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The 2022 Oxfam Inequality Report – like an annual exercise of showing the mirror on the state of inequality in India to policymakers – continues to provide stark evidence of the widening gap between the rich and the poor.
The report – called “Survival of the Richest” – explicates how “the top 1 percent in India now owns more than 40.5 percent of total wealth in 2021, while the bottom 50% of the population (700 million) has around 3 percent of total wealth. Since the pandemic began, till November 2022, billionaires in India have seen their wealth surge by 121 percent, or Rs 3,608 crore per day in real terms (Around Rs 2.5 crore every minute).”
The report also highlights how progressive tax measures can help combat inequality in India.
Over the last three years, before every Union Budget, we have presented a case for introducing a consumption-based tax on the ultra-rich (maybe the top 1 percent at first and then expanding the base to the top 5-10 percent wealth-endowed class of citizens over a three- to five-year roadmap).
Among these are an asymmetrically skewed direct-indirect tax revenue base (heavily dependent on indirect taxes), a widening fiscal deficit, lesser tax-non tax revenue sources available to the government, which has made it to borrow more over the last few years for deficit financing purposes.
Let’s look at some of these issues closely.
The Union government’s own fiscal position is as worrying as anything else. As the government’s tax and non-tax revenues (disinvestment target-based realisation) overall have dwindled over past few years, the government debt to GDP level has rapidly increased.
There is also less (fiscal) room for the Central government spending to rise (which is why I recently argued that one shouldn’t keep high expectations from the upcoming Budget).
Most government spending, as part of GDP, has been debt-financed (see figure below), which is worrying.
While the government wants to increase spending on capex to drive growth, more than 65 percent of budgetary requirements are on the revenue expenditure side (due to the high-interest payment costs and government wages or salaries, social welfare needs).
On other (non-tax) revenue sources, the Narendra Modi government across terms, has consistently failed to meet its own set disinvestment targets year after year.
If we closely review the numbers on tax, the policy effort over the past decade to revive private capex in India and derive a sustainable 7-8 percent has been futile as evidenced by (a) sustained decline in investment and saving rates, (b) rising unemployment and (c) trend decline in real GDP growth to 2-3 percent on a three-year CAGR.
According to a recent policy study, “The policy structure was woven around resurrecting the banking sector and corporate balance sheet, fiscal conservatism including limiting revenue expenditure and higher capital outlays, enable low-interest rates and ensure accommodative finance conditions. Private capex was encouraged through lower corporate tax incidence (2.9 percent of GDP) translating into a decline in the ratio of direct tax/GDP to 5.4 percent from the post-liberalisation peak of 7.3 percent in FY08.”
Simultaneously, the indirect taxes or the GDP ratio increased to 11 percent from lows of 8.8 percent in FY10, more recently through the increase in taxes on fuel and broadbasing GST to even basic consumption items.
Therefore, the progressive regime over the recent years has been reversed with greater emphasis now on the supply side while simultaneously inhibiting the demand side.
This approach of pursuing ‘supply-side fiscal interventions’ by the Modi government has so far miserably failed as corporates have preferred to conserve their profitability, specially amid rising uncertainty attributable to frequent and multiple exogenous (external) shocks, both domestic and global.
Going forward, the challenges to growth are going to intensify due to a slowdown in global growth, tightening financial conditions, and muted private capex due to the private inflections further drifting away. Hence, one may think, India needs a significantly different macro-fiscal strategy going forward.
Well, for a start, acknowledge and address the root of the problem(s).
During the last Union Budget, the finance minister’s speech didn’t even have a single mention about the presence of demand-induced crisis (or, if there was a crisis.)
Corporate tax cuts, as argued before, in a broader sense provide a sugar-rush to an economy. Investors feel happy, albeit more temporally in the short term, buying more stocks which puts a smile on the faces of stock traders and India’s financial markets. Others will invest majorly in greater capital-intensive modes of production which may drive nominal growth rates for a period, but hardly do much to boost employment or create higher wage-paying opportunities.
In terms of a few tangible fiscal measures, say on the fiscal tax-side, a reduction in consumer (indirect) taxes and personal (direct) income taxes may help in at least increasing the disposable income of most under the tax base. This can be targeted more for low-income classes where the suffering from pandemic-induced debt and borrowing has been more. The consumption demand of this class is still very low compared to what the richer (urban-based) classes spend.
The introduction of a consumption tax for the top income class (say the top 1 percent) could be first introduced as a ‘consumption cess’ justified by the fiscal pressures imposed by the pandemic in recent years.
A radical proposal like this may have been perceived as a drastic measure in a more ‘normal’ time, but in the context to a pandemic, and the polycrisis it imposed, such an idea can be seriously considered.
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’.
Going beyond all this, the Modi government in the upcoming Budget may also benefit from emphasising the need of having a three-to-five-year fiscal plan, say from FY 2021-2023, without speaking in abstract for 2047 (100 years for India) plan.
A small- to medium-term roadmap for fiscal policy can help outline its own (fiscal) priorities and consequently help businesses, households, external actors (investors), all, to get more clarity on the government’s action-plan for the long-road-to economic normalcy.
(This is part 3 of our series and special coverage of the upcoming Union Budget, 2023. Read Part 1 and Part 2 here. 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.)
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Published: 19 Jan 2023,03:40 PM IST