The growth in the Infotech (IT) industry is one of the most visible products of the Indian economic reforms that started in 1991. Over the last few years, India has developed an international presence in the area of IT, making it the poster-child of the ten-year old economic reforms process. This success in the global marketplace has trickled down to the Indian economy by way of flow of capital into the Indian economy, creation of jobs in the software sector and perhaps more significantly, a well-deserved respect for Indian professionals in the global marketplace.
But a decade into the reforms process, there are some glaring inconsistencies in this IT revolution. The IT industry growth has shown an overwhelmingly urban bias. Much of the rural and small town India has been bypassed by this boom. Even within the urban centers, the growth has been largely restricted to the small segment of the population with college degrees, which itself comes from the middle and upper middle-classes. To be sure, the very nature of the IT industry demands an urban concentration and job creation for college graduates.
At least in the short run, IT may not play a pivotal role in promoting an equitable development process. But it is indeed possible to harness the power of technology to release resources, which can then be channeled into financing public welfare projects. IT is essentially an enabler of knowledge management, i.e. effective capture and efficient dissemination of information. While it might sound a little presumptuous to talk of information organization in a society which is still unable to provide basic public services to the population, there is growing awareness that IT can be leveraged to harness the knowledge capital that abounds across the country. This in turn can play an important catalytic role in the development process.
Leveraging information : correcting defective asset forms
In 1999, Hernando De Soto, an economist from the Institute of Liberty and Democracy in Peru, put forward a completely new perspective to the problem of development in the poor countries of the world. He argued that most of the poor already possess the assets that could be used to raise capital for their enterprises. However, these resources, according to him, are in defective forms: houses build on land whose ownership rights are inadequately recorded, unincorporated businesses (e.g. street vendors) with undefined liability, industries located where financiers and investors cannot see them (e.g. hundreds and thousands of village enterprises). Because the rights to these possessions are not adequately documented, they cannot be traded outside of the narrow local circles (where all transactions are based on trust), cannot be used as collateral for a loan, and cannot be used as a share against investment.
On the other hand, in the west, every asset (from a parcel of land to equipment to inventory) is represented as a property document. This can then be used as collateral for credit. For instance, in the United States, mortgage on the entrepreneurs house is the single most import source of funds for new businesses.
The root of the problem, according to De Soto, is the fact that developing countries do not have this representational process. As a result, most of them are undercapitalized (making these small enterprises akin to corporations that cannot issue shares or bonds to obtain new funds). Without representations, these assets are dead. Citizens of the third world have houses but no titles; crops but no deeds; businesses but no statutes of incorporation.
Can IT help capitalize these assets?
Needless to say, creating a system to record these representations presents an enormous challenge in a country like India. This is where the power of IT can be leveraged to organize information. For instance, capturing property ownership in an urban area in a database would be the first step to generating house ownership deeds. Once this is in place, a shopkeeper, armed with asset ownership documents for her house as well as the shop, can raise capital to expand her business. Likewise, in principle, in the rural areas, a small farmer, with her ownership documents, can apply for loans at the local bank instead of having to resort to the local moneylenders.
Here, it is important to recognize that capital formation is not just restricted to supply of funds (as is normally thought). It is just as important to provide the businesses the ways and means to absorb the funds. In todays India, small businesses obtain capital but that is primarily through local lenders, at prohibitively high interest rates, which is in turn, a reflection of the risk level of the investment. By contrast, a loan backed by a properly documented asset as collateral, would significantly reduce risk and consequently, prove to be less of a burden on the borrower.
The following example shows an estimate of the level of capital locked in India. The rural areas used for productive purposes (croplands and grasslands) in India total up to about 30% of the total area (a conservative estimate, given that 72% of India lives in rural areas). Assuming that 40% of this land is used on an informal basis i.e. no formal ownership deeds exist - (with 75% being used for crop cultivation and 25% for grasslands), approximately 30,000 hectares are used for agriculture and 10,000 hectares are used as grasslands. Putting a notional price of Rs.135/sq. ft for croplands and Rs.45/sq. ft for grasslands (in reality, the value would be much higher); we arrive at a figure of Rs. 57,600 crores of informal assets in rural India.
In case of urban areas, the results are even starker. In India, around 285 million people live in urban areas. Assuming an average occupancy rate of 5 people per house, there are around 57 million urban dwellings. Of these, around 85% are informal dwellings (built in an extra-legal framework i.e. in violation of land laws; without proper ownership documents; in violation of legal requirements which usually means that the dwelling is improperly valued). This is obvious to anyone who has been to any Indian town or city. Assuming an average urban dwelling size of 200 sq. ft, and putting a notional value of Rs. 180/sq. ft (it should be noted that both the dwelling size and the value would be higher than what has been used here); we arrive at a figure of Rs. 1,72,800 crores of informal assets in urban India.
Thus, this adds up to a whopping figure of Rs. 2,30,400 crores of informal assets in India assets which cannot be put to productive use because the government of India does not have the necessary systems in place to formally capture this information. To put this in perspective, the total Foreign Direct Investment (FDI) to India in 1997-98 was a mere $5.025 billion (Rs. 22,600 crores). Formalizing a mere 20% of the informal assets would create the potential of injecting over Rs. 45,000 crores into the Indian economy which, at an asset capitalization rate of 50%, would raise over Rs. 22,500 crores at the same level as the annual FDI inflows in 97-98!
Leveraging connectivity: Online taxes and levies
In countries like India, revenue generation via tax collection happens to be one of the most notoriously managed areas. The numbing bureaucracy, arcane laws associated with all the paperwork is enough incentive for a large number of people to risk tax evasion altogether. This is painfully obvious to anyone who has been subjected to the ordeal of filing tax returns in India. As the Indian government struggles to improve tax revenues, an online tax filing and excise collection system can be of enormous help in this direction.
Direct taxes are made up of income taxes and corporate taxes, which together contribute about 34% of total government revenues (and a mere 2.9% of the GDP). Traditionally, India has had an extremely poor collection of direct taxes, not least due to the complicated and time-consuming process of tax collection. Indirect taxes are made up of Excise taxes and Customs, which together make up about 66% of the total government revenue (and 5.7% of the GDP).
The Excise and Custom Revenue System is a wonderfully complicated web of legislations and needless to say, the bane of almost every manufacturing firm in India. Companies regularly get into trouble, thanks to the complicated laws and more importantly, due to the vast number of records and data that need to be maintained and reported on a regular basis. This very nature of data presents an opportunity to generate substantial savings by introducing an online filing system.
Streamlining the taxation process: potential for cost savings
It is evident that the process of filing taxes (direct and indirect) must become more transparent, efficient and above all, user-friendly. An online tax filing system can achieve these goals and has the potential for not only making the process more efficient and user-friendly but also to improve tax collection, by making it more accurate and less intimidating for the taxpaying population. For instance, the process of excise/customs tax filing is highly manual and data intensive (a manufacturing company has to pass an accounting entry for every consignment of raw and semi-processed material bought for production), the savings potential from online filing of these returns could not only accrue in cost savings to the corporations, but also translate to significant cost savings for the Revenue department (Income Tax as well as Customs and Excise departments).
Income taxes
In 2000, the Indian government collected around Rs.15,000 crores in income taxes. The Ministry of Finance estimates that the Revenue Department spent Rs. 850 crores towards the collection of direct taxes. The ability to file taxes online could translate into a less cumbersome filing process. Admittedly, internet penetration is extremely low (in 2000, an estimated 5.5 million, but was estimated to rise to 30 million by the end of 2003).
If we assume, conservatively, that 40% of the internet users start paying taxes online (which amounts to a mere 10% of the total taxpaying population by contrast, 24% taxpayers in the US filed online returns in 2001), it would amount to Rs. 1,500 crores collected online (a conservative estimate, since it is assumed here that the tax revenues are evenly spread over the population. (In reality, it is highly likely that the internet users would be in the higher percentiles of the tax paying population). This could translate to a cost savings of Rs. 7.5 crores per year (assuming a 20% saving in the cost of filing taxes when filed online). In addition every day that is saved in the payment of taxes translates to a saving of Rs. 41 lakhs (assuming an opportunity cost of 10% for money that is incurred when money is in transit from the individual tax payer to the IT department) for the exchequer.
Corporate Taxes
In case of corporate taxes, the potential for savings is much larger. In 2000, corporate tax collections were a little over Rs. 18,000 crores. Internet penetration in the corporations is much higher thus, it is appropriate to estimate that 30% of the total corporate tax filing can be moved to the internet. Assuming a 20% cost savings with online tax filing, the annual savings could add up to Rs. 55 crores. Further, for every day that is saved in the payment of taxes translates to a saving of around Rs. 1.5 crores for the exchequer. In addition, for every 0.1% increase in tax filing (driven by a less cumbersome filing process), the direct tax revenues could grow by an estimated Rs. 34 crores every year!
Excise and Custom Duties
In 2000, the central government collected over Rs. 65,600 crores in excise and custom duties, at a cost of Rs. 1200 crores. Assuming that 30% of this amount can be collected online (again, a conservative estimate), a total of Rs. 72 crores could be saved on an annual basis (assuming a conservative savings potential of 20%). In addition, for every day that can be cut from the excise and customs payment process, the exchequer would stand to save Rs. 5.4 crores. Last but not the least, for every 0.5% increase in excise and custom revenue generation, the indirect tax revenues would grow by about Rs.328 crores a year!
All these add up to a savings potential of around Rs. 535 crores on an annual basis. To put this in perspective, lets assume that this would release Rs. 53.5 crores (10% of the savings realized every year, after accounting for the infrastructure and operating costs of such a system). The World Bank estimates that a basic health package could be supplied to a low-income country like India at an annual cost of Rs. 540 per person per year. An amount of Rs. 53.5 crores could, thus, is used to provide basic health services for almost a million people.
Conclusion
The two scenarios demonstrate how technology can be used to indirectly contribute to development by allowing the government to better allocate resources. The role of IT has to expand from that of merely being an agent of the trickle-down effect to active resource mobilization. Needless to say, automation could also greatly contribute to improving the efficiency of operations, accuracy of data and speed of response. As good governance becomes an end in itself, it is increasingly apparent that efficient, streamlined and citizen-friendly functioning is essential in for the Indian government a factor made even more important as India tries to compete in the global marketplace. It is time for the notoriously slow white elephant to pick up speed.
