Evaluating India’s Economic Health

by March 27, 2018 0 comments

Although we depend on the economy’s market-led model for growth and development, but to make it comprehensive and sustainable, fiscal transfers from the rich sector to the poor are mandatory.

Globally, billionaires’ total wealth increased by 31 per cent to $10.5 trillion, equivalent to 13.2 percent of global GDP and almost double the seven per cent of global GDP six years ago.

The Hurun Global Rich List 2018 ranked 2,694 billionaires from 68 countries and 2,157 companies. India reclaimed the third place in the list. The country saw the addition of 31 new billionaires this year, taking the overall tally to 131. In India, the richest one per cent own 53 per cent of the country’s wealth, according to the latest data from Credit Suisse. The richest five per cent own 68.6 per cent, while the top 10 percent have 76.3 per cent. At the other end of the pyramid, the poorer half jostles for a mere 4.1 per cent of national wealth. A few months back, a research paper co-authored by French economist Thomas Piketty estimated that the share of the top one per cent of India’s income pie is higher than ever before. A report released by Oxfam India on February 22 revealed that inequality has been on the rise for the last three decades.

The report, ‘The Widening Gaps: India Inequality Report 2018’, alleges that the wealthiest individuals in India (it pegs the total wealth of Indian billionaires at 15 per cent of the GDP, has risen from 10 per cent only five years ago) have cornered a large share of their wealth through ‘crony capitalism’ and inheritance, while people at the bottom have been seeing their share reduced further. The report pointed out that the path of inequality has changed in India — from being stagnant in the 1980s to increasing since 1991 and to a subsequent and continued surge up to the present.

Incomes are derived from assets like land, cattle, shares and labour. In India, a few own a large chunk of income-earning assets. This enables them to get incomes in the form of rent, interest and profit. As these assets accumulate and pass on from generation to generation, the earning capacity of these increases continuously. As for the rural areas, ownership pattern of the most important asset, namely, land, is highly unequal. Marginal households (with holdings less than one hectare), which account for as many as 72 per cent of the rural households, own only about 17 per cent of the land. At the other end, there are those with large holdings (of more than 10 hectares) who are about one per cent of the rural households. But they have under their ownership as much as 14 per cent of the area.

Such private ownership of property and inheritance laws are mainly responsible for highly unequal distribution of assets. People at the bottom could raise their economic status and to and extent reduce the distance separating them from those at the top, if they could get work. In other words, if they did not possess adequate earning assets, they could at least earn from their labour. But for quite some time, the increase in employment opportunities remained much less than the rise in the labour force. An inheritance or estate tax is a tax paid by a person who inherits money or property or a levy on the estate (money and property) of a person who has died. Inheritance tax is no longer levied in India and was abolished during the time of the Rajiv Gandhi Government in 1985. An estate tax is seen as a viable instrument against rising inequality. The Organisation for Economic Co-operation and Development suggests that reducing inequality through tax and transfer policies does not harm growth, so long as the chosen policies are well designed and implemented. They argue that redistribution efforts should focus on families with children and youth, and improvements in human capital investment by promotion of skills development and learning.  Governments can intervene to promote equity and reduce inequality and poverty, through the tax and benefits system. This means employing a progressive tax and benefits system which takes proportionately more tax from those on higher levels of income and redistributes welfare benefits to those on lower incomes. It can support sectoral training, apprenticeships, and earn-while-you-learn programmes; maintain and strengthen safety net programs such as welfare, unemployment benefit, universal healthcare, homeless shelters, and sometimes subsidised services such as public transport, which prevent individuals from falling into poverty beyond a certain level.

This brings us to the concept of Universal basic income (UBI) which is a sum of money provided by the state to all citizens to take care of the bare necessities of life. This measure is intended to provide a safety net, preventing any citizen from sinking below a basic minimum standard of living. The argument for a basic income for all is not only in the interest of the poor but also in the interest of the rich to maintain social order and rule of law. In China, there is already a kind of minimum livelihood guarantee, set at different levels in urban and rural areas, that adds to the incomes of those categorised as poor so that they reach a certain minimum.  With protectionism resurfacing all around and to fight the recessionary trend, it is necessary to boost domestic consumption demand. UBI will mostly go to the poor and rural segment where marginal propensity to consume is high and therefore consumption demand will substantially go up. But how can it be funded in India? According to N Chandra Mohan in Hindustan Times (January 10, 2017), taking out all subsidies, reducing unnecessary tax exemptions, taxing agricultural incomes among other measures frees up resources up to 10 per cent of the GDP annually. If we take out 3.5 per cent of GDP for UBI, this would entail Rs 5.32 lakh crore which is double the budgeted subsidy bill for 2016-17. Even otherwise, consequent and subsequent to demonetisation, tax accrual has substantially gone up and, therefore, funding of a none too ambitious programme for meeting minimum basic needs should be possible.

Writer: Sudip Bhattacharyya

Courtesy: The Pioneer

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