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
http://www.thestatesman.net/index.php?option=
com_content&view=article&id=403739&catid=38
