Economic situation

India's working classes bear the brunt of the Narendra Modi government's economic policies

Print edition : November 19, 2021

At a construction site in Chennai. The recent Periodic Labour Force Survey says that for the first time since poverty estimates began in India, the number of absolute poor has risen by about 70 million. Photo: B. Jothi Ramalingam

The cumulative effect of the Modi government’s flawed policies and the unfair tax burden have sent millions into unemployment, truncated the small and medium industry, and sapped vitality out of India’s working classes.

There seems to be no let-up in the bad news emerging from India’s real economy. The latest National Sample Survey Office (NSSO) data reveal that the economy grew by 20.1 per cent in the first quarter of 2021 compared with the same period in 2020. This is still a -9.2 per cent contraction from the pre-pandemic level of 2019. In simpler terms, if you take Rs.100 as the size of the economy in March–June 2019, we are today at about 91. Earlier, an analysis of the Periodic Labour Force Survey (PLFS) Quarterly Bulletin (July 2020–September 2020) revealed that for the first time since poverty estimates began in India, the number of absolute poor had risen by about 70 million.

Yet, despite a battered real economy, India’s stock markets are soaring. Recently, the benchmark index of its largest stock exchange NSE’s Nifty 50 closed at an all-time high of 16,250 points; up about 45 per cent from a year ago, but only 87 per cent up from five years ago, meaning that more than 60 per cent growth has occurred during the pandemic year alone. India’s second wealthiest person, Gautam Adani, has seen his wealth soar by an astronomical 500 per cent in this period.

While these figures are striking, they are not global outliers. America’s Dow Jones has given 28 per cent returns in the same period, and the wealth of billionaires such as Elon Musk has seen a 540 per cent jump since January 2020. Economic theorists explain the K-shaped response to the pandemic—the rich becoming richer and the poor becoming poorer—as a result of cheap money fuelled by low interest rates and the appetite of the rich to buy cheap assets during downturns. The Guardian estimates that the world’s current super-rich holds the greatest concentration of wealth since the Gilded Age in the United States at the turn of the 20th century.

Working classes

COVID has bled government treasuries globally. COVID-19 relief packages have been financed through various models, most commonly through debt monetisation. In developed economies such as the U.S., low-income and middle-class families benefited from direct stimulus cheques and pay cheque protection plans. In India, while rural and poor households received a marginal increase in direct cash transfers as part of an existing employment guarantee scheme, and organised businesses in affected sectors received a government-backed line of credit, the average working classes—the middle and upper-middle class Indians—were left to fend for themselves.

Also read: No data, little relief: Panel report exposes government inadequacies

With economies now reopening, ballooning fiscal deficit demands attention. In the U.S., clarion calls are being given to reintroduce the wealth tax; in the United Kingdom too, there is talk of taxing the rich. The United Nations Secretary-General has urged governments to reduce income inequalities by taxing those who profited from the pandemic. The International Monetary Fund has echoed those views.

In India, the Narendra Modi government is implementing a fiscal policy that is just the opposite of this worldwide concern: it is effectively forcing the working classes to fund the deficit. In the 2021 annual Budget, the government has set about Rs.1,98,000 crore as the target for additional excise cess collection on transport fuel, an increase of nearly 300 per cent over the pre-pandemic collection in 2019-20. This is when crude oil prices have hovered in the $60 range from April 2019 to April 2021, going to about $20 in April 2020, a historic low. Runaway oil prices are causing retail inflation to cross the Reserve Bank of India’s upper tolerance for consecutive quarters, hurting the working classes. Some staple food items such as mustard oil have seen their prices nearly double in one year.

Expected revenues from corporate taxes have been significantly reduced, but revenues from personal income taxes have been increased by over 11 per cent. More than half of the personal taxpayers are salaried classes, who are unable to claim any profit-linked tax deductions. In Modi’s first Budget of 2014-15, the total corporate tax collection was about 76 per cent higher than the collection from other direct taxes, the vast majority of which was personal income tax. Seven years down the line, this difference has been reduced to less than 5 per cent.

Within corporate taxes, those with profits of over Rs.500 crore pay an effective tax of 25 per cent, 3 per cent lower than the average tax paid by corporates having profits between Rs.100–and Rs.500 crore, yet both are substantially lower than the average statutory rate of 34 per cent. The Budget documents note that “larger companies avail themselves of higher deduction and incentives as compared to smaller companies”. And yet, policy remains unresponsive to such a glaring economic inequity.

Also read: India slips in Global Hunger Index ranking

India’s Receipts Budget further reveals that Special Economic Zones and power generation and distribution claimed Rs.23,261 crore and Rs.15,513.02 crore, respectively, as various tax deductions, constituting the lion’s share (40 per cent) of tax incentives available across industries in 2018-19. Coal mining paid an effective tax rate of 23.90 per cent and petrochemical refining paid 21.22 per cent, both substantially lower than the statutory rate. These industries are minting money on Dalal Street, and their doyens happen to be two of Asia’s wealthiest men—Mukesh Ambani and Gautam Adani.

In Budget 2018, on the pretext of spurring economic growth, corporate tax rates for companies having profits less than Rs.250 crore were reduced to a maximum of 25 per cent. Newer companies in certain sectors could avail themselves of rates as low as 15per cent. With these concessions, while the treasury booked hundreds of billions in forgone revenue, the Indian economy stuttered, going into a technical recession in Q2 of 2020. All this while, the maximum marginal tax on personal income stayed one of the highest in the world, around 42 per cent. Expected revenues from the Securities Transaction Tax (levied on transactions in listed securities undertaken on stock exchanges and in units of mutual funds) has also been kept at the same level of about Rs.12,000 crore for three years, despite the growth in the share markets.

Cumulative effect

The Modi government is beholden to the economic philosophy of the “trickle-down approach”, despite evidence of it lacking efficacy and a clear constitutional mandate against it. It took policy shape most conspicuously with demonetisation in November 2016, was swiftly followed with the Goods and Services Tax in 2017 and finally topped off with the grossly underprepared lockdown in early 2020.

The cumulative effect of these three policies, read with the destructively unfair tax burden, has sent millions into unemployment, truncated the small and medium industry, and sapped vitality out of India’s working classes by denuding them of the constitutionally guaranteed right to economic justice.

According to an analysis by the Pew Research Centre, owing to the pandemic-induced downturn, India’s middle class has shrunk by a third to 66 million, accounting for a 60 per cent of the global retreat in the number of people from that income tier.

Also read: How the pandemic has led to a shrinking of the middle class in South Asia

In Papiah vs State of Karnataka, the Supreme Court held that “economic justice is a facet of liberty without which equality of status and dignity of person are teasing illusions”. Apart from that guarantee enshrined in the Preamble of the Constitution, Article 38 enjoins the government to minimise inequality of income and status; Article 39 directs it to distribute material resources of the community to best subserve the common good and to ensure that the operation of the economic system does not result in concentration of wealth and means of production.

In practice, the government’s economic policies are drawing us to the opposing spectrum of the mandate of our founding fathers. Indian economy’s dream run from 2003-2011 saw unprecedented upward social mobility of millions moving out of poverty, and the lower-middle class moving to the middle class, and so on. That created a powerful political identity for the working classes, as evidenced by the India Against Corruption movement, and the sweeping protests after the brutal gang rape and murder of Nirbhaya. But since 2014, that story of politically empowered working classes has no shining exposition. Today, India is ranked 76 out of 82 nations in the Social Mobility Report, 2020, of the World Economic Forum; this implies that it is least likely for a family in today’s India to move up from their economic class.

India’s tax and economic policies are systematically and unjustly purging India’s working classes. Jean-Baptiste Colbert’s seminal trick, “the art of taxation consists of so plucking the goose as to obtain the largest amount of feathers with the smallest amount of hissing”, has run its course. The government scantly realises that the prescription from 17th century imperial Europe should not be emulated in 21st century India. The working-class goose has been stripped off its feathers. It is time for wealthier Indians to bear their fair share in the egalitarian demands of India’s democracy. The government has a singular place to look: the stock markets. But would it? For, “a government that robs Peter to pay Paul can always count on the support of Paul”.

Kabeer Shrivastava is an advocate.