benefit at all.

Yet, this small increase is better than no increase. Additionally, they can invest in equities up to Rs 50,000 per year and claim 50 per cent deduction for the same from taxable income. The common man stands to gain from the budget in another way—though only in the long run. Effort of the finance minister is to control the fiscal deficit. There are doubts whether that will happen because government expenditures have a way of jumping ahead. The foreign investors may develop confidence in the Indian economy and their investment may increase.

The increase in taxes will be troublesome for the corporate sector as well. Goods will become expensive and sales may flounder. Yet there is some relief for them. The finance minister has raised the limit of tax-free bonds in infrastructure sector from Rs 30,000 crore to Rs 60,000 crore. Say, the National Highway Authority of India needs to raise Rs 10,000 crore. Investors are unwilling to buy bonds issued by it because the returns are ordinary. The same bonds will become attractive if income tax is not to be paid on the interest payments. This move will help raise funds, improve infrastructure and reduce costs of industries. External commercial borrowings by infrastructure companies have also been made easier.

It is necessary to understand the basic philosophy of the government to appreciate this budget. The UPA government is committed to heavy expenditure. It wants to collect more taxes and use the revenues for people’s welfare. The rates of excise duty and service tax have been increased in keeping with this thinking. Problem with this philosophy is of quality of government expenditures. A large portion of the money spent in the name of people’s welfare is actually captured by government servants and upper classes. 

 People pay taxes and the government servants make merry. Perhaps the UPA leaders know this reality. Perhaps the unsaid objective is to create an army of supporters of the government who will crush the people’s voice. But untruth does not stand the test of time. The people will surely realise that the welfare bureaucracy is behaving like a welfare mafia. The UPA government should think afresh on this basic ideology. Till then it is futile to expect much more. The budget has tried to make whatever small improvements are possible within this overall decrepit ideology.

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