An Inequitable Path: The ritualistic exercise in fiscal management*

Mar 23rd 2012, Amiya Kumar Bagchi

Economists and other social scientists have known for a long time that growth does not trickle down, if the state and empowered social actors do not take positive action to redistribute assets and incomes in favour of the poor and ensure employment with dignity to everybody seeking work. It is by learning such lessons that the foundations of the welfare state were laid in Western Europe, Canada, Australia or New Zealand. Under neo-liberal slogans, the State was made to withdraw slowly but surely, from the duties of providing full employment and social security. When this was combined with the slogan that indulging the rich and drastically lowering tax burden on them would lead to more growth, inequality climbed to a historic high in all the major capitalist countries, and especially in countries pursuing the Anglo-Saxon model of allowing virtually totally unregulated behaviour by big investment firms and banks.

This has been demonstrated by major economists around the world, including Tony Atkinson of Britain (a colleague and friend since my Cambridge days), Thomas Piketty of France and James Galbraith of the USA. They found that in countries surveyed by them, which include India, most of the growth in incomes accrued to the top 1 per cent of the income-earners of the population and a very large part of those increases came through astronomical salaries paid to a select few in private sector employment and through capital gains (made, we know, generally in the stock market, real estate and oil or other mineral companies).

On top of all that, top income-earners hide much of their wealth in ‘treasure islands' such as Bermuda, Jersey, Andorra, Mauritius, Vanuatu or Switzerland, numbering at least 50 to 60 worldwide, where the governments do not ask questions about the source of the funds deposited there and tax any declared incomes at very low rates.

Reading the GOI's Economic Survey for this year and the budget proposals for 2012-13, I get the distinct impression that the framers of the Survey and the budget proposals have decided to ignore all this evidence and have fixed the target of raising the rate of growth at any cost, without bothering about what is going to happen to the 93 per cent of the Indian population who work in the informal sector in which work is anything but ‘decent' as defined by the ILO, and piling up problems of management of the Indian economy as conceived by even the mandarins of the North Block in the Central Secretariat.

Take the latter issue first. All economists want to know whether the particular economy being managed can pay its way without becoming heavily indebted to the rest of the world. The index for that is the balance of payments made abroad as against receipts from abroad. There can be trouble when this current account balance is negative. In the Indian case the balance is not only negative but has increased steadily since 2006-07, when it was -1 per cent of GDP to the current fiscal year, when it is expected to be -3.6 per cent of GDP. We have been meeting these excess payments by attracting foreign capital from abroad as loans or investments, for which we have been paying increasingly larger amounts. Moreover, as a result of these inflows, the external value of the rupee is being kept artificially high. This is depressing the growth of exports and increasing problems of exchange rate management by the Reserve Bank of India. Instead of addressing the issues of how to encourage the growth of exports with high value-added, the budget has eased external commercial borrowing for airlines and for low-cost housing (!). The latter step will only allow further capital gains to accrue to realtors and traders in houses.

Another figure that bothers the watchers of the economy is that of the fiscal deficit, which was 5.9 per cent of GDP in 2011-12 as against the budget estimate of 4.6 per cent, and much higher than the 3.3 per cent of GDP in 2006-07. Another serious problem that concerns us is the high rates of inflation during the last few years. You would have expected the budget framers to avoid taking steps that would increase the rates of inflation. Increasing rates of indirect taxes on commodities is a sure recipe for fuelling the risk of inflation. What does the budget do? It gives exemptions on direct taxes that would lead to a revenue loss of Rs 4500 crore and raises the general excise duty from 10 to 12 per cent, subjects a whole range of services to tax and thereby makes a revenue gain of Rs 45,940 crore. There is a class logic behind this, as behind the proposal to raise Rs 30,000 crore through disinvestment of public undertaking shares. Increases in food prices or in fact most other prices will matter very little to persons with incomes of say, Rs 50 lakh and above. In any case what little they might lose as consumers will be greatly overbalanced by the increases in their incomes as big traders, company executives or controllers of mega companies such as Reliance or DLF.

The Finance Minister would have eased the task of managing the economy in the long run if he had brought back the long-term capital gains tax, imposed higher taxes on transactions in the stock market (instead of which, he has reduced it to a derisory level) and disallowed the tax haven of Mauritius. Even an iconic investor such as Warren Buffett has complained about big investors paying a lower proportion of their incomes than ordinary salary-earners. The framers of the budget could have heeded even his advice and brought down both the current account deficit and the fiscal deficit. Those steps would also have brought down corruption by creating an interlocking set of accounts for every large income-earner. Just a 5 per cent increase in the marginal rates of taxation on incomes above Rs 50 lakh and bringing back the long-term capital gains tax at a rate even of 10 per cent of the value accrual would have netted him as much as he has obtained from this inequitable and inefficient raising of indirect tax rates and coverage, and disinvestment of shares in profitable public enterprises.

The Minister for Rural Development used the peculiar logic that in order to provide more money for safe drinking water for villages (on which we definitely need much higher levels of public spending), to persuade the Finance Minister to slash the allocation for Mahatma Gandhi NREGS - which benefits the poorest of the rural population- from Rs 40,000 crore to Rs 33,000 crore (that is really by Rs 10,000 crore in real terms, taking the food price inflation into account). The larger allocations for ICDS and Sarvashiksha Abhiyan are welcome. The Economic Survey correctly talks about reaping the demographic dividend from the globally largest cohort of working age population we are going to have. In order to obtain that, it is necessary to empower the youth with decent employment, and education to back it, all the way from the primary to the tertiary stage. What is needed to achieve that is a progressive system of taxation, putting money in the hands of the 93 per cent, using local resources to create employment and universalize the public distribution of foodgrains so as to bring down the shamefully high levels of malnutrition. (India has the distinction of being home to the largest mass of malnourished and illiterate people in the world).

Why does the Finance Minister have to encourage the export of iron ore by lowering import duties on mining equipment instead of giving incentives for expanding steel production to much higher levels at Bhilai, Jamshedpur, Durgapur, or Rourkela? Also, are there not enough illegal mining scandals blotting India's record anyway?

Is it because the Central government knows that taking this inequitable path of fiscal management will create further distress among the 94 per cent and lead to escalating civil violence that it has made a large allocation for UID-Aadhar that will be used for domestic surveillance? Is that what the people of this great democracy deserve?

*The article was originally published in The Statesman on 20 March 2012 and is available at


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