Forget inequality, focus on growth: Here’s why India must focus on job-creation

As in the past, Oxfam’s latest data—released at the WEF, where the world’s rich and powerful meet—is shocking: the top 1% of Indians own 42.5% of the country’s wealth while the bottom 50% own a mere 2.8%; indeed, the wealth of the top 1% rose 46% last year while that of the bottom half rose by just 3%. Nor is it much better at the global level, with the top 1% owning 45% of the wealth; Oxfam relies heavily on the Global Wealth Report by Credit Suisse Research Institute though, at times, it even uses data from the Forbes list of the rich, and others like Piketty.

Put this way, the conclusions pretty much write themselves: taxing the rich just a bit can solve the problems of the most of the world’s poor. Oxfam, not surprisingly, says that taxing an additional 0.5% of the wealth of the richest 1% over the next 10 years will give enough investment to create 117 million jobs in education, health and elderly care, etc.

It is coincidence, but given the Budget is just 10 days away, this is great ammunition for the Opposition; if, as expected, the finance minister cuts income taxes for the rich, the Opposition will cite such numbers as proof of this being a suit-boot-ki-sarkaar. In any case, Oxfam has argued for hiking corporation taxes—India slashed them recently—since “governments are massively under-taxing the wealthiest individuals and corporations”.

A few points need to be made even before looking at the data that seems dodgy. No one country can afford to either hike corporate or individual taxes alone since many rich will migrate to tax-friendlier jurisdictions, or find suitable tax-shelters; and that is assuming that higher tax levels don’t crimp investment and innovation. India tried a 96% marginal tax for a while during the Indira Gandhi years, and we saw how that turned out; indeed, India’s tax collections have only risen as tax levels have become more reasonable, though the importance of a tighter tax administration is not to be scoffed at.

Even if the data is correct, the real issue is the policy prescription that follows, and whether or not this is implemented. Clearly, education has to be one of the top solutions to ensure the poor can make the most of opportunity. In a country like India, while increasing the education budget by soaking the rich will be a big help, an even bigger issue is the fact that those in school/college are simply not learning enough; the education bureaucracy, and policies like reservation are a bigger problem than the lack of funds. Indeed, even when the private sector wants to set up schools/colleges, bureaucratic controls are a nightmare and getting permission to set up institutions isn’t easy. Blaming the rich for not being able to spend enough on education is just deflecting the real issues; Oxfam’s India CEO, though, had no problem grandly declaring, at Davos, “no wonder people are starting to question whether billionaires should even exist”.

And, why just focus on what the rich are not giving the taxman? When Narendra Modi came to power in 2014, the share of PSUs in India’s overall market-capitalisation was 22.5%; it is down to 8.4% today. This means a notional loss of Rs 21 lakh crore in the value of PSUs, thanks to a policy that didn’t allow PSUs to function freely. Think of what this money could do to increase education- or health-spends.
There is, then, the tens of thousands of crore rupees lost annually through bad policies—do two-thirds of Indians really need a 90-95% foodgrain subsidy? And, even if that ruinous policy isn’t junked, giving this by way of cash transfers will cost Rs100,000 crore or so versus the Rs170,000 crore spent every year on the FCI procurement-cum-ration-shop system; selling FCI’s excess food stocks can also fetch the government Rs100,000 crore.

While there can be no doubt that a more equal distribution of wealth—and incomes—is a good thing, demonising inequality doesn’t help. For one, inequality gets accentuated when some exploit opportunities more than others; in a developing economy, that could mean providing telecom services, setting up airports, ecommerce portals … Few, if any, economies haven’t seen inequality rising as they have developed; it is only after a certain level of development and education that inequality levels reduce. Also, does it matter more to a poor labourer that his income rises 50%, or that inequality rises as Mukesh Ambani’s doubles? While Oxfam and others—like Piketty—bemoan Indian inequality rising, the country has seen a dramatic fall in the number of poor; ditto for China. India was less unequal in the pre-liberalisation days, but it was also a lot poorer.

If India is to reduce inequality, people need to get much better jobs, whether in manufacturing or services. Yet, while textiles and readymade garments have been the two industries that have catapulted countries like China and Vietnam out of poverty, India’s policies have kept it from benefitting as much from the global boom in textiles and readymade garments; and this is one of many such examples. Not having policies conducive to industrialisation can hardly be blamed on existing or rising inequality.
There is, then, the issue of data reliability. Since India doesn’t collect data on incomes or wealth, and that on consumption capture less than half of what people buy, it is not clear the models used accurately reflect the reality. Piketty, who does similar work, for instance, assumes NSS consumption surveys approximate the reality for the poor, and uses income tax data to make assumptions about the rich! The Credit Suisse data, and other such like the Forbes’ rich list, use stock market or realty data in top cities, but wealth can be held in various other forms as well such as cattle; as such, the wealth-share can fluctuate quite a lot. In 2016, Credit Suisse (see graphic) estimated that the top 1% of Indians owned 52% of the country’s wealth; why this should fall to 42.5% in 2019 is not clear since there has been no attempt to soak the rich in this period, nor was there any sharp jump in the availability of high-paying jobs. It is also odd that, for 2017, Oxfam claims “73 percent of the wealth generated last year went to the richest one percent” and the top 10% of the population is also said to hold—the same figure!—73% of the wealth.
Rather than getting caught up in the rich-poor debate, it makes more sense to focus on policies that free up the economy, and create millions of jobs across various sectors. And, instead of just trying to soak the rich—look at the damage demonetisation caused to the poor—the focus has to be on eliminating the massive government waste. India’s liberalisation policies since 1991 were about not demonising the rich, and allowing them to set up new businesses, don’t let Oxfam and others drive us back down that rabbit hole.

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Twitter: @thesuniljain

Source: Financial Express