Opinion | The ideal size of a government for a country like India4 min read . Updated: 27 Jan 2020, 10:26 PM IST
We clearly need a bigger government at this stage of development to help address inequalities
Close to the presentation of the Union Budget, it is worth pondering a question hotly debated across the world. Just what is the optimum size of a government? In India, is the government too big, too small, or just right? The Narendra Modi government of 2014 was elected with an absolute majority for the Bharatiya Janata Party (BJP), whose manifesto had the promise of “minimum government, maximum governance". This implied that the government needed to be downsized, although no specific metric was offered to measure its size. Was it in terms of its total spending, i.e. the size of its annual budget? Or manpower employed? Or number of ministries? Or was it in terms of the plethora of laws, rules and regulations that affect and interfere in every aspect of our lives? The BJP’s promise seems to have been inspired by Henry David Thoreau, who said, “That government is best which governs the least." Thoreau was a 19th century philosopher who inspired the idea of civil disobedience against an unjust state, and whose thoughts influenced Mahatma Gandhi. In more recent times, Ronald Reagan was a diehard campaigner against big governments. In his folksy way, he used to say that the nine most terrifying words of the English language were “I’m from the government and I’m here to help". This exemplified the Margaret Thatcher-Reagan era of sweeping deregulation, reduction of welfare spending and subsidies, and free market-based solutions even for public goods. After 2008, the tide has been turning toward more, and not less, government intervention. Even under Reagan, government spending and deficits increased substantially, not least because of a surge in defence spending as well as tax cuts. For nearly a century, US governments have always had budget deficits, save a few years during Bill Clinton’s second term in the White House. So, despite an almost libertarian anti-government undertone to the rhetoric of many presidents, the American state has expanded. Yet, it is smaller than most of its OECD peers. The combined spending of all federal, state and local governments in the US is just above 40% of the economy, whereas in many European countries, it is above 50%. Much of that government spending is on payments for social security, mainly for unemployment, health and old age pensions. In that respect, large governments function like a mega conduit to redistribute income from the young to the elderly, from taxpayers to subsidy recipients and from the rich to the poor.
Even after correcting for this social security effect on the size of governments in the OECD and other large countries, India is still an outlier. This may dismay those who think that our government is too large and unwieldy. One can use several metrics to back up this assertion of inadequate scale. Take, for instance, our budget size. On the revenue side, India’s tax to gross domestic product (GDP) ratio is among the lowest in the Group of 20 countries. India has only seven income tax payers for every 100 voters, a ratio that is absurdly skewed. Within direct taxes, both from individuals and corporations, a small percentage accounts for the bulk of collections. The exemption threshold for income tax is about 400% of India’s per capita income, among the highest in the world. On the expenditure side, government spending is about 13% of GDP. Compare this with France at 56%, Germany at 44% and South Korea at 32%. Even if you add state and local government spending, India is at the bottom among large economies.
To these statistics, if you add inequality measures, the picture looks very grim. The human rights organization Oxfam reports that India’s richest 1% hold more than four times the wealth held by the bottom 953 million. There have been various other reports confirming rising income inequality.
You can’t escape the conclusion that with low tax efforts and spending, and high wealth inequality, the country’s government needs to be bigger, not smaller. That is not to say that budgets can ignore outcomes or deny the need for downsizing government departments. By other metrics, such as personnel in the police, judiciary, regulatory bodies or even armed forces for every 1,000 people, India is definitely undersized as a state. Readers may have noticed that a comparison with China, where the state is disproportionately large, has been avoided by this analysis.
An important research study by economic historian Peter Lindert, covering data across several countries over large time periods, has concluded that a rise in government spending and accompanying taxation has no correlation with economic growth. In fact, from 1880 to 1930, there was a positive correlation between the two for many nations. More recently, in countries like Sweden and Germany, tax-and-spend policies have had a more pro-growth effect than in lower-spending countries like the US.
At India’s stage of development, the government needs to play a bigger role in the provision of public goods. This means spending not only on infrastructure and law and order, but also primary health and education, and reversing our inequalities of income, wealth and opportunity. We just need to be more vigilant and hold the government to account, even if it is bigger. Even though Thoreau argued in favour of a small government, it is worth remembering the second part of his quote: “That government is best which governs least, because its people discipline themselves."
Ajit Ranade is an economist and a senior fellow at The Takshashila Institution