Budget 2022: Can a ‘Consumption Tax’ for Rich Help India’s Uneven Recovery?

The 2022 Budget must ensure that India’s recovery focuses not just on the top 10% but that it is also inclusive.

There's a need to create a robust safety net for lower-middle-class workers, with a need to put more money in the hands of those left most vulnerable from the pandemic. Photo for representation.

(Photo: PTI)

India’s Union Budget presentation in February has become a day of close observance for most economic and political commentators. It is a time when the ruling government is either trying to correct some ‘wrongs’ from last year’s fiscal arithmetic, or give a handful of ‘carrots’ for poll-bound state demographics for votes. In both these scenarios, there remains a sharp divergence between ‘what’s promised’ and ‘what’s delivered’.

For example, last year’s budget outlays by Finance Minister Nirmala Sitharaman sought to offer an optimistic ‘pro-growth’ vision to the government’s long-term plan to kickstart (domestic) private investment through increased government-enabled capital spending with the hope to revive ‘animal spirits’ and ensure economic recovery across sectors.

Where Modi Govt's Fiscal Priorities Fall Short

As per recent Centre for Monitoring Indian Economy (CMIE) data, on year-to-year growth trends, there were some positive signs on manufacturing and mining activity performance in 2021. But the overall situation still looks grim, particularly in areas of agriculture, industrial production and services. And now, with the third wave of COVID-19 infections, there is more adverse impact likely on the performance of almost all these sectors in the coming quarters.

Going forward, it is also important to focus the growth diagnosis on the sequential aspect of growth performance seen across the year, than overemphasise the year-to-year percentage data alone.

However, where the Modi government’s fiscal priorities, based on the recent Union Budgets, continue to miss is with respect to the nation’s puzzling unemployment-underemployment challenge.

It is further entrenched in the crises of low social spending in areas that could help create a robust safety net for lower-middle-class workers, with a need to put more money in the hands of those left most vulnerable from the pandemic.

India’s macroeconomic landscape also faces a classical Keynesian trap of low consumption demand from a deeply unequal saving-investment relationship seen between ‘big’ capital and smaller firms, which was exacerbated during the pandemic. Unfortunately, Budget speeches have failed to even acknowledge these issues, especially of joblessness.

Setting the Diagnosis Right

We need a correct diagnosis, too. As Mahesh Vyas recently pointed out, “The unemployment rate is not India’s most important labour market indicator. The unemployment rate was 7.9 per cent in December 2021. This does not mean that the remaining 92.1 per cent were employed. It does not even mean that 92.1 per cent of all working-age people were employed.” Vyas is right here. Amidst the many concerns in a disjointed labour market structure within India, one of them is how most adults do not clearly express a desire to work to earn wages or profits. That makes traditional metrics less significant in interpreting and studying the problem.

The employment-population ratio becomes a more useful indicator, measuring the ratio of the employed to the total working-age population.

India’s pre-pandemic employment-population ratio of 43% was lower than the global rate of 55% in 2020, as per World Bank data. The employment rate in Bangladesh is 53%, and in China, it is around 63%. As per the CMIE’s estimate, India’s employment-population rate is below 38%.

A Chronic Crisis of Quality Jobs

What this reflects is a chronic crisis of ‘good quality jobs’ across India for the working-age population that is entering the labour force every year, the rate of which continued to be high even during the COVID-19 pandemic.

At the same time, in rural India, the demand for MGNREGA work, seen as a fallback option for a safety net, still remains high despite the resurgence of some economic activity from the second half of 2021. Inadequate MGNREGA budgets have made it difficult for states to provide adequate employment to those in rural areas who have less or no alternative employment opportunities.

Where the Finance Minister and the Modi Government would need to get their act straight is in defining their allocative spending priority. This upcoming Budget should, therefore, be about two things:

One, focus the design of our fiscal policy towards creating good-quality jobs through incentives across sectors, and to do so over a three-to-five-year plan. Second, create well-financed job-based social security nets by supporting increased outlays to MGNREGA in rural areas and create an urban version of the National Employment Guarantee Scheme in cities for temporal relief to those struggling to find employment in both rural-urban areas.

How to pay for the ‘Change We Seek’?

Based on good tax-revenue proceeds, tax-to-GDP numbers look good for this year. Even if the disinvestment targets aren’t met, a more buoyant tax-GDP ratio should encourage the Union Government to enhance its ‘redistributive capabilities’ now.

A proposition to the Finance Minister would be to do the following:

• consider generating greater redistribution and fiscal spending capacity through a ‘COVID consumption tax’ on the ultra-rich consumer class;

• use these additional resources with proceeds from a higher tax-GDP yield on job creation (create an automatic stabiliser job creation plan in the form of an urban-based employment guarantee scheme)

• add more money on social welfare plans for farm, nutrition and health schemes.

A Tax for the Ultra-Rich

The idea of a ‘COVID consumption tax or cess’ for the ultra-rich has been discussed before. A consumption tax – for the top income class (say, the top 5% to 10%) – could be first introduced as a ‘COVID Consumption Cess’, if needed.

How would this work? A ‘consumption tax’ (or a cess) is a tax imposed on ‘consumption’, as opposed to some other measure of ability to pay, most notably ‘income’.

As mentioned earlier, in India, data on consumption-based surveys (even at household levels) and trends seen within them has been observed as a principal method for understanding and analysing various kinds of inequities. It can thus allow policymakers to have a good idea on considering a ‘consumption tax’ that progressively accrues income from higher consumers-producers.

Measuring Consumption is Easier

In practice, too, ‘consumption’ is much easier to measure than ‘income’, and the dynamic efficiency gained from encouraging savings and investment could be huge. The transitional difficulties, often associated with implementing such a system, are more likely in nations where consumption-based data and its sources are weak.

In India, relatively more robust consumption-based household data allow any such transitional costs to be minimised. For a start, in a graded implementation cycle, one can at least consider imposing a marginal consumption or spending tax side-by-side with existing income taxes, which can be phased out over time.

The vitality of this upcoming Union Budget in tackling India’s jobs problem is hinged upon the government’s ability to establish ‘clarity’ in its macro-fiscal, economic action plan through a comprehensive three-to-five-year agenda. And this agenda must be coherent in its vision and blueprint, ensuring that India’s economic recovery is centred on the well-being of not just the top 10%, but that it is also more inclusive, equitable and sustainable in its nature.

(The author is Associate Professor of Economics, OP Jindal Global University. He is currently Visiting Professor, Department of Economics, Carleton University. He tweets @Deepanshu_1810. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)