Nobel laureate Ragnar Nurkse had once said, “the … poor are poor because they are poor! The vicious circle of poverty that runs from low income to low savings to low investment to low productivity and then back to low real income can be broken by an increase in savings and investment”
Added to this is the famous quote from Adam Smith’s “Wealth of Nations” which reads, “It is not from the benevolence of the butcher, the brewer and the baker that we expect our dinner, but from their own … self- … interest”.
Much water has flown under the bridge since these two famous postulations, the world economy, and thereby also the Indian economy, has undergone a major metamorphosis as well. A seemingly inconsequential (mis)interpretation of a clause that deals with the Tax Residency Certificate (TRC) led to the BSE Sensex plunging within hours of the budget speech of the FM P Chidambaram. And when the next press statement clarifying the Government’s position on the issue was released, the sombre mood of the market changed again, causing a sudden 0.3% northward swing in the index, following the buying of stocks worth INR. 626.90 Crore by FIIs (Foreign Institutional Investors).
Although the following day the Finance Minister puts up a brave face in an interview, saying, “I make the budget for the people of India, and not for the Rating Agencies,” the fact remains that present day economic management cannot be oblivious to the moods of foreign investors, NRIs and rating agencies”. Willy -nilly, the budget managers have to face a looming contradiction between poverty alleviation schemes that draw heavily on financial resources by way of subsidies on the one hand, and the fiscal deficit that is a red rag to rating agencies, on the other. Chidambaram’s predicament is understandable. The 31 years of economic liberalization (since 1980), integrations of the Indian economy into the world economy (since 1991) and the neo-liberalization (since 2001) that our nation has embarked upon, saw an average 6.5% of growth rate, leading India to become one of the ten largest global economies, as per the volume of GDP (Gross Domestic Product). But in the Human Development Index, however, our country ranked 134 in the world in 1980, and has stood there, exactly at the same rank, even in 2011. This paradox is what belies the Finance Minister’s assertion that he makes the budget for the ‘people’ of this country.
The Finance Minister visibly felt elated when he announced that he proposes to bring down the fiscal deficit to 4.8%, and perhaps his penchant for reducing the Fiscal deficit has had its imprint in the entirety of the budgetary provisions for the year 2013-14. It is also telling in that even though this is the last full budget before the general elections scheduled for next year, there was complete absence of populist measures. The Finance Minister has handled the taxation policy with kid gloves when it came to taxing the burgeoning super- and ultra-rich classes of Indian society. Considering that the suggestions, even from the Prime Minister’s economic advisory council, were loud and clear to the effect that rich sections ought to be brought into a new higher and multi-tier tax brackets, Chidambaram chose to take just a baby-step in that direction, by effecting a ten percent surcharge on the section earning more than Rupees One Crore. In this he seems to have followed the recent Good Samaritan statement of the Wipro chief Azim Premji. “I believe that there is a little bit of spirit of Azim Premji in every tax payer”, said the finance minister, justifying the levying of surcharge. Curiously enough, the Indian Crorepatis’ did not react to the new tax proposal with an expected element of anger, as was seen when the US President Obama taxed his rich recently. Perhaps the Indian rich are more benevolent than what Chidambaram may think about them.
But what is of more concern to the “aam aadmi” is the paltry release of INR. 10,000 Crore to meet the much-touted food security needs of 67% of the poor (around 80 Crore people). For the past three years there has been a running tiff between the finance ministry and the planning commission on the one side, and the National Advisoty Council (NCA) inspired by ruling United Progressive Alliance Chairperson and Congress president Sonia Gandhi on the other. Sonia Gandhi wanted that the Food Security policy be institutionalized, legalised and given effect to, with earliest dispatch. But the Opposers in the finance ministry, as also in the planning commission, continued to talk about a subsidy burden of INR. 2.40 Lakh Crore against its implementation. How come all of a sudden a mere INR. 10,000 Crore has been earmarked for this great poverty-alleviation and hunger-eliminating plan? Even if we take into account the existing subsidy under PDS (Public Distribution System) it hardly gives any fillip to the plan to provide Wheat @ Rupees Two a Kilogram, and Rice @ Rupees Three a Kilogram, to 80 crore people who are undernourished and hungry. A sum of INR. 10,000 Crore for food security, if worked out with simple arithmetic, comes to Rupees 125 Per Annum for one person, or less than 33 Paise per day. It is indeed an insult to the poor.
Under this anti-spending drive pertaining to food, fertiliser and fuel, the finance minister has expressed no qualms while cuttingdown subsidies by 11%, instead of raising it. Against the 2012-13 revised estimate of INR. 2.47 Lakh Crore, the budget proposes a pruned expenditure of INR. 2.20 Lakh Crore during the year 2013- 14. Oil subsidy has been brought down to INR. 65,000 Crore, from the 2012-13 Revised Estimate of INR. 96,880 Crore. If India boasts of a high food-grain production of a record 260 Million Tons, the credit goes not to the Government, but to the toiling and poverty-battered farmers and … maybe … Lord Indra.
It is not without reason that in the past 15 years nearly three lakh farmers have committed suicide. Now it is true as Chidambaram has stated in his speech too, that India has the lowest tax-GDP ratio of 9.9% (Seven percent from direct taxes like income tax and corporation tax, and 2.9% from indirect taxes like customs and excise duty), approximately. Even the less poor countries have a tax- GDP ratio of 12~14%, whereas for several advanced economies it is as high as 30%. Why can India not have a six slab system of income tax, ranging from 10% to 60% … we may ask. Because … it will irk the corporate world and the rich … hence Chidambaram shied away from this kind of tax regime. “It vitiates the investment climate as also acts as deterrent against higher earnings” claim the representatives of the industry bodies. So if a salaried person earns INR. Ten Lakh per year and an industrialist earns INR. 10,000 Crore, both fall in same tax bracket, i.e., 30%. Do not forget that salaried class cannot conceal its income, and is thus forced to cough up 30% of its taxable income above this amount, but a corrupt nexus of a corporate giant with a tax collector can manage to ensure “zero” tax. Another aspect. Finance Minister rues that Indian has a low tax- GDP ratio. The logic given against high tax brackets for super-rich is that it will prod the rich towards tax evasion. But this year despite low tax-GDP ratio, the finance ministry failed to achieve its tax collection targets. There is a huge gap between the budgetary estimates and the revised estimates so far as tax revenue is concerned. Does it not show that despite potential to mop up tax, the tax authorities failed to realize the revenue expected of them? The moot question is … If GDP is moving up north, why not the HDI in a democratic India? The solution (If we go by what Adam Smith had said) is: do not shy away from taxing the rich, award severe punishment to those officials who show laxity in tax collection and distribute gainfully to the poor as Brazil had done under Lula’s over two-decade regime adopting the doctrine of Direct delivery. Ratings agencies assessment will not change the destiny of India but HDI will.