by Roopa Pai
Policy-makers in different countries have to make similar choices. For example:
▶Should they encourage the spending of money on setting up factories that will make lots of money, but will also almost certainly end up polluting the land, water and air (in other words, ‘jam today’, since the environmental problems won’t come back to bother you for a few years yet); OR
▶Should they recommend that money be spent on developing ‘clean technology’, which will ensure that any factory that comes up in the future will pollute as little as possible, thus making for a better planet for everyone in ten years’ time (jam tomorrow).
Obviously, the right choice in all these cases lies in choosing smartly and wisely—using both head and heart—so that there is a little bit of jam today but also a little bit left over for tomorrow, not just for the person who makes that choice, but for everyone else too. The study of how households, firms, governments and all the others in between choose to spread their jam, why they spread it the way they do, and how those choices can tell us how they will spread their jam in the future… (aaaarghhhhh! enough with the jam already!) is what Economics is all about.
Sounds like Economics is about a lot more than just money being exchanged for goods, doesn’t it? In fact, it feels like it has bits of psychology in it, even philosophy! Maybe you are even beginning to believe that the passionate economist in the introduction to this book wasn’t entirely joking. Well, let’s see in the next couple of sections, shall we?
Bet you didn’t know that!
How Economics gave Darwin his Big Idea
In ye olde England in the eighteenth century lived a priest called Thomas Malthus. Reverend Malthus was a scholar in different fields, including Economics, and much respected by the community. In 1798, after he published an essay called The Principle of Population, he suddenly found himself quite famous. The essay itself was quite a gloom-and-doom one—after a ton of mathematical analysis and deduction, Malthus had concluded that human population was growing way too quickly for the world to produce enough food for everyone. Therefore, said Malthus, humans were condemned to a life of great hunger and misery unless population was controlled.
This statement was taken literally by rich, mean landlords, who made life miserable for their poor labourers, reasoning that if the poor fell ill and died as a result of the oppression, it was a good thing, since that was one way of controlling the population and making sure there was enough food for the others. After all, argued the landlords, the poor, with their lack of education, hygiene and terrible sense of fashion, didn’t deserve to live even half as much as the sophisticated, intelligent rich did. Charming men, these landlords, don’t you think?
Funnily enough, when Charles Darwin read the same essay, it sparked off an entirely different train of thought in his head. He saw instantly that the same constraints—uncontrolled population increase and a limited supply of food—applied in the animal and plant kingdoms. Unlike in the human world, however, animals and plants could not decide to have fewer children and thus conserve their resources. Neither could they learn to grow more food using science and technology. But somehow, Nature still managed to maintain that perfect balance of food and animals.
That realization gave Darwin his ‘Eureka!’ moment. The way things worked out in Nature, he figured, was through a system that he called ‘natural selection’. Species of animals and plants that could not deal with the competition for limited food and resources from other species completely died out. But those that adapted, i.e., cleverly got rid of those features that hindered their survival, and kept or added features that helped them win the competition for resources, became the ‘fittest’ species, and were ‘selected’ by Nature to survive into the future. And that was how population was controlled in the natural world! This idea became the basis of his theory of evolution and his big fat book The Origin of Species*.
You see? Economics strikes again!
*‘to defer’ means ‘to put off until later’
*Gold and silver in the form of ingots and bars rather than coins.
*At least, that’s what most of the world thinks. We in India know better. Our home-grown ‘book’ on Economics was written almost 2000 years before Adam Smith’s, in Sanskrit, by a brilliant scholar and kingmaker called Chanakya Kautilya. The book was called the Arthashastra, which is Sanskrit for ‘The Science of Wealth’. Ta-da! Unlike Smith’s book, the Arthashastra wasn’t only about Economics, though. There were sections on politics, marriage laws, crime and punishment, government, ethics, and trade, and on the duties and obligations of a king. That’s why its title is often translated as ‘The Science of Politics’.
*This didn’t mean that the average Indian’s pockets were overflowing with wealth, though. There is often no correlation between how much money is in the national treasury to how rich (or poor) the people of the nation are. You see, it isn’t enough for the wealth to be there, it is how it is shared that matters. ‘Distribution of wealth’ is a tricky thing, because of human selfishness and greed.
*The 2001 blockbuster Bollywood film Lagaan, the Hindi word for tax, is a period film set against this very backdrop.
*Okay, maybe he didn’t use exactly those words.
*The term ‘laissez-faire’ (say ‘lay-say-fair’) is also used in regular English, to mean ‘laid-back’ or ‘allowing things to take their own course, without interfering too much’ as in, ‘a laissez-faire attitude to life’.
*No, there’s nothing wrong with the grammar in that sentence. Neither have we suddenly switched over to moral science. ‘Good’ in this case is the singular form of ‘goods’, which is another word for products. So ‘good’ here simply means a product. We shall keep using ‘good’ in this way through the book.
*No, we still haven’t wandered off into a moral science class.
*This book also has a much longer name, but we can make do nicely with this short, sweet version.
WHAT COUNTRIES THINK ABOUT WHEN THEY THINK ABOUT ECONOMICS (A.K.A. MACROECONOMICS)
There are many ways to split the bulky ‘Study of Economics’ pie to make it easier for wide-eyed newbies to consume and digest. One popular way is to divide it into Macroeconomics and Microeconomics.
What is Macroeconomics? It is a macro (the Greek word for ‘large’) way of looking at how Economics works. Macroeconomics is not concerned with what individuals or households spend each month on soap or how many packets of biscuits a factory makes in a year. It is concerned with larger and way more complex issues, like how the price of a barrel of oil in Saudi Arabia affects the price of onions in India, how the fear of terrorism in France affects airline companies in the USA, how India becoming the first country in Asia to send a mission to Mars affects its trade relations with China, and so on.
Such issues are way too complex for this book to handle, but what we will try and do is find the not-always-simple answers to four simple questions that skim the surface of Macroeconomics. Here goes.
BIG QUESTION 1
Where does the government get its money from? And what does it do with it once it has it?
Hmmm. That’s something to think about, isn’t it? After all, the government is in a sort of special position—it can’t go to work like normal people and earn a salary every month. Sure, a government could own farms where it grows things (rice, apples, sugarcane) or factories where it manufactures stuff (toothpaste, paper, cars) and earn money for itself by selling them in the market. The governments of many countries do earn money this way, but there’s something inherently unfair about that. Since it is the government that makes the rules on how to do business in a country, what’s to prevent it from making rules that would help its own companies? It would be like having the referee in a football match playing as part of one of the teams.
That is why several governments don’t own too many factories or farms, preferring to let the people of their countries compete among themselves, thus keeping it all fair. How do these governments earn money, then?
We shall come to that, but in the meanwhile, let us consider the second part of the question: what does a government spend its money on?
First of all, on salaries. The government has hundreds of thousands of employees—politicians, bureaucrats, policemen, firemen, soldiers, station masters (at railway stations), sweepers (who clean your streets), doctors (who work in government hospitals), teachers (who work in government schools), scientists (who work in space research and development, for instance), and they all need to be paid salaries.
Secondly, governments need money to spend on building ‘infrastructure’—new roads, parks, bridges and dams (because who else will build them?), providing streetlights, laying pipes to transport clean water from rivers and reservoirs to our homes and other pipes to take used water and sewage away. They need money to buy x-ray machines for government hospitals and benches for government schools, apart from fighter planes, aircraft carriers, submarines, jeeps and tanks for the armed forces. They need money to invest in space exploration and scientific research, which will bring great benefits for the country in the future. They need emergency money stored up which can be used in the event of natural calamities like floods or earthquakes. Phew!
So, we have established that governments need money. Now let’s go back to the question of where the government gets its money from. Quite obviously, it gets it from the people who are enjoying the services it provides—us! There is no such thing as a free lunch in this world, and we have to pay for the pleasure of having a neighbourhood park and the security of having brave soldiers defending our borders while we sleep. The government has found a simple, straightforward way of getting us to pay for all this—taxes!
You have to pay a tax if:
▶You earn a salary or have any other income except agricultural income (income tax)
▶You manufacture anything in India (excise duty)
▶You sell anything in India (sales tax / value added tax, VAT)
▶You bring anything into India from outside (customs duty)
▶You transport what you manufacture from one state to another (octroi)
▶You own a car, or a house, or non-agricultural land (property tax)
▶You use the road (road tax)
▶You go to watch a movie (entertainment tax)
▶You eat out at a restaurant in a fancy hotel (luxury tax)
▶The government decides to raise money for a specific project, like Swachh Bharat (Swachh Bharat cess)
And so on.
Governments also get money into their kitty by:
▶Selling off companies they own
▶Borrowing from the people of the country by selling them ‘government bonds’*
▶Borrowing from other countries or ‘financial institutions’ like the World Bank or the International Monetary Fund
▶Charging a fee to anyone who wants to mine metal ores or extract petroleum or natural gas
▶Charging ‘spectrum fees’ (see page 51)
A good question to ask now would be: how much money does the Indian government actually raise using all these different methods? Maybe you should sit down before you read the number—it is so large it might cause your head to spin. In 2015, it totalled up to—drumroll please—28.1 trillion rupees (a trillion is 1 followed by 12 zeros) or 410 billion US Dollars (USD)! But here’s what’s even more interesting—the government’s expenses in the same period were way higher at 38.3 trillion rupees (USD 560 billion)! Apparently, countries are just as good at living beyond their means as we are.*
LEARN THE LINGO
Spectrum Auctions
An interesting, and fairly new, way for governments to raise money is by conducting ‘spectrum auctions’. The spectrum we’re talking about here is the electromagnetic spectrum—the medium through which wireless signals are transmitted through the air. Every time you listen to music on your car radio, watch digital TV, make a call on your mobile phone, or use Google Maps to get directions on the highway, you are using the electromagnetic spectrum. Unfortunately, there is only a limited number of signals that can go back and forth on the available spectrum. If there are too many signals, the spectrum gets jammed and your YouTube video will keep buffering instead of playing.
Telecommunication companies like Airtel, Bharti, BSNL, and so on, all want to control as much of the spectrum as possible so that their customers have the best experience. So they go and bid big money to ‘buy’ chunks of the spectrum at ‘spectrum auctions’ that the government organizes. Whoever offers to pay the highest amount of money for a chunk is the one the government sells the chunk to. Once a company has ‘bought’ a chunk, no one else is allowed to transmit on it except that company. Yup, ‘ruling the airwaves’ just got a whole new meaning.
Bet you didn’t know that!
Only 3 per cent of Indians pay income tax!
If you earn an income in India, you are supposed to pay part of it to the government as income tax. The only people who don’t have to pay are those who earn their income through agriculture. Yes, India doesn’t tax farmers, whether they are poor peasants labouring in the landlord’s fields, or the wealthy landlord who owns hundreds of acres of farmland and makes tons of money every month. This is a decision the founding fathers of our country took when India first became free—since most of the country then was poor and depended on agriculture for a living, they didn’t want to burden them any more than necessary.
Even today, almost 70 per cent of Indians depend on agriculture for their livelihood. That means 70 per cent automatically pays no income tax. Of the 30 per cent who don’t depend on agriculture, only about 3 per cent pay their income tax. Everyone else either (1) earns too little to pay the tax (only people who earn above a certain amount of money per year are taxed), (2) is pretending that he earns too little to pay the tax (cheater!), or (3) is counting on the fact that the government is too busy to catch him and force him to pay (avoider).
The government is constantly trying to figure out how to ‘get more people into the tax net’, so that they can have more money to spend on things the country desperately needs. But because it is so difficult, the government compensates by taxing us ‘indirectly’ (via taxes like sales tax, luxury tax, VAT and service tax). Look at your bill when you eat out at a restaurant next time and calculate what percentage of your bill is just the tax part.
If your parents pay income tax (ask them!), they are part of a very small percentage of Indians who are doing the right thing—be proud!
LEARN THE LINGO
Black Money
Sounds quite sinister, that. But it is also a phrase we hear a lot in India, in casual conversation, especially since the demonetisation of November 2016. And small wonder, because according to reports, India has more black money than the rest of the world combined!
Yayy! Another thing that India is World No. 1 at!
Erm, actually, it’s nothing to rejoice about. To see why, you have to first know what black money really means.
In general, black money essentially means all the money that has been earned on the black market. The ‘black market’ is the umbrella name for a ‘marketplace’ where trade in all kinds of illegal things—guns, drugs, women, children, human organs like kidneys, animal parts like elephant tusks and rhino horn, alcohol, tobacco, petrol, counterfeit medicine, currency, fake passports—happens, without governments knowing. Anyone who indulges in these activities whether as buyers, sellers or transporters, is considered a member of the ‘illegal economy’.
Another illegal way to make tons of black money, (or money that the government doesn’t know about) which is very popular in our country, is through corruption. Many government officials, who are already paid a salary by the government, make more money on the side by asking you to pay them an extra something ‘under the table’ in cash. In return for such a bribe, they will make sure that your work gets done smoothly (for instance, you will get your driver’s licence without even showing up at the RTO) or that your firm gets picked over several
others to supply a huge order of steel or cement for a government project like building a road or a flyover.
There is another kind of black money, too. This is money that someone has earned in a legal way, but hasn’t told the government about, so that she doesn’t have to pay income tax on it.
If your parents work for a company that pays them their salary by cheque at the end of each month, or deposits money directly in their bank accounts, they can’t hide what they earn from the government. But if they work for themselves, and receive money for whatever goods and services they are selling in cash, or if they work for someone who pays them in cash, there is no way for the government to know exactly how much they are earning—the government will simply have to believe what your parents tell them.
By law, this way of avoiding income tax by not ‘declaring’ your entire income to the government, even if you have earned the money in a perfectly legal way, makes you as much of a criminal as someone who smuggles drugs into the country. And yet so many Indians continue to do it!
It was all these kinds of black money that the government was trying to curb and destroy through its ‘demonetisation’ move (see page 56 for more details) in November 2016.
Now, what do you think these criminals do with all their black money?
▶They spend it, live life king-size! (Nope, that would only get the tax officers all suspicious.)
▶They stuff it into their mattresses! (Yes—that’s what many of them actually do!)
▶They put it into a bank! (Erm, no, because then the government will know they have it. Duh!)
Actually, most ‘black money criminals’ either: