The good for the government Vs the good for the governed: The government is only financed by the tax payer

We can have small governments and we can have big governments, Mr. Modi. Small governments always do better.

Mr. Narasimha Rao’s government was small going by the majority it enjoyed and also by the spending it did, in its entire tenure there was hardly any big public announcement; the private investments soared in his tenure through reforms of many kind. Some states did better during his tenure but they were not ruled by his party.

Governments before him earned several times from the tariffs it levied on imported goods. It made some manufacturing in India thrive as this protected them. But it led to the bankruptcy which became unavoidable due to the balance of payments crisis as the Reserve bank barely had three week worth of reserves to pay for imports.

Of the most astounding accomplishment was the reduction of tariffs from an average of 85 percent to 25 percent and the rolling back of quantitative controls. (The rupee was made convertible on trade account). The second was reduction of fiscal deficit that was the fundamental reason why India was at the verge of bankruptcy in 1991. The third was relaxing FDI norms, both in terms of approvals and also in investments in Indian equity; FDI soared in the years thereafter. Finally he slashed India’s License Raj, paving way for rapid privatization in the manufacturing sector.

The abolishment of Controller of Capital Issues and the enactment of the SEBI Act of 1992 were path breaking initiatives. These actions appear counter intuitive; to slash tariffs on the face of a balance of payments crisis does not seem to look like a very perfect action.

On the contrary if his government became bigger, as the previous governments wanted to become, the expenditure of the government would have risen, which could only be borne by the minuscule population who pay taxes (which in India happened to be 2% of the population for personal taxes and the rest was borne by the bleeding corporates). The bigger the government the more this government would have owed to this very minority than to the majority it had to serve to get elected.

May be this government believed in the greater good than the good of the government.

A good economy needs a government that makes good allocative decisions between the public and the private sector. By making large public investments it would make fiscal deficits grow while if it does not make room for private investments to happen it would lose its ability to generate revenues for running the existing services where it is already committed to.

Some economists talk about fiscal expansion when there is lack of private spending; this is same as helicopter money as both serve the same purpose of inducing additional spending, which must be paid for in due course. Both have issues of asymmetric payoffs for the many constituencies and not necessarily it benefits all equitably. If a government is already indebted heavily, this would mean further debt issuance to the public with a pledge. A downturn is not particularly the time when such an action will be a good one as the public then must postpone some of their current consumption to finance this public spending. Everything will finally have to be borne by the public, so if they postpone the current consumption, they would tilt the balance of the economy in the same direction as the downturn tilts it.

Fiscal policies have remained pro-cyclical largely.  

Developed economies have cut out the role of the government in areas where the private sector cannot play a role, for example in defending the country or in external affairs. But the real role of the government is to make judicious allocative decisions that would not make one section better off against another, who will be worse off.

If a regulation is made which defines the way a common resource is to be exploited, the government must see that this does not give an unfair advantage to some in the process. If a tax is levied the government must see that it does not raise the price of goods for one class of consumers while lowering the same for another class disproportionately.

For every action by the government there are not one but many constituencies who are competing to take the benefits or the losses. The simplest example is the railway freight increase versus low passenger fares, which makes the price of essential goods that much more costly to be borne by the consumers, who may gain from the low passenger fares. The loss from one could be disproportionate to the gain derived from the other.

If an import tariff is increased that would make local manufacturers sell their wares better, it also would mean that the price of the product will go up that would harm the prospects of consumers of that product.

What are the basic roles of a government that is not at war? To enact laws for the common good and see that the laws are followed; it is that simple. But so many laws or regulations have already been enacted, how many actually are in effect is a question that must be answered. There may not be any point in passing new regulations or ordnances when those that have already been put in force are ineffective or are not followed to the letter and spirit.

The Indian codes have followed from the British and there is no dearth of laws in any sphere. Once we found that there were at least 156 ways of putting a factory manager behind bars, such are the laws of the land, but not one has been put behind so far permanently or even for a short duration. When measures are strict, the punishment is stricter, but it needs law enforcement to make this happen.

Law enforcement must also not be biased towards certain sections; this is where a great government and the good differ. But the good government does better when it keeps its objectives limited to what it can deliver within its means.

The common good is better served with limited resources in government that can only be financed by the tax payer.