With all economic indicators racing downwards, everyone, including Government spokesmen, accept that all is not well with the Indian economy. The Finance Minister even took some drastic measures to revive the economy; on the advice of pink papers, tax rates were cut after the Budget but the massive giveaway to the corporate world has failed to stop the downward slide of the economy. With the next Budget Day approaching fast, the FM’s top concern is to reverse the slowdown in the economy, for which she is getting an excess of contradictory advice.
Some would have her hike the GST rates to bolster the sagging tax collections while others would like her to reduce personal income-tax rates to give a fillip to consumption. The first suggestion is a sure-fire recipe for disaster; the all-pervasive GST, while causing misery to the poor has ensured that Indian goods are priced out of our own markets. Reducing personal income-tax rates and bringing the tax rate for firms on par with that of corporates may provide some impetus to the economy because smaller business entities provide around 80 per cent of the total employment.
Yet, without anything more, personal tax rate cuts would only provide a partial solution to our economic woes. The Government seems to have adopted an economic strategy, which equates resolution of the problems of the big boys with that of the resolution of the problems of the entire population. This approach is bound to fail; what is sauce for the goose may not be sauce for the gander also. While Mr. Mukesh Ambani earns Rs.300 crore per day our average Ramlal earns only Rs. 315. The Indian economy is progressing, though at a reduced rate, but the poor especially in the rural areas are in dire straits.
The results of a leaked consumer expenditure survey by the National Statistical Office (NSO) show that average spending per consumer per month declined by 3.7 per cent , from Rs.1,501 to Rs 1,446 between 2011-12 and 2017-18. Villages fared even worse with consumer spending declining by 8.8 per cent; more significantly the average monthly spending on food in rural areas declined by 10 per cent, from Rs 643 to Rs 580. One may well ask as to what nutritious foods could be had in Rs 580 per month? Should we not have wellthought policies designed to take the poor out of the vicious circle of hunger and poverty?
Post-Budget, the Finance Minister announced relief packages for specific sectors, e.g. Rs 30,000 crore to Home Finance Companies, Rs 20,000 crore for finishing stalled housing projects, export incentives of Rs.50,000 crore in addition to a Rs 1.45 lakh tax cut for corporates but so far,the FM has taken few steps to benefit small businesses or farmers. For example, despite a raging debate on GST and all States being members of the GST Council there has been no official study on how the transition to GST has affected small businesses. Farmers have fared even worse; Zero Budget Natural Farming (ZBNF), a method of chemical-free agriculture, was the only measure announced in the Budget specifically for the benefit of farmers.
Paradoxically, the Finance Minister did not allocate any funds to ZBNF. Perhaps, the Finance Minister can encourage economic activities better by looking at the economy as a whole rather than at its specific parts. The current slowdown in the economy is a result of falling demand. So far, hoping that the excess liquidity would end up in increasing demand, the Government has tried to bolster the supply side by tax and interest rate cuts.This approach has not worked because more money in the hands of the already rich is likely be saved or used for purchase of expensive items.
Thus, money would get locked up ~ away from productive use. Moreover, scarce resources would get frittered away in catering to fancies of the rich. On the other hand, a family with limited means would spend any extra money that it gets on the consumption of staples and other mundane commodities, which would in turn stimulate demand. The Sixth Pay Commission bonanza to Government employees, which increased consumption by close to Rs one lakh crore was one of the factors that helped India beat the worldwide recession of 2008-09. Almost half of our population (45 per cent) is engaged in agriculture.
Realising that better returns from agriculture would solve most of the problems of our economy, our PM had set a goal of doubling farmers’ income by 2022. Sadly, not much has been done on the ground for achieving this objective. Implementing a well thought out comprehensive strategy like the Swaminathan Report on Agriculture of 2006 or putting in place a policy like the Common Agricultural Policy of the European Union alone can address agricultural distress. In the medium and short term, instead of relying on monetary policies alone, we can have a three-pronged strategy of increasing employment, providing universal healthcare and quality education at an affordable cost.
More employment means more money in the hands of more people ~ a key requirement of increasing consumption. A beginning can be made by the Government, by filling up the thirty-lakh odd vacant posts in the various departments of the Central and State Governments. Good, inexpensive healthcare is essential for the poor because they spend a large part of their incomes on their illnesses. A revamp of the Primary Health Centres and Community Health Centres is required, as Ayushman Bharat has failed to take off. Similarly, providing good education to all children would equip the next generation for facing the challenges of the twenty-first century. Improving the quality of Government schools is necessary to achieve this objective.
The principal advice of the Economic Survey of 2014-15 was that the Government should not go in for Big Bang reforms but adopt “persistent, creative and encompassing incrementalism” as the guide for prospective action. For good measure this advice was repeated at the very beginning of the Economic Survey of 2015-16. The credo of the present Government being quantum change and soaring expectations, disruptive steps like demonetisation and uneven implementation of GST were taken, contrary to the advice of its own economists. Moreover, in the present scenario, the Government would be better advised to eschew contentious social and political issues till our economy regains its momentum because businesses can flourish only in an environment of peace, friendliness and certitude, which has been lacking for some time.
The present trend of increasing tax revenues to fund money-guzzling social sector schemes (Rs12 lakh crore in the last budget) must also stop. Instead of a policy of maximising tax collection, we should go in for a rational and comprehensive taxation policy designed to prevent concentration of wealth and straightening out the glaring inequalities in our society, which would entail reducing GST and bringing back taxes on wealth, inheritance and gifts. Otherwise, there are fair chances of our socialist republic morphing into a plutocracy. On the other hand, a more logical and friendly tax regime will work wonders for ushering in prosperity. Sir Winston Churchill once said: “We contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.” Let us follow his sage advice.
(The writer is a retired Principal Chief Commissioner of Income-Tax)