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Why we must tweak the market-led model
October, 07th 2016

ACCORDING to the latest report by the New World Wealth, after Russia, India is the second most unequal nation in the world as 54 per cent of its wealth is in the hands of millionaires. The New World Wealth opines that the level of inequality is determined by the proportion of wealth controlled by millionaires and “The higher the proportion, the more unequal the country is”. Compared to India, Japan is considered as the most equal country, where millionaires control only 22 per cent of total wealth. Even in other developed countries like Australia and the US, such proportions are 28 per cent and 32 per cent, respectively.

The way India is developing fast, ignoring the ill-effects of the market-driven growth model, it will soon become the most unequal nation in the world. Earlier, the “World Wealth Report 2015” also predicted that India has become the largest population of millionaires and the growth in their number has become the largest in the world. Research by the IMF has also emphasised that instead of delivering growth, the market-led policies have increased inequalities which in turn have jeopardised durable expansion.

Earlier, in September 2015, the World Economic Forum (WEF) in its report entitled “The Inclusive Growth and Development” has observed that there is an “accumulation of evidence that reducing inequality can actually strengthen economic growth”. The WEF report is based on the performance across 112 countries, divided into 30 advanced, 26 middle income, 38 lower middle income and 18 low income countries. India is fortunate to find a place in the lower middle income countries. According to this report, India can achieve a higher growth rate if it improves fiscal transfers where it ranks 37 out of 38.

In the same vein, another IMF study on “Causes and Consequences of Income Inequality: A Global Perspective,” published in June 2015 has also shown that the policy makers should focus on the poor and lower middle class. “Specifically, if the income share of the top 20 per cent increases, then GDP growth actually declines, suggesting that the benefits do not trickle down. In contrast, an increase in the income share of bottom 20 per cent is associated with higher GDP.” These findings appear to be logical in the sense that as the poor and the lower middle class have high marginal propensity to consume, they spend nearly all the increase in their income. This should have a multiplier effect on total demand. It is only the billionaires and millionaires who resort to ostentatious consumption, which has zero or negative externalities.

Even since 1991, we have been depending on the market forces which have led to more than 7-8 per cent and sometimes even 10 per cent rate of growth. The big assumption was that the markets are the true guides to decide what, where and how much to produce. Market forces incentivise private investment and hence promote economic growth. The increase in investment was expected to increase employment and income, thereby trickling down benefits of growth automatically covering all sections of the society. But this trickle-down theory now stands rejected. So what we actually experienced was the increase in distributional inequalities.
Earlier, we had a very few corporate houses. But now we have a large number of millionaires and even billionaires. With the public-private partnership (PPP) mode of production, there is a possibility that this number will further multiply.

From this it may not be concluded that India should do away with the market-led growth model. If India is to achieve a key position in the world economy, we must streamline the market forces. It needs to be stressed that the market-led growth model is bound to lead to concentration of wealth and inequalities in the distribution. Until and unless some corrective measures in the form of progressive taxation and income transfers are ensured by the government, there is bound to be a widening gulf between the rich and the poor, which will threaten the social fabric. Ground realities, however, show that the present government is continuing with the unrestrained market-led growth model, thereby threatening equitable distribution of income.

The latest time series data, published by the CBDT, shows that the proportion of direct taxes (which are great income equalisers) in the total tax revenue has decreased from 61 per cent to 51 per cent. The recently released data by the Finance Ministry also shows that increase in direct tax collections during April-August 2016 is nearly double compared with direct taxes. While indirect taxes have added to over 43 per cent of budget estimates, direct taxes amounted to barely 22 per cent.

The government appears to have forgotten the concept of equitable development or all inclusive development, that is, “Sab ka saath”. On the contrary, the Narendra Modi government appears to be in a running spree to gratify the corporate sector. According to Venkaiah Naidu, Union Minister for Urban Development, the Modi government's mantra is: “Development, development and development.”

Wealth tax has already been abolished. Corporation tax is scheduled to be reduced to 25 per cent, from the existing 30 per cent. Further, the proposed GST which is on the fast track to be implemented, will further enhance inequalities as GST is an indirect tax and indirect taxes are mostly regressive. GST will not ask the consumer whether he belongs to the upper income group or the lower income group. Therefore, while designing the tax rates for different commodities, the GST Council should keep in mind that luxuries and other non-merit goods are taxed at higher rates. Currently, it is presumed that there will be three rates: merit rate, standard rate and luxury rate. However, in order to correct inequalities, let there be four to five rates that may be eventually converged into three as has been done in the case of income tax rates.

The government needs to stop non-merit subsidies to the well-off. In the Economic Survey 2015-2016, it has been admitted that various “schemes and policies provide a bounty to the well-off of about Rs 1 lakh crore”. We need to evolve a new strategy of development, depending on our strengths and weaknesses. Under no circumstances should we follow the World Bank /International Monetary Fund directives “in toto”. Although we have to depend on the market-led model to raise the rate of growth, to make the growth inclusive and hence sustainable, we must also ensure fiscal transfers from the rich to empower the poor.

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