Budget unmindful of income inequality

The Union Budget attracts considerable media hype and debate. Democracy, if understood as a contract between the state and its citizens, may have to use the budgetary process to ensure not only prosperity for all, but justice or fairness to the most disadvantaged among them as well.

A rational budgetary process assumes efficient and purposive management of expenditure (which necessarily should involve considerable zero-base budgeting rather than incremental budgeting) along with an equally efficient manner of financing it (which ideally demands a progressive tax structure).

If spending is about the entitlements of citizenship for a decent existence, taxation is the obligation to facilitate that. The Budget, an annual fiscal exercise, can be used as an instrument for shaping the economy and even society once you are sure of the goals to be achieved.

Amartya Sen’s book, Development as Freedom, clarifies the confusion confronting development thinkers and policymakers about instruments and goals. Improving the lives of people and promoting social inclusion being the most desired goals, building the capabilities of individuals as well as the institutional architecture and social arrangements to improve them (public provision for education, healthcare, food security) assume importance.

In the Indian federal context, policy and instrumental choices will have to promote continuing convergence towards income, health and education. No budget so far has ever thought of it, leave alone strategised it. That in the early Nehruvian era, the ruling party, the Indian National Congress, debated the niceties of the terms ‘socialist’ and ‘socialistic pattern of society’ threadbare is indicative of the significanceattached to envisioning a common goal for the Indian economy at that time.

In order to achieve genuine social inclusion, India has to curb the inequalities created by unbridled capitalism. Where growth keeps increasing and poverty is reduced, but at the same time inequalities continue to widen, true social inclusion will be almost impossible. There will be no equality of opportunity. The process is eminently exclusionary.

There is overwhelming evidence of the growing inequality in income and wealth in India. A recent paper based on three All-India Debt and Investment Surveys ( EPW , December 10, 2016) provides convincing evidence to show that between 1991 and 2012 India witnessed heavy concentration of wealth with the top 10 per cent of the population, particularly after 2002. This needs to be seen in the context of the disturbing data on the increasing inequality in income in India published by Oxfam and by Credit Suisse recently.

That the richest 1 per cent in India own 58 per cent of its wealth as against 40.3 per cent six years ago is an alarming trend no Prime Minister can afford to ignore. Budget 2017-18 is conspicuously silent on this fundamental issue. Correcting the disproportionate bias in favour of indirect taxes to make the tax structure less regressive is also not on the agenda. Even the Keynesian remedy of re-distribution to enhance the marginal propensity to consume despite the severe demand slump the poor faced following demonetisation seems to have been ignored.

In the chapter entitled ‘Fiscal capacity for the 21st Century’, Economic Survey 2015-16 points out that the ratio of taxpayers to voters is only 4 per cent, whereas it should be closer to 23 per cent. The Survey also says: “India’s spending to GDP ratio (as well as spending in human capital, i.e. health and education) is lowest among BRICS and lower than both the OECD and EME averages. India’s tax (Centre + State’s) to GDP ratio at 16.6 per cent also is well below the EME and OECD averages of about 21 per cent and 34 per cent, respectively.”

That 85 per cent of the national income falls outside the tax net is indicative of the tax potential. The Budget speech mentions that only 24 lakh people in India have incomes above ₹10 lakh and that the number of those earning over ₹50 lakh is a small — just about1.72 lakh people. This squares well with the magnitude of inequality in the country. The Budget also gives revealing numbers about the deposits that accumulated following demonetisation. But the proportion of gross tax revenue to GDP for 2017-18 works out to only 11.34 per cent as against 11.29 per cent for 2016-17 (RE) which makes no big difference.

The three surveys prepared by Chief Economic Adviser Arvind Subramanian are presented as guides to budget-making in facilitating social choices, especially policies relating to economic inequalities. ‘Wiping every tear from every eye’ (Chapter 3, ES 2014-15 ) was a policy option given in Chapter 9 ( ES 2016-17 ) recommending universal basic income (UBI).

Not sure of its implementation, the CEA softens his concrete recommendations by presenting them as a conversation with the Mahatma. Even so, the pros and cons of UBI are presented. Experimenting a UBI for women is worth attempting provided it is part of a well-designed drive to contain inequality and enhance employment.

The latest budget ignored the UBI proposal. To make UBI a substitute for existing welfare schemes (although bedevilled by mis-allocations, leakages and ignoring the poorest of the poor) is a poor option.

While rationalisation of the 950 schemes and sub-schemes is long overdue, UBI should not supplant MGNREGA, PDS and other basic needs and employment programmes. Indeed, UBI in a Pareto-optimal world that wants for status quo in income or wealth distribution can only be counterproductive.

The budgets as well as the economic survey have so far failed to acknowledge the role of local governments in public finance and federalism. Without this, egalitarian society will be impossible to attain, particularly because the property tax potential would remain inadequately explored.

The writer is honorary fellow at CDS, Thiruvananthapuram

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