In a lucidly written, feel-good election manifesto that seeks to address every possible segment of the Indian electorate from farmers to ex-servicemen, the Indian National Congress has articulated its vision statement on forty different areas of governance.
But financial folks reading the manifesto have just one question: Where’s all the money going to come from?
The question is premature given that election manifestos are seldom about the hows and whys. Nevertheless, the numbers suggest that India’s Union Budget will have to expand significantly to make room for the Congress vision.
To illustrate, the manifesto clarifies that NYAY, the Congress’ flagship income guarantee scheme, will cost 1-2 per cent of GDP, at about ₹3.6-lakh crore, and will be shared by the Centre and States. It also proposes to double budget allocations for healthcare and education, taking them up to 3 per cent and 6 per cent of GDP, respectively, in four years’ time. Giving effect to just these three promises, out of the many, could take up 10-11 per cent of GDP.
To put that in perspective, in FY19, the Central government earned ₹18-lakh crore or 9.6 per cent of nominal GDP from its tax and non-tax revenues. Recurring expenses such as salaries, pensions and interest alone took up over ₹10-lakh crore of the budget.
In effect, for a Congress-led government to stick to its deficit target while delivering on its promises, it would have to substantially raise tax revenues, cut back on expenses, or do both.
So, to address the question of where the money will come from, the following ideas may be in play.
Robin Hood taxes
Globally, the Robin Hood idea of taxing the rich to redistribute the proceeds to the poor has been making a strong comeback in policy circles. Recently, leading US politicians mooted a 70 per cent income tax rate and a 2 per cent wealth tax for America’s super-rich to bridge economic inequality. Statements by Congress spokespersons in India suggest that the party is debating this too.
World Inequality Lab (WIL), a policy think-tank, has done extensive work on global trends in inequality and appears to have been a source of inspiration for Congress’ NYAY. In a March 2019 paper, ‘ Tackling inequality in India: Is the 2019 election campaign up to the challenge?’, Nitin Bharti and Lucas Chancel of WIL cite the Congress announcement on minimum income guarantee and advocate such transfers over the economic reservations proposed by the NDA.
Pointing out that India has seen an unprecedented rise in inequality, they argue that India’s tax system has gotten less progressive in recent years, which needs to be corrected. (A progressive tax system is one in which the rich pay a higher rate of tax than the poor.) They specifically discuss the fiscal implications of an income transfer of ₹72,000 a year and suggest ways to fund it.
They offer three options to bankroll NYAY. One, a 2 per cent tax on the total wealth of households owning more than ₹2.5 crore of wealth. On a simple calculation, they reckon such a tax can raise ₹2.6-lakh crore or about 1.1 per cent of GDP, while affecting only 0.1 per cent of the households.
Two, a 2 per cent wealth tax on land and building value alone, above ₹2 crore. This would yield ₹2.6-lakh crore, about 1.2 per cent of GDP, and hit only the top 1 per cent households.
Three, carving out a new 50 per cent or 70 per cent income tax rate for individuals earning incomes of over ₹50 lakh a year, estimating this could yield 0.6 or 1.2 per cent of GDP.
Making it work
Fleecing the Ambanis, Mittals and Birlas of the world to fund a basic income for the poor is certainly an alluring concept. But in practise, governments around the world have struggled to enforce Robin Hood levies on the slippery super-rich.
Take wealth tax. Faced with steep taxes, the super-rich are often quick to offshore their assets to the many tax havens that dot the global landscape. This also leads to a flight of capital from the economy. The wealthy are also big funders of political campaigns and tend to be quite adept at lobbying for exemptions from wealth tax.
Wealth tax also poses practical difficulties to moderately rich folk who have the bulk of their wealth locked up in illiquid assets. Consider an individual owning an apartment worth ₹3 crore in Mumbai. At a wealth tax rate of 2 per cent, he would have to shell out ₹6 lakh every year and a cumulative sum of ₹60 lakh in ten years. It is quite likely that, to raise that kind of liquidity, he would have to sell his asset. For the taxman, this ends up killing the goose which laid the golden egg.
It is for such reasons that several European nations which did levy wealth tax in the 1990s, have since scrapped it to experiment with alternatives. India, which levied a wealth tax of 1 per cent until 2015 decided to shelve it after it netted a measly ₹800-1,000 crore.
Imposing a 50 or 70 per cent income tax rate on the wealthy may be easier given the established administrative set-up for income tax in India.
But that’s no guarantee against evasion. Even at current tax rates, under-declaration of income is quite rampant and India’s tax base is extremely narrow at the top. Only 2.5 lakh out of the 4.66 crore filing returns, reported an income of over ₹50 lakh last year.
In short, scant official data on income distribution and a porous tax administration pose stiff challenges to the successful enforcement of Robin Hood taxes in India. Such taxes may need to go through multiple iterations before they materially contribute to the budget.
If taxing the rich offers one route to funding the Congress poll promises, doing away with non-essential and poorly designed welfare schemes offers another equally viable route.
On this score, Economic Survey 2016-17, authored by Dr Arvind Subramaniam, which kicked off the debate on Universal Basic Income in India, offered specific solutions.
The Survey pointed out that the Union Budget bankrolls 950-odd schemes, but the top 11 schemes hogged 50 per cent of the outlay, while 939 schemes made do with minuscule budgets. Rationalising ineffectual schemes can free up as much as 2.5 per cent of GDP.
Large welfare schemes such as MNREGA and PDS allocate resources to the more affluent States, often leaving out the truly deserving beneficiaries. A direct cash transfer can substitute these, distributing incomes more equitably. The Survey also highlighted that a host of budget handouts — from duty concessions on aviation fuel, to low customs duty on gold — effectively constitute bounties for the rich and can be phased out.
Slashing existing welfare schemes or subsidies offers a quicker solution to fund the Congress’ poll promises than Robin Hood taxation. But such moves can be politically painful because the beneficiaries of NYAY are unlikely to neatly overlap with those under the discontinued schemes.
Overall, if the Congress wins at the hustings, it may have its task cut out to keep its electorate happy while making the budget math work.