The upcoming Union Budget will be the last full-fledged one for the Modi Government before populism takes over the Budget ahead of the 2024 general elections. Finance Minister Nirmala Sitharaman must be complimented for her budget last year, the way she brought succour to the distressed migrants, poor and hungry by providing adequate allocation for food and increasing allocation in MNREGA.
The other very significant signature tune of the last budget was a whopping increase in capital expenditure (35%), promoting the PLI scheme which has generated export revenue of $ 5 billion in mobile sets. By extending the ECLGS, close to 130 lakh beleaguered SMEs have also benefitted. However, the most significant concerns have been high fiscal deficit of 6.4% of the GDP, looming the spectre of inflation and stagnant tax/GDP (13%). In this backdrop the OXFAM recent report with the headline: Survival of the richest makes interesting reading and a timely pointer to our FM how to contain growing income inequality, improve tax collection and reduce market borrowing, is relevant.
There have been two ideological perspectives on taxation. While Arthur Laffer has championed the cause of low taxation as the forerunner of better tax collection, economists like Thomas Piketty and the OXFAM report clearly bring out how this is not the case in actuality. Reaganomics thrived in the 70s when the tax rate on the super-rich was reduced from 60% to 30% and income inequality increased sharply in the USA thereafter. In India also, the tax rate on the rich was reduced significantly by Chidambaram in 1997. As per the World Inequality Report (2022) the bottom 50% of the population in India which accounted for 21% of national income share in India in 1991 witnessed its share coming down to only 15% of the national pie by 2015. In contrast the top 10% who accounted for 32% of national wealth in 1991 now account for 57%. Ironically, the 40% middle class who accounted for 43% of national wealth, today account for only 30%.
Quite clearly, the soft taxation policy after economic liberalisation has made the bottom 50% and middle 40% poorer while the top 10% has harnessed an unusual spurt in prosperity.
On the global scale, bottom 50% today account for 8.5% of income while the top 10% account for 52%. The findings are even more disturbing in terms of wealth inequality where the 50% own only 2% of global assets while the top 10% account for 76%. Cutting across all continents, the poorest half lags behind significantly.
The SDG in its target 10.1 therefore advices that every country should focus on the poorest 50%. Thomas Piketty in a seminal book “Capital in the 21st century” (2015) was the first to demolish Simon Kuznets’s grand proposition that inequality would reduce when countries grow richer. For him inequality is not an accident of history but a feature of capitalism that can be reversed through State intervention. Walter Schedel in another path breaking work “Great Leveller” (2017) also found that the average tax rate on top 1% households has come down from 42% to 27% during 1980 -2013. While agreeing with Piketty’s finding, he was not very sanguine whether the Government would have the requisite political will to increase the personal income tax rate on the super-rich and impose wealth tax. However, he was prescient enough to conclude that “peaceful policy reforms will prove unequal to the growing challenge of inequality.”
In this backdrop, the OXFAM’s report is a reiteration of concerns raised by Piketty and Schedel but raises interesting insight on postpandemic situation, globally. It brings out that for the first time poverty has increased in 25 years. Besides, since 2020, the richer 1% have captured 66% of the new wealth created. While the fortune of the billionaire increased by 2.7 billion dollars per day, inflation outpaces wages of 1.7 billion workers. Food and energy component doubles the profit of the suppliers in 2022 while 800 million people went to bed hungry.
The report recommends wealth tax up to 5% on multi-millionaires and billionaires which will fetch 1.57 trillion dollars per year which will be enough to lift 2 billion people out of poverty. As an interesting aside, it brings out that if 5% wealth tax is imposed on Ambani and Adani, it will fetch $9.1 billion which will be sufficient to cover a scheme like MGNRGA which support 100 days’ work to nearly 5 crore unskilled men and women. It also recommends that the highest tax rates on millionaires should be increased to 50-60% based on an IMF study. The tendency of the rich corporate to hide their money in tax havens can be stopped by bringing in legislation like GARR which has been working very effectively in countries like Australia and Germany. The report also calls for taxing capital gains at 18% rates and removing a plethora of tax exemptions that principally benefit the rich.
As Nirmala Sitharaman inches towards the new Parliament building to present her Budget, quite clearly she will look for a continuance with her strategy to increase capital expenditure, and continue with support for the PLI scheme and SMEs. However,the most disquieting aspect of India’s budgeting trend has been the significant drop in the tax to GDP ratio from 13.2% in 2018-19 to 10.9% in 2021. This is significantly lower than most emerging market economies like China where it is around 10%. In developed countries the tax to GDP ratio hovers between 20-30%. On the fiscal deficit front the figures are far more alarming. As against 2018-19 where it was 3.4% it went up to 9.5% in 2021 and the expectation is that it will go up to 6.4% in 2022-23. The total debt to GDP which was around 48% in 2018-19, is likely to touch 60% for the Centre and 40% for the States. Kenneth Rogoff and Reinhart had brought out that if the debt to GDP ratio is more than 90%, a country is more likely to witness low or negative growth.
The challenge of the Finance Minister is twofold: How to increase capital expenditure and bolster employment; and ensure economic stability by containing deficit. Instead of a debt propelled policy strategy (higher market borrowing) with inflationary potential, it would make eminent sense if she takes the initiative to increase tax collection, particularly of direct taxes. It is time for Sitharaman to turn upside down the pro rich policy of Arun Jaitley of abolishing wealth tax in 2017 and bring in 5% wealth tax and increase tax on the super-rich to 40%. This should collect enough revenue to spend on most of our social sector programmes like MDM, MNREGA, ICDS and SSA.
The critical needs of the nation are quality education, basic healthcare, minimum nutrition for children and anaemic adolescent girls and women. An inclusive India needs a sharp departure from pro rich tax policy and crony capitalism. Joseph Stiglitz constantly harps on the importance of shared prosperity in a liberal democracy like ours. Reducing income inequality is a constitutional mandate (Art38(2)). She must take a definitive initative in the upcoming budget.
(Prof Dr Misra teaches Macro Economics)