Savour these facts. “Since 2020, the richest 1% have captured almost two-thirds of all new wealth – nearly twice as much money as the bottom 99% of the world’s population. Billionaire fortunes are increasing by $2.7bn a day, even as inflation outpaces the wages of at least 1.7 billion workers, more than the population of India. Food and energy companies more than doubled their profits in 2022, paying out $257bn to wealthy shareholders, while over 800 million people went to bed hungry. Only 4 cents in every dollar of tax revenue comes from wealth taxes, and half the world’s billionaires live in countries with no inheritance tax on money they give to their children. A tax of up to 5% on the world’s multi-millionaires and billionaires could raise $1.7 trillion a year, enough to lift 2 billion people out of poverty, and fund a global plan to end hunger.” This emerges from Oxfam’s latest assessment on inequality.
Let us turn to India. “Just 5% of Indians own more than 60% of the country’s wealth while the bottom 50% of India’s population possess only 3% of wealth. India’s richest man has seen his wealth soar by 46% in 2022. The report shows that a one-off 20% tax on this billionaire’s unrealised gains from 2017–2021 could potentially raise Rs 1.8 lakh crores. This is enough to employ more than five million primary school teachers in the country for a year.” In fact the report shows that the reduction in corporate tax rate from 30% to 20% involved a loss of over Rs 1 lakh crore which was higher than the outlay on NREGA! In FY22, bottom 50% contributed to 64% of GST while the top 10% contributed to 3%.
These facts at both the global and domestic levels are disturbing and can cause considerable umbrage. However, while these numbers do indicate that there is something amiss in the way in which the world operates, on deeper thought it does appear that this is inevitable in a capitalist world. And also considering that there is no alternative to capitalism to bring about growth, as socialism in any form has failed, inequality is inevitable and has to be accepted. The challenge for governments is to then balance out society requirements and hence fiscal policy plays a very important role in re-distribution through appropriate tax and expenditure policies.
In a utopian world, every individual should be having a proportionate share in the national wealth. But this does not happen and even if it were so, there would be limited progress. The issue with capitalism is the following. Policies (that are influenced by corporates largely) are geared to generating growth and the capitalists are the ones who take on this role. A large number of them fail (start ups for example) and invariably there is a step-down structure where the top 100 own the largest share of wealth. But they create the genesis of the high GDP growth which holds not just in India but everywhere else. Often when there is talk of unrealised wealth, it is very notional because of the valuation in the stock markets. This may again not be the best measure as such value can never be realised. This is borne out by the stories of failed billionaires whose capital market value has disappeared. The broader question is whether anything can be done?
If the capitalist was not on the scene there would have been limited growth and employment opportunities. The state can provide limited employment and it is the private sector that drives the economy as the former cannot look at profit all the time. In this situation the only way out is redistribution. The model followed in India has been pro-industry where the tax rate has been kept low (the effective tax rate at 22% is much lower than the nominal 30% rate once companies take advantage of the exemptions and deductions). The focus on infrastructure and the PLI scheme by the government is supposed to lead to higher growth in turnover of companies and bring in more jobs and hence income leading to a virtuous chain of higher consumption, investment and further production. Practically speaking taxing the rich because they are rich can become a disincentive as was the case when the marginal tax rate was close to 100% around five decades ago.
The job of budgets both at the centre and state levels is to do the maximum possible to balance this inequality. This is in the concept of a welfare state. All the debates on freebies are centred on this concept. In a society like ours’ such measures are required. The MGNREGA scheme for example is an example of one which adds no value but provides paltry income to the poorest sections. The same holds for the PM-Kisan scheme where money is given to farmers. Food subsidy from now on will be a free PDS scheme again targeting the poor. The states have their schemes like free cycles, free water to farmers, sewing machines, computers etc. which are targeted at the lower income groups. While critics call them populist which ruin fiscal accounts, the fact remains that if not done, the poor would be in a worse state. Similarly the interest subsidy given to the lower income groups under affordable housing should be welcomes as it does help in wealth generation at the lower levels. Therefore in an unequal world, there is a strong case for persevering with such schemes.
The dexterity to be shown in budgets is as to how a balance is drawn between the two – providing for the poor and giving incentives to the capitalist as both are required to maintain equilibrium in society. And hence irrespective of what economists and critics say, all governments tend to find a delicate balance between the two. But as critics, we need to look at freebies with an open mind just as we do for the wealth creators.
Madan Sabnavis is Chief Economist, Bank of Baroda, and author of ‘Lockdown or economic destruction?’ Views are personal
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