Building Ethics With A Strong Economy

Updated: Jun 15 2003, 05:30am hrs
Two days ago, I delivered a talk on Building a strong economy with ethics. It was a lecture in honour of Mr GK Sundaram, a young 89, the doyen of the textile Industry in Coimbatore. This piece is not on the subject of the talk I delivered but on the subject of a talk I did not deliver and that is Building ethics with a strong economy.

Indira Gandhi once said that Poverty is the greatest polluter. Poor people cut trees not because they want to cut trees but because, in most parts of the country, the only fuel available is timber. Thousands of people defecate in the open not because they do not want privacy but because there are no toilets. It is a long list of neglect of basic human needs.

I believe that one of the reasons for an all-round decline in ethics is the grinding poverty and the slow rate of growth witnessed in the first three decades after independence. The high rate of inflation (which persisted until the 1980s) and the crippling rates of taxation (a favourite instrument of the socialist era) only made matters worse. As a result, I believe, even honest people were forced to become dishonest in some respects particularly in the payment of taxes.

In 1955 or so, Mr TT Krishnamachari, in one stroke, introduced high rates of income tax, the expenditure tax, the wealth tax and the estate duty. At one point of time in the 1970s, the marginal rate of income tax was 92.5 per cent and, if wealth tax was added, many assesses were required to pay more than 100 per cent of their income as tax.

There was also a tax on corporate dividends. A partnership was taxed on its income and the profits distributed to the partners were also taxed in the hands of the partners. Both were examples of double taxation.

For many years, high inflation was the rule. Inflation ate into the earnings of a person. Not all were protected by a dearness allowance. Besides, dearness allowance did not fully neutralise the rise in the cost of living and also lagged behind price increases.

Slow rates of growth 3.5 per cent through three decades meant that most people remained poor throughout their lives. Even those who had received higher education and found a job, barely progressed, through their working lives, from living standards of the poor to a standard of living of the lower-middle class.

At the end of a career, there was little left in the nature of savings. At the end of a working life, few persons could claim to be owners of a home or a vehicle or even a healthy bank balance. The saving grace was pensions to government servants, but even that was a pittance. It is during this period of crippling taxes, high inflation and slow growth that ethical standards began to decline. The rise in aspirations and the decline in ethical standards pushed India to the brink of a civilisational collapse.

Tax evasion and corruption became rampant, laws evoked neither respect nor fear, charlatans became leaders, criminals entered politics and the fence started eating the crop.

When we announced the Voluntary Disclosure of Income Scheme (VDIS) in 1997, we were faced with a peculiar problem.

Tax evasion, especially of income tax, had become so commonplace that anyone who paid his taxes in full was considered a fool. There were many respected lawyers and doctors (who would consider it wrong to violate even a traffic rule) who took the bulk of their fees in cash and did not think it was wrong not to disclose their total income. An income-tax raid on a persons business or house was considered as a temporary intrusion into the normal way of life, and sometimes even as a badge of honour (There was a raid, but they found nothing.)

We discovered that over the years the word honesty had come to acquire different meaning in different situations. For example, there was the case of a scrupulously honest lawyer with a considerable practice. His name was proposed for judgeship, but he was turned down when it was found that he had paid virtually no income tax for many years in the past! Was he an honest person or a dishonest person Similarly, if a politician from humble origins after ten or twenty years of public service was found to have more than one house or more than one car or more than one family, or gave large cash gifts at weddings in the families of party workers, he did not suffer in the estimate of the people. So it was in the case of a government servant too. No one paused to ask how he had accumulated wealth or spent large amounts of money totally disproportionate to his income. There was one standard of honesty when it pertained to money-matters and another when it pertained to other aspects of life like family, friendships, education etc.

Through VDIS, we offered the tax-evader a one-time opportunity to turn honest, regularise the past, bring all his assets into his balance sheet and, thereafter, pay taxes at the new moderate rates. VDIS collected over Rs 10,000 crore to the treasury and it was proclaimed a great success. But I have often asked myself, how many tax-evaders really and truly returned to the path of tax-compliance How many did not revert to the old ways of tax evasion in subsequent years I do not know, because I left government shortly thereafter.

As long as there is endemic poverty and as long as there are glaring inequalities and disparities, it is difficult to build an ethical society. There is a proverb in Tamil which loosely translated reads, All ten virtues will disappear in the face of hunger. Only steady and sustained growth over a reasonably long period will ensure the abolition of poverty and a minimum standard of life for all the people. And only a society where people lead contented lives will turn its attention to ethics and other values of a civilised society.

Just as it is not possible to build a strong economy without ethics, it is not possible to build an ethical society without strong economic foundations.

(The author is former Union finance minister)