Analysis of Arthakranti

 

Every few months someone seems to send me some information regarding Arthakranti, wanting my views.
But what exactly is Arthkranti? This is what their key proposal looks like:
Proposal
  • Withdrawal of existing Taxation System completely (except customs i.e. import duties).
  • Every Transaction routed through a bank will attract certain deduction in appropriate percentage as Transaction Tax i.e. Single point tax deducted at source. (say 2 %).
  • This deduction is to be effected on receiving/credit accounts only.
  • This deducted amount will be credited to different Government levels like Central, State and Local (say 0.7%, 0.6%, 0.35% respectively).
  • Transacting Bank will also have its share in this amount as the bank has a key role to perform (say 0.35%).
  • Withdrawal of High denomination currency (say above Rs. 50).
  • Cash transactions will not attract any transaction tax.
  • Government should make legal provisions to restrict cash transactions up to a certain limit (say Rs. 2000).
The website makes the following claim:
ArthaKranti proposal is a designed technical correction that can completely transform the current Indian socio-economic scenario. We firmly believe that implementation of this proposal would enable 'Principled, Prosperous and Peaceful living' for all citizens of our country. In addition to strengthening the Nation internally, this proposal will enable India to realise her potential and command the respect that she deserves internationally. And from such position of strength, we can lead the rest of the world towards the only sustainable possibility – the thought that has been treasured and propounded by India for centuries – ‘Vasudhaiv Kutumbakam' or 'mankind as one big global family'!.
That's a huge claim to make. But they have two documents that explain this further: a) a 73 page bookand b) a powerpoint presentation
 
So what do I make of it?
 
Well, this is what I wrote to Mr. Kalyan Varde of Pune in December 2009:
Someone had indeed brought your proposal to my notice some time ago. I have confirmed that this is the case by looking through http://www.arthakranti.org/ak_proposal.php.
 
I admire your vision for India, but unfortunately, Artha Kranti's proposal  didn't make sense to me earlier, and doesn't make sense to me today. My main objection is that it has no clear theory behind it that links these prescriptions to the social contract. I would begin by asking: why should there be any tax at all? If tax is needed to provide public goods then how should it be imposed? There is a huge literature on public (collective) choice which throws useful light on this question. 
 
And I simply can't fathom why transactions through banks should be a component of the taxation system at all.
 
Finally, you suggest that "Government should make legal provisions to restrict cash transactions up to a certain limit (say Rs. 2000)". But surely you know that such laws are not worth the paper they are written on. The whole essence of public choice is about understanding human incentives. Such simplistic solutions never work (even if they are 'good').
 
I believe that 'solutions' that are not founded on a deep-rooted theory (and empirical analysis) are likely to almost certainly make things worse than what they already are. Your proposal, I suggest will destroy India's banking system, create a huge underground economy on the lines of the hawala, and bring India to its knees.
 
May I therefore suggest that you go back to the drawing board? Think of the system of taxation as part of the overall social contact and consider the scope, magnitude and extent of taxation as a logical derivation from its imperatives. 
 
May I suggest you spend a few hours to read my book which is now freely available athttp://bfn.sabhlokcity.com/ and also my draft manuscript at http://discovery.sabhlokcity.com/? That will supplement what I'm saying in this email.
So, nearly three years later, what do I think of Arthakranti?

I’ve had a quick glance through the slides, the booklet and the proposal once again, and would like to state that I’m not happy with this proposal.
 
On the one hand its authors rightly say: “Excessive political interference in the Agricultural sector has led to utter mismanagement of every aspect of [agriculture]. Be it … the freedom to set prices and choose markets … and so on. The arbitrary opening and closing of export opportunities and such other man-made calamities render the scenario hopelessly entangled and complex. These shortsighted measures have only hurt the real interests of the farmer.”
 
This would presume that they are aware of the need to increase liberty, but that's not true. In next breath they oppose competition (e.g. lower import duties and FDI). And want a “comprehensive Social Security system” on the lines of “most developed countries” – little realising that such socialist ideas are extremely harmful, and that the West is going downhill rapidly largely because of its ridiculously bloated welfare system.
 
It is also disappointing that the entire booklet fails to ask a single fundamental question. For instance it states:
"Thanks to the Movement for Freedom, our country got great leaders to head its government in the initial years. They were eminent people with great strength of character. There were lawyers, educationists, social workers and activists. Unfortunately, when economic power passed to the Parallel Economy, all kinds of people with very poor credentials began to get attracted to politics from the outer fringes of respectable society. These elements had the clout of black money at their disposal and gradually good citizens were left with the options of getting pushed out of the political process or sourcing funds from the parallel economy in order to survive."
But then it fails to ask why economic power passed to the "Parallel Economy". What is by magic. Surely there were no British rulers. So why did this happen? Why could "eminent" people not prevent this? 
 
That level of fundamental thinking is entirely missing from the booklet.
 
That's because they choose socialism. Indeed, the fact that Arthakranti is a socialist proposal is acknowledged in the booklet itself when it states, "this system … is also a truly benevolent and fair system, in line with the basic socialistic philosophy of the nation." Well, that's the precise philosophy that has DESTROYED India.
 
Why not learn some basic economics, instead?
 
Let me just say that Arthakranti would not win any prize in FTI’s policy competition for it doesn't demonstrate first principles policy thinking.
 
I’d encourage the writers of Arthakranti to investigate the complete picture about why India is in bad shape. I’ve written extensively already on this subject and the answer is simple: socialist policy and colonial governance. The package of solutions needed for India is complex but each solution will require consciously nudging the country towards greater reliance on markets and incentives-based governance.
 
While Chanakya’s Arthashatra is a gem, a masterpiece, a brilliant exposition of economics by a thinker unmatched in intellectual capability and clarity of thought, Arthakranti is best left alone.
 
I wish I could have given it a tick, given the genuinely commendable intentions of the writers of this document. Unfortunately, good intentions don't always make good policy. That's my key message for India.