Addressing the nation from the ramparts of the Red Fort, Prime Minister Narendra Modi, on Independence Day, said that wealth creation is a national service and that wealth creators should not be viewed with suspicion.
Furthermore, he added, only when wealth is created can it be distributed.
These statements come at a time when the economy is facing severe headwinds and yet, the prime minister has set a tough target of almost doubling the economy to $5 trillion in the next five years. Even if it is in nominal rupee terms, including a depreciation of the rupee by 15%, it would require an average 16% rate of growth over the next five years. Investments which have been significantly down compared to their peak in 2012–13 have refused to show an uptrend and without that, the target is unachievable.
Private investors are not boosting their investment significantly. The rich are unhappy about the additional cess levied on incomes above Rs 2 crore in the budget presented in July. Other changes pertaining to the corporate sector have also acted as a spoiler for businessmen. Important corporate leaders, who were earlier supporters of the current ruling dispensation, are ticked off enough to speak out about the deteriorating climate for investment. They have also complained of tax terrorism by the tax departments.
Modi’s words on Independence Day therefore were a balm to the frayed nerves of the business community.
Finance minister Nirmala Sitharaman followed it up this week after announcing some sops to the investors. This came on the back of Niti Aayog boss Rajiv Kumar saying that India hasn’t seen a liquidity crisis like this in the last 70 years. Prior to that, the RBI governor and members of the Economic Advisory Council to the prime minister had also stated that there is a slowdown. The concessions now announced by the finance minister are also an admission of a declining economy.
But is it not too little too late? Sitharaman maintained that Indian economy is one of the fastest growing in the world. So, the package announced caters to the corporate sectors and not to the root cause of the problem. It shows the clout of the corporate sector with the government and the belief that they are the wealth creators and need to be mollified.
In India there are about 35 million demat accounts. Presumably they represent those who trade in the stock markets. That is less than 3% of the population. But most of the stocks are held by a tiny percent of the corporates, foreign portfolio investments (FP!s) and financial institutions.
A large number of people also save small sums of money and invest it. These are the households, the savers whose money is invested in financial assets and banks, and from the banks it goes to the investors. So, while encouraging businesses, one should not forget the workers, farmers, the officegoers, etc.—we should celebrate everyone. But Modi did not mention them and Sitharaman has not catered to them.
Stagnant rate
The moot point is why is the investment rate stagnant? Output and employment have been stagnant or declining. Not only is enough new work is not being created for those entering the labour force, but workers have been losing employment as various surveys show. Consequently, as real income has declined for a large segment of the workers, demand has fallen short.
Furthermore, according to an OXFAM report, disparities have grown rapidly with nine people having as much wealth as the bottom 50% of the population. And, the top 1% of the population hold 51% of the national wealth. Clearly, the top wealth holders have been cornering a disproportionate share of the wealth and incomes of the economy. So, do they need more incentive or is it those at the bottom who need more support?
This kind of extreme inequality raises the question—who should be taxed how much? According to the ‘ability to pay’ principle of taxation, those with higher incomes and wealth ought to pay not only higher taxes but higher tax rates.
After the global crisis in 2007–08, Warren Buffet said that the rich need to pay more tax for capitalism to survive. This has been repeated again recently. Buffet’s statement was supported by the rich in the US, Germany, Italy and France. But the Indian rich do not seem to want to pay more taxes.
How much more tax the rich should pay is a political decision.
Fixing rates
An income of Rs 2 crore is 160 times the current per capita income. There are very few people in this category. According to tax data, 1.5 lakh individuals declare an income above Rs 1 crore. The number of people declaring an income above Rs 5 crore is 6,361. The number declaring an income above Rs 2 crore is around 40,000. The number of tax filers in India in 2018–19 was 6.1 crore. So, those impacted by the higher tax rate would be only 0.1% of the tax payers and 0.004% of the population.
The new tax rates after the increase in surcharge are comparable to what people earning similar amounts pay in some of the advanced countries like Germany. In reality the tax rates paid by the rich are much less than what appears to be on paper. They take advantage of innumerable concessions and deductions allowed to them and they resort to black income generation by declaring only a part of their incomes. Warren Buffet once said that he pays a lower tax rate than his secretary because of these tax concessions. In India, the situation is likely to be even worse given the resort to large black income generation by the rich.
The Indian rich unfortunately compare the tax rates on paper to those in some of the developing countries or in the South East Asian economies. Since capital has become highly mobile, they threaten to leave India. There are 90 tax havens and funds can be easily moved out through them through the process of ‘layering’, erasing the trail for the agencies to catch them.
Flight of capital
Further, since 2014, 23,000 of these rich people, called high net-worth individuals (HNWI), have left India. So, a large number of ‘wealth creators’ are voting with their feet?
Flight of capital is a risk minimisation strategy to relocate in tax havens which offer low tax rates and a high degree of secrecy. The US has been complaining that rich companies have been relocating their offices to jurisdictions with low tax rates, like, Google and Starbucks moving to Ireland. This is called BEPS (Base Erosion Profit Shifting). So, globally, many of the ‘wealth creators’ are more concerned about their profits and less about national well-being.
The Indian economy has suffered due to the shocks administered by the government in the form of demonetisation and GST. Add to this the non-bank financial institution and the non-performing assets problem of the financial sector. Though the official data does not reflect it, the economy has been tanking with capacity utilisation at around 75%. This is the real cause of the lack of pick up in private investment and cannot be countered by cut in tax rates or cuts in interest rates or by a boost to the stock markets as the ‘wealth creators’ have been demanding. The RBI has cut interest rates by 1% over the last one year and the stock market has been on a high but investment rate has not budged.
In the current quarter, the official nominal rate of growth is about 7%, so how can it be raised to 16% if the private sector investment does not rise sharply. Foreign investment is small and uncertain given global and national uncertainties. Meanwhile, the government has proposed Rs 100 lakh crore investment in five years.
But this year, the capital expenditure in the budget is pegged at Rs 8.5 lakh crore (including the public sector)—nowhere close to the average of Rs 20 lakh crore targeted. So, the prospects of reaching $5 trillion by 2024 are bleak even if the rich are incentivised and their hurt feelings are soothed from the ramparts of the Red Fort.
(Arun Kumar is Malcolm Adiseshiah Chair Professor, Institute of Social Sciences, and Astha Ahuja is with Arya Bhatt College, Delhi University.)
