Government Spending is the Problem, Not the Revenue

The Narendra Modi government of India is trying desperately to bring more people inside its tax net (sic) since it came to power 3 years ago e.g., they tried drastic measures like demonetization, making Aadhar card compulsory for filing IT-returns, linking it with bank accounts and PAN card etc. Continuing the same trajectory, the finance minister of the Indian government Mr. Arun Jaitley recently launched their new scheme of Clean Money Portal as an extension of their ongoing initiative of Operation Clean Money. Mr. Jaitley said that,

the message is clear that it’s no longer safe to deal with excessive cash as through the use of technology and data analytics, it has become easier to detect tax evaders

According to above cited news report data, the Modi government has unearthed some 23,144 crore rupees of undisclosed tax income during the past six months of demonetization scheme! That against lakhs of crores of rupees of loss due to demonetization and its adverse effects on the economy, which is still ongoing!

The real question here is, is government income, and so non-compliance with the tax code, a real problem or the problem lies somewhere else? As common financial prudence will tell us, the problem doesn’t lie in the lack of income for the government (they have plenty of it), but with its expenditure. For example, suppose Mr. Robinson earns 1000 rupees annually and his annual spending is 5000 rupees then we don’t really say that Mr. Robinson has a problem of lack of income. The problem is his expenditure in proportion to his income! The real solution of this problem lies in Mr. Robinson reducing his expenditure and balance his budget. The Indian government is running a budget deficit – budget deficit means governments expenditure is higher than its revenue – in the vicinity of 3% of its GDP in present. It’s debt to GDP ratio is close to 70% right now. And this is the reason why global credit rating agencies are not ready to raise Indian government’s credit rating from its present low to high even after heavy lobbying from the Indian government! The financial prudence is the same when we deal with the governments as when we were dealing with Mr. Robinson as an individual. Just like him, the Indian government also needs to drastically reduce its expenditure and, at the least, balance its budget immediately if it wants to avoid the impending future disaster of insolvency like the Greek government! Such borrowing and spending pattern of lifestyle is a sure way to financial and economic ruin for an individual as well as governments.

The only way in which the Indian government can reduce its expenditure is by ending its Welfare-Warfare state. Economic theory and history is absolutely clear that no government and country has succeeded in maintaining itself for long by heavily taxing its citizens to maintain its spending. Government spending is not the panacea of the economic problems that India faces. In fact, that government spending is the root cause of all our problems. Government’s interventionism policies, which necessitates the spending, is what wrecks the economy. This interventionism must stop immediately. No matter how much tax revenue (sic) the Modi government is going to collect by squeezing its productive citizens, it will only fail in the end. All these efforts of centrally planning the economy will result in ruin.