Bad news for the rich

In the past two years, as Covid ravaged the global economy, the world’s billionaires added more wealth than they had done in the previous 23 years. Four billionaires were added while 36 lakh people slipped into extreme poverty, every five days. By the time the world learnt to live with Covid, the 10 richest men of the world had amassed as much wealth as the bottom 40 per cent of the earth’s population. While millions went hungry as food production and distribution was disrupted, 62 new ‘food’ billionaires were born – people who made their money from food or agri-businesses. Food inflation hit an all-time high in March 2022, the highest since the UN began recording global food prices, while the world’s biggest food companies declared record profits. All these, and many other startling facts, can be found in Oxfam’s latest inequality report, aptly called ‘Profiting from Pain’.

This is not only India’s problem. It is a global issue that every government is trying to tackle as Covid recedes leaving a more unequal world.

Most surveys and reports about India paint a similar picture: Covid made the poor poorer and the rich richer. But India’s inequality situation has been getting worse for several years before that. In the two years preceding Covid, the richest 1 per cent of Indians saw a 15 per cent growth in their earnings, while the incomes of the poorest 10 per cent dropped by 1 per cent. This data hasn’t been produced by any independent survey or study, but by the government-approved experts. It is part of the ‘State of Inequality’ report released by the Institute of Competitiveness, under the aegis of the Prime Minister’s Economic Advisory Council (PMEAC).

This quasi-official report is a damning indictment of the economic policies India has been following for the past few decades. According to the report’s estimates, anyone who makes more than Rs 25,000 a month in wages is part of the top 10 per cent of earners in India. This is the reality of a country which boasts of the world’s largest middle class. That is why the report says, ‘if an amount like this (Rs 25,000 a month) comes in the top 10 percentile, then the bottom-most condition cannot be imagined.’ The report call this a ‘failure of the trickle-down approach to economic growth’.

One could dismiss this as views of a team of experts who have no real heft in the Modi government. That notion is bolstered by news reports which suggest that officials in the Finance Ministry and Niti Aayog were taken by surprise when the report was released. However, given the past track record of this regime, it is very unlikely that such a report would get the blessings of the PMEAC and be made public by the Press Information Bureau without a nod from someone high up in the government. If that is the case, it could well be a signal for India’s consent-manufacturers to build up public opinion on inequality and income distribution. And that is why India’s rich should be worried.

Take a look at these numbers: The Centre’s latest move to slash excise duties on petrol and diesel will cost it about Rs 1 lakh crore in revenues; the fertiliser subsidy has recently been hiked by Rs 1.10 lakh crore; the government’s free food scheme for the poor has been extended till September because of the huge rise in food prices, which will cost an additional Rs 80,000 crore. Just these three heads will result in a net increase in expenditure of nearly Rs 3 lakh crore, which is more than 7 per cent of the total budget for this year.

But these are just band-aid fixes. The inequality report asks for much more – it recommends a Universal Basic Income (UBI) and an urban version of MGNREGA as a job guarantee for the poor in India’s towns and cities. The UBI idea has been doing the rounds for several years now, and previous estimates on its costs range from 1.5 to 5 per cent of India’s nominal GDP. Implementing even a watered-down version of it will cost the Modi government at least an extra Rs 3 lakh crore. An urban job guarantee scheme will add to those costs.

Any attempt to tackle inequality, therefore, will have to boost the incomes of the poor and simultaneously protect them from inflation. This will mean an additional expenditure – net of reduced revenues and added budgetary outlays – of about Rs 6-7 lakh crore. This could be financed in two ways: either by increasing direct taxes (since raising indirect taxes will increase inflation) or by increasing the fiscal deficit, or a combination of the two.

Let us assume that at least Rs 3 lakh crore of additional expenditure on the poor has to be financed through extra direct taxes. What would that mean for India’s rich who account for the bulk of direct taxes paid? Income and corporate taxes are expected to fetch Rs 14 lakh crore this year, out of which the Centre will get to keep roughly Rs 10 lakh crore. Extracting Rs 3 lakh crore more from this segment would mean a 30 per cent increase in their tax burden. Even if this is done through surcharges and cesses, which wouldn’t have to be shared with states, it will still be a 20 per cent increase in taxes paid by the affluent on their income or profits. And that is bad news for the rich, who have got used to certain kinds of lifestyles, which are financed by a steady income and rent flow. It is bad news for corporates who expect a certain rate of post-tax profit.

This is not only India’s problem. It is a global issue that every government is trying to tackle as Covid recedes leaving a more unequal world. The IMF, OECD and EU have recommended one-time taxes on windfall gains, along with wealth and inheritance taxes. Argentina already implemented a one-time wealth tax on the country’s richest last year, and Italy has imposed a one-time windfall tax. The writing on the wall is clear. The rich need to read it.

The author is a senior economic analyst