India’s Budget will soon be presented. It shares the global budget problem: how to spend more while taxing less and borrowing less.

The pre-Keynesian answer to this was to spend less, period. The post-Keynesian answer, because budgets have become primarily instruments of politics, is to tax more, or borrow more or, as is often the case, do both.

Spending less is considered bad manners. It’s also politically foolhardy, as Modi with his prudent fiscal policies has discovered. There’s always a rival promising the moon.

But there comes a time when you can’t do either — borrow more and tax more. So you go back to the original pre-Keynesian solution, spend less.

The question is whether governments the world over, and in India in particular, have reached this stage. It certainly looks that way to me.

This fiscal impasse now exists even in one-party ‘democracies’ like China and Russia which don’t have to tackle the populism of rivals. The rude way of saying this is that governments the world over are broke.

What all this means for the future is unclear. But I think much of it depends on how wedded politicians are to the Keynesian solution which was actually a highly specific answer to a highly specific problem at a very specific point in time. It was never meant to be a carte blanche to governments to use expenditure as a way to persuade voters to vote for them under the guise of development and welfare.

Just to remind readers, Keynes was addressing the problem of excess industrial capacity. His solution was intended to revive demand for industrial products when it slumped deeply.

But in due course it became the answer to the prayers of politicians who only wanted to buy votes, albeit in an intellectually acceptable way. Left wing economists — pardon the oxymoron — cheered them on.

But now the time has come to ask if the political prayers should be left unanswered. The answer is yes, they should be. But, quite tragically, they can’t and won’t be. This is the mega dilemma of 21st century — aamdani athanni, kharcha rupiah (income eight annas, expenses one rupee).

So regardless of how much central banks wring their hands about it, high (and higher) inflation is now a permanent scourge of political parties. They are damned if they do and damned if they don’t. That’s the impasse.

Targeting inflation was thought to be a solution but it has turned out to be just a diversionary game, like pushing on a string. It’s not going to help as long as governments don’t rein in spending.

Don’t miss the bus

Modi now has exactly the same choice which confronted Rajiv Gandhi in 1985 and Deve Gowda in 1997: how to raise the growth rate via the private sector.

Rajiv cut taxes but increased deficit financing even while reducing public investment in the Seventh Plan. Deve Gowda also cut taxes but kept the deficits under control. He also encouraged the private sector to invest, which it didn’t.

This is the problem Modi has to tackle now. In fact his job is much easier today. He has already cut corporate taxes to 22 per cent and further to 15 per cent for new investments.

That leaves personal income taxes and indirect taxes. The former are unconscionably high, if not in terms of rates certainly in terms of incidence. The CBDT needs to take a course in the sociology of household incomes which have been stagnating for a decade.

Basically what’s happened is that the fixed costs of a household are now so high that a mere tweaking of the slabs will not do.

Along with slab adjustments the rates must also be redone to 20 per cent for all incomes up to a crore and 40 per cent beyond that. Nothing else. Keep it low, keep it simple and deploy the redundant tax officials somewhere else, maybe on the borders.

As for indirect taxes or GST, they are not based on any economic logic. Too many things are not taxed at all which means other things are taxed too much.

A single rate of 15 per cent applied to all but 10 per cent of things will work wonders. The problem is to work out a way of getting there. It will be the Big Bang we are waiting for but it’s not something a Union Budget can manage to do.

But it should be done quickly because Modi will not, in all probability, win a fourth general election. This is his golden opportunity to fix the tax system in a way that endures for 30 years, like the personal income tax rates of 1997 Budget have done, and GST will do.

Kya Modi hai toh mumkin hai?