What should have been in the budget

We need to focus on employment and leave the rest in the hands of the ingenuity of the Bangladeshi people, argues K. Siddique-e-Rabbani

Poverty alleviation needs enhancement of the purchasing power of the masses, and that needs mass- employment generation. This simply cannot happen through direct government initiated programs like earth cutting for road and food for work, or through grants or through setting up of a few large industries with foreign investment, as suggested in our national budget.

Every year, about 3 million new individuals join the work force in Bangladesh. The sheer dimension of the problem is beyond the realm of any direct action or program of the government, and those in policy-making need to understand and appreciate this fact well.

While making policies, we tend to think of the masses only as pairs of hands -- cheap labour to be exploited -- but we fail to appreciate the fact that each of them is an individual human being, having an innovative brain, who can find his/her way out even from a deep crisis, if we do not impose manmade obstacles deliberately or inadvertently.

The government machinery, however brilliant it may be, can never match the brilliance of the millions of people. One should also appreciate that people are ready to face many challenges with their ingenuity; they can surmount many obstacles, but any obstacle coming in the form of a government policy, or obstacles created by its corrupt administrators, are simply insurmountable for them. This is particularly so since we still have not been able to come out of a top-down system of government administration.

Poverty alleviation and mass employment can work for the millions of people only when the brain and the hands of each individual are allowed to blossom in a free and fair environment, and this should have been the basis of the policies in the budget which is called pro-poor. Unfortunately, it has not been that way, neither was it ever in the past.

No cost
As mentioned above, poverty alleviation can only come from mass employment, and that can come from two major sectors -- agriculture and small industry -- in both of which the people can exercise their ingenuity and skills. So the policies to look for in the budget are those that help creation of a suitable environment for enhancing the spontaneous activities of people in these two sectors.

Such a policy demands very little, almost nothing, from the government exchequer in the short term. The long-term requirements are education, research, and training of the people, which are already in place. Therefore, in the immediate time frame, such policies demand only some inhibition-free vision (free from vested interest groups -- local and international), and brainstorming on the part of the policymakers, and a stroke of a pen, nothing much.

Because of some favourable policies in the field of agriculture, and new technologies offered by the local agriculture scientists, our intelligent farmers could feed a population that has doubled in the last 30 years. Moreover, they achieved this success with age-old tools, and even with inadequate and irregular supply of necessary inputs like seed, fertiliser, electricity and/or diesel for irrigation, etc. by the government. Although much more needs to be done in this sector, the other sector mentioned above is a complete tragedy, and is a classic example not only of government failure but also of the government itself posing as the greatest obstacle.

Two major obstacles
What we want is setting up of hundreds of thousands of small industrial enterprises spread all over the country. Obviously, the target entrepreneurs are uneducated or semi-educated, normally poor, and would begin with something small, probably from a few thousand to a few lakh taka, gathered from family and friends. These simple folks are not expected to know or understand all the government regulations or tax requirements, and would mostly go about the enterprise based on common sense and past experience of others. So anyone with the authority of the government, like a field-level tax officer, or even a low-level police constable or traffic police who are not at all connected with the tax collection system, can harass small entrepreneurs by demanding bribes. This situation is enough to put the starting entrepreneurs off, and that is one of the two main obstacles posed by the government itself.

The other way that the government obstructs the small industries is by imposing an inverted import duty regime, so they cannot earn a profit in competition with imported finished products, however efficiently they are run. Although the general government policy is to give some degree of protection to local industries through the import duties, this principle is followed for items produced by large or medium industries only.

In many cases, such "protection" is given to items that are not produced in the country at all, just to make the overall statistics look good.

On the other hand, for items produced by the small industries, who do not have the capacity to organise themselves in order to satisfy the corrupt desires of the officials involved with the details of the budget preparation, the import duties are usually reversed. A striking example is the inverse tax regime on electronics products and their raw materials, which has come up in the media several times in the last few years, and representations have been made to the NBR and relevant bodies, but nothing tangible has happened.

Usually, the ministerial cabinet or the high officials are presented with overall statistics, where such tax inversions on individual items do not appear as such, but the small entrepreneurs never get a chance to see the minister or the adviser to point out the intentional errors, and the budget gets passed. Therefore, the small industries fall into the perpetual trap of being unprofitable. All the money that these entrepreneurs invest, and all the money that banks and other financial organisations put into this sector as loans, ultimately ends up un-recovered. Subsequently, less and less funding is available for the small industries.

Removing the obstacles
It is also important to know that the above situation is nothing new, it has been going on for the past few hundred years, when the colonial rulers wanted to destroy local production by levying high excise duties while making imports entirely duty free. This allowed the field-level tax officials to become corrupt. We cannot expect to weed out this culture of corruption, built over centuries, in a few years time. The only way out is to stop the opportunity for corruption, firstly through freeing the new industrial enterprises from all taxes and VAT, and secondly involving civil society experts and entrepreneurs' associations in the detailed preparation of import duties. Regarding VAT at production, it is not only the amount of tax that is the cause of concern, even levying a fraction of percentage of tax will allow the corrupt officers to play their game, and to discourage the new entrepreneurs. Therefore, total freedom from tax and VAT payment is needed for small industries and other enterprises, defined by a certain ceiling. Only then can we call the budget pro-poor.

Case for budding industry
To determine the above ceiling, let us discuss the present economic situation. The present industrial policy of the government defines a small industry as one that has a fixed investment of under Tk.1.5 crore, excluding land and building. It was argued that fixed investment is a better criterion for monitoring compared to yearly turnover, which is difficult to assess and leads to more corruption. Keeping a proportionate valuation, the ceiling for the proposed complete waiver of taxes and VAT could be fixed at Tk.15 lakh, defined similarly

No tax, no loan
There may be a counter-argument of abuse of such incentives. A simple way to prevent such abuse is to add a clause that small industries which want to enjoy VAT and tax waiver under the above policy cannot get any formal loans from banks, under the provision "no tax, no loan." The same may be coined in a slightly different way, "no loan, no tax," which would help in attracting local investment. Here "tax" includes VAT or any other form of tax. The national SME taskforce recommended a similar waiver of VAT and tax to small industries with a ceiling of Tk.30 lakh fixed investment, which was, unfortunately, not finally approved by the cabinet in 2005. The reduced amount of Tk.15 lakh, and the restriction on bank loans, should satisfy the policymakers.

Revenue will not fall
At present, the government is not getting any significant revenue from the budding industry sector, as such an industry is virtually non-existent. Therefore, the proposed VAT and tax waiver for the budding industries will not reduce the government revenue significantly. On the other hand, the hectic and widespread economic activity that this proposed scheme will generate within a few years will add substantially to the government funds indirectly, and will give the nation self-esteem and prestige besides leading it to prosperity.

Indian experience
India has been taking similar measures since 1991. Small industries under a certain ceiling do not have to pay any form of tax; they do not even have to register. The ceiling currently stands at Rs.1crore annual sales turnover. Furthermore, for the slightly larger ones, no customs field officials are allowed to visit the factory premises of any small industry that pays a tax of Rs.10 lakh annually, without permission from higher authorities. Clearly, this is a measure for stopping harassment of entrepreneurs by corrupt officials. As for larger industries, they have to pay a composite VAT of 4% on the total turnover. VAT, in the standard sense, is only applied to traders. The result was immensely successful -- the number of small industries is more than 35 lakh now, contributing to employment of millions of people. We can also see it in India's fast increasing demand for energy, and in how she is taking on the global market.

We can do it, too
Given the high level of intelligence and skill of the general people in Bangladesh, it is almost certain that if appropriate policies are taken the anticipated large scale economic activity and enthusiasm will be visible within a few years, and all this will not cost the government a penny; simply a few strokes of a pen on the policy papers will do the magic.

Dr. K. Siddique-e-Rabbani is Professor of Physics, Dhaka University, and Member, National SME Taskforce.