How powerful the ministry of finance is, I realised some years ago, when I once went to see the finance minister in New Delhi.
Through a misunderstanding I arrived at his North Block office an hour early and so had to while away the extra time in the waiting area.
Later, I met people who had seen me there or who knew people who saw me there. They showed a greater respect for me and willingness to hear me out than ever before.
A Latin American economist who had had a similar experience in his country told me that this had made him wonder if he should not put aside an hour or two every week to just go and sit in the minister's waiting room.
That was, I think, a shrewd observation. But not having had the far sight to have done that, I am now left with no option but to use the written word to exercise whatever little influence on policy that I can.
This being the time of the Union Budget, there is much that will be written about fiscal policy. Indeed there is a lot of good wisdom that is floating around.
Much of it can be found in one report that was commissioned by the ministry of finance, though the ministry has tried to distance itself somewhat from the report since.
I am referring to the much-discussed Kelkar report on direct and indirect taxes. The report bristles with good economics and commonsense, though maybe, for that very reason, seems anathema to politicians.
The proposals have received a lot of press and I do not wish to go over them in any detail.
Who can take issue with the importance of bringing agricultural incomes into the tax net? Not only is it unfair to exempt rich farmers from taxation, but it is an open secret that this is a conduit through which the urban rich evade taxes.
Just as, thanks to fraudulent labelling, more Scotch whisky is drunk in India than is produced in Scotland, more income is shown as arising from agriculture than actually is the case.
According to some estimates, the revenue loss from this kind of money laundering is Rs 1,000 crore (Rs 10 billion). Politicians have shied away from this for fear of losing votes. It is therefore heartening to see an official government document making a case for the agricultural income tax.
Savings in particular financial instruments have for long fetched handsome income tax exemptions.
It is, therefore, natural that people will be upset when such exemptions are recommended to be taken away, as has been done by the Kelkar committee for savings under Sections 80L, 88 and some others.
But if one thinks for a moment, it is evident that, since the poorest Indians (and I am talking of the majority here) do not earn enough to pay income tax, they get no benefits from these savings incentives.
Hence, these incentives are simply a method for raising the effective interest that rich people earn.
It is right that this benefit be taken away. If government feels that there are positive externalities to savings that individuals do not appreciate, it should think of subsidising interest incomes for people who earn less than a certain amount instead of giving tax cuts.
It is not as if I agree with all the recommendations in the Report. I think, for instance, that income tax rates should be a little more progressive.
Instead of having a marginal tax rate of 30 per cent for all annual incomes above Rs 4 lakh (Rs 400,000), we should have a 40 per cent marginal rate for very high incomes, for instance, above 10 lakh (Rs 1 million). This will not be out of line with what is practiced in most industrial nations.
But I do not want to dwell further on budgetary policy. Poor fiscal policy can derail an economy, but it is, nevertheless, only a small part of what enables an economy to take off.
And this is where the power of the finance ministry comes in. It needs to think of major initiatives to get the economy moving. After the growth spurt of the mid nineties, the Indian economy has slowed down and is in desperate need of initiative.
The economy is one of the most complex machines that we know of; and there is no single known policy intervention that can guarantee take-off. But we do know of a variety of things that can help.
In early January I attended a star-studded conference on game theory in Mumbai. It was centered around John Nash (of A Beautiful Mind fame), who came in person. There were special plenary sessions given by Amartya Sen and Robert Aumann (famous Israeli game theorist). There was much economic wisdom being offered.
But from a policy point of view what stuck in my head was a throw away remark by John Geanakoplos of Yale University, who spoke on the American mortgage market.
This is an amazing invention which, by giving people low-interest loans that can be repaid over thirty years, has enabled even poor Americans, who would otherwise be homeless, to buy their own homes.
Why does India not have a thriving mortgage market, certainly not one with interest rates as low as the American one?
Geanakoplos's answer was that this was a consequence of the seeming policy kindness that makes it hard for a lender to foreclose on the property of a person who defaults on a loan.
In India it is very difficult for a lender to confiscate the property of a defaulter legally and with little transaction cost. (Some lenders use goons for this but that is not what I am talking about.)
This means that banks are not willing to make long loans and, when they do, they want to have huge interest rates to cover the risk of default. The upshot is that the poor and the lower middle classes cannot buy houses.
A recent study of credit markets in rural Tamil Nadu shows illegal money lending and chit funds thriving. Why do people not borrow from banks which offer much better terms?
The reason is that, land titling being poor, people are not able to offer the collateral of land that would enable them to approach a bank.
To correct these flaws does not require money as much as imagination and political courage. We need to change laws to enable long-term mortgage markets to take off.
We have to improve land titling not just in villages but to get rid of the ubiquitous system of owning property under 'power of attorney.'
This is usually a ploy to effect a sale where some archaic law makes selling your own property illegal. We need big effort to unleash the human capital that sits untapped in human beings who are illiterate. It is not enough to have intelligent people; a nation needs system to harness that intelligence -- something sorely lacking in India.
These could be thought of as 'infrastructural policies'; once undertaken they enable the private market to function better and so promote efficiency and growth in the economy.
Delhi's new underground metro system, built in record time and running smoothly like in an advanced industrialised economy, shows that if we have the will we can achieve wonders.
This will needs to be extended to areas of policy making which may not attract as much press as the metro but can do as much if not more to help ordinary citizens lead a better life.
The writer is professor of economics and director of the Programme on Comparative Economic Development at Cornell University
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