This market model won’t work

Janak Raj Gupta

The recent debate on the economic health of the country has relegated two important social aspects, viz poverty and inequality, to the background. The latest dip in GDP growth to 5.7 per cent has also sent an alarming signal for the ruling BJP. Prime Minister's Economic Advisory Council (EAC), which was abolished in May 2014 when the Narendra Modi-led government came into power, has been revived. Of course, the setting up of the EAC comes against the backdrop of the slowdown in the economy and the criticism of the government's handling of key issues, such as poverty alleviation and achieving social justice. 

Broadly, there are two models of economic development: investment-led and consumption-led, though both are interrelated. Currently, the government is relying on private investment or what we call the market-led growth. The private sector has been invited in a big way to invest in infrastructure. The Public Private Partnership (PPP) model has become the fashion of the day. On the pretext of fiscal prudence, even social welfare measures such as education, health and social security have been handed over to the private sector. 

Poor can’t afford essential services 

This has brought these essential services beyond the reach of the poor. Conditions mentioned in the MoU under the PPP model are often violated with impunity. It is being presumed that private investment would increase employment and income, and hence consumption in the economy, ie, benefits of growth will automatically trickle down and include all sections of society. 

But what has happened in the past is that the market-driven model has increased distributional inequalities and poverty, too, has not declined significantly. The International Monetary Fund (IMF) and the World Bank (WB), the main protagonists of the 'trickle-down theory', have themselves rejected it and advised the developing nations such as India to focus on the poor and middle classes. Because of pent-up demand, the poor spend all the increase in their income, which has a multiplier effect on growth. In fact, post deomonetisation, the main cause of the decline in the GDP is the fall in the income of the poor. The middle class, that has a positive propensity to save, prefers to keep its savings in safe channels which may find outlets in productive investment. It is only the billionaires and millionaires who resort to ostentatious consumption which has fewer multiplier effects. 

Transfer income to poor

A recent IMF study points out that "fiscal redistribution can help raise the income share of the poor and middle class, and thus support growth. But the redistributive role of fiscal policy could be reinforced by greater reliance on wealth and property taxes, more progressive income taxation, removing opportunities for tax avoidance and evasion and better targeting of social benefits." Worried about the growing inequalities, IMF managing director Christine Legarde says: “What better than more growth, more equitably shared.”

Our experience stands testimony to the positive effects of transferring income to the poor. For example, an increase in the public expenditure on MGNREGA and debt relief measures in 2009 insulated the Indian economy from global recession. No doubt the market-led growth model is the pre-requisite for removing the current sluggishness in economy, but this model should be redesigned by providing more resources to the poor. India has a great potential to rely on the internal market. Instead of subsidies, let the poor have sufficient disposable income to use the market forces for their uplift. 

Reduce inequalities

Therefore, the government should make efforts to reduce inequalities through progressive taxes and expenditure, which are important components of the fiscal policy. According to the recently released 'New World Wealth Report' pertaining to the 10 richest countries, India has topped in the world insofar as increase in wealth between 2015 and 2016 is concerned. And, India is ahead of many rich countries, including Canada, France and Italy. Even employees of private companies such as Infosys and Larsen and Toubro have become millionaires by purchasing companies' shares. The 'World Wealth Report 2017' shows that there are 2.19 lakh crorepatis in india (having minimum Rs 6.50 crore) and every year, they are increasing in thousands. Thus, increasing the concentration of wealth in India has become an area of great concern. 

But the government appears to be allowing a free play to market forces, making the rich more rich. The wealth tax stands abolished and the corporation tax is set to be slashed to 25 per cent from the existing 30 per cent. Even the time series data released recently by the Central Board of Direct Taxes (CBDT) reveal that after 2008-09, the direct tax collections have become less buoyant, ie the growth in direct tax revenue does not respond to the growth of GDP automatically. The ratio of direct taxes in the total tax collections has declined from 60.8 per cent in 2009-10 to nearly 50.0 per cent in 2016-17. All these developments do not augur well for reducing inequalities. Even the World Bank and the IMF have cautioned India about the growing inequalities. 

New India by 2022

Efforts towards ‘New India by 2022’ would be meaningless if widespread poverty continues to persist. In fact, the world over, there is a growing concern about the nexus between poverty and inequality. In India, poverty and inequalities have increased to such an extent that many NGOs have come up in certain cities to collect eatables from persons having surplus resources to distribute them among the poor. From such incidents and other recent social developments, the government should take the hint and redesign its tax-expenditure policies. 

India still ranks 97 in the list of 118 poor countries. In his various 'Man Ki Baat' speeches, Prime Minister Narendra Modi does talk about the plight of the poor, yet at the government level, much is not being done to ameliorate their lot. The poor must be included in the debate of stimulating economy. 

Therefore, in the name of fiscal prudence, instead of pruning public expenditure for the poor, the government should mobilise more resources from the rich. In view of the ever-increasing number of billionaires, wealth tax and estate duty/death duty abolished earlier need to the re-imposed. The poor can be ensured a decent level of disposable income to spend on education, medical facilities, insurance policies and other social security measures, which in a welfare state should be government obligations. The idea of Universal Basic Income (UBI) championed by many across the world can be tried for the poorest of the poor.

The writer is Fellow, Punjabi University, Patiala