“Year after year in Washington, budget debates seem to come down to an old, tired argument: on one side, those who want more government, regardless of the cost; on the other, those who want less government, regardless of the need. We should leave those arguments to the last century and chart a different course.” — President George W. Bush
President Bush is dead wrong about this.
The debate over the merits of big versus limited government is certain to remain a central issue in political economics for years to come. Ironically, just hours after Bush proclaimed the need to argue was over, India’s Finance Minister Sinha announced a major new budget plan suggesting that a fight for smaller government is required for India to maximize growth in the 21st century.
President Bush certainly couldn’t claim that India is without “need.” India, with the world’s second largest population of about one billion, has only the fourth largest economy within Asia. According to the World Bank, two-fifths of the population lives on less than $1 a day, and its per-capita GDP is under $500.
Part of the reason for India’s poverty is that, since becoming an independent Republic in 1950, its government has been essentially socialist, imposing exhaustive controls on production, prices, and employment, nationalizing industries, granting government monopolies, subsidizing certain industries, discouraging foreign investment, imposing tariffs, and heavily taxing business and investment. Beginning in the 1990’s, India’s politicians began to take steps to free up the economy, but reforms have been agonizingly slow to materialize. In the 2001 Index of Economic Freedom, India is rated “substantially unfree” and is rated worse than even the Communist-run People’s Republic of China.
In his bid to “downsize government”, Finance Minister Sinha has re-launched promised reforms. He cut the dividend tax in half, deregulated 14 small industry segments, and lifted restrictions on investment and currency inflows and outflows. He simplified and generally cut the sales tax structure, and extended a tax holiday for roads, power, and ports for 10 years. Sinha also promised to kick-start the government’s stalled program to sell stakes in state companies, suggesting asset sales will fetch $2.6 billion in the coming fiscal year, about five times more than in the current year. The budget paves the way for increased private participation in India ‘s sick socialist electric system.
Sinha even made proposals to ease India’s strict labor laws. At present, any company employing over 100 employees must seek and receive government permission to lay off workers. Sinha proposes to raise that employee threshold to 1,000, and he also announced changes that will allow companies more flexibility in outsourcing employees. Current laws create bloated workforces, such as Air India’s, with 720 employees per aircraft, over three times the ratio to Western airlines.
The stock market and industry captains greeted the budget with unrestrained joy, with the index rising over 4% that day. I can only hope that their optimism is justified, and that India finally moves towards a freer economy and the prosperity that follows.
Though President Bush thinks the fight over the size of government is over, for billions of people around the world, the battle is just being joined. In the twenty-first century this issue will remain a central determinant of the success or failures of national economies, from India to the United States.
