Sanjeev Ahluwalia | Will Robin Hood' taxes be the answer for India?

Behind the din of whether the Congress Party is likely, as alleged by Prime Minister Narendra Modi, to tax wealth and inheritance if it comes to power, lies the stratagem of signalling to the top 10 per cent of Indians, whose share in the national income surged from 45 per cent in 1981 to 64.6 per cent by 2023, that only the BJP lies between them and the deep sea of marauding socialists and other opportunists. It proved effective too by provoking the Congress, now lulled into a habitually reactive mode, to go all out to deny the allegation. The question is -- why did they bother?

The share of Congress voters in the top 10 per cent by wealth is likely to be negligible. The BJP has been good for urban business, professionals and government servants who are the majority in this population segment. The Congress’ best shot at power, as of all other Opposition parties, is to tap the seething resentment amongst the have-nots. Farmers, workers and the minorities together are more than one half of the voters. The neatly devised Mahalakshmi scheme of the Congress manifesto targets 220 million poor via an assured direct transfer of Rs 0.1 million per year payable to the oldest woman in a poor family. This should cost around Rs 4.4 trillion (for 44 million poor families), or about 1.4 per cent of the GDP this year.

At present this “promise” hangs in the air with no identified source of finance. Will this come at the expense of the Garib Kalyan Yojna, which now provides free food to 110 million people, which costs about Rs 2.05 trillion, and the end of cheap fertiliser costing another Rs 1.64 trillion? The alternative is to pancake it onto the existing welfare schemes, that will enhance the fiscal deficit from a projected, already high 5.1 per cent to an even more unsustainable 6.5 per cent. Are the BJP’s dreams being

countered with even bigger Congress dreams? Had the Congress acted true to its voter base, it could have proposed a new tax on wealth and inheritance. The share in wealth of the top one per cent (10 million) individuals increased from 12.5 in 1981 to 39.5 per cent in 2023 as per Bharti, Chancel, Piketty and Somanchi (2024). Marxist writers Patnaik and Ghosh assess the potential of a 2 per cent wealth tax and 33 per cent inheritance tax levied on this set at Rs 12.1 trillion in 2018.

That the Congress shunned this bold approach reflects the dilemma of all middle-of-the-road parties. Politics and not economic theory drives tax policy in India. The politically docile, urban middle class is the only cash cow now available which spends more than one half its income on Union, state, or municipal tax compliance.

Liberal capitalistic economic opinion warns that resurrecting wealth and inheritance tax is a distraction. India should instead focus on accelerating growth with fiscal stability, the benefits from which overshadow a tax funded redistributive tax policy.

Far better, they say, to incentivise earning Rs 100 than to give the same as a tax-funded dole. Far better to incentivise new private sector jobs than to increase tax-funded expensive government jobs. There is merit in this argument.

Sadly, the external conditions are not supportive. Global growth is low, which is sinking all boats. Automation, robotics, and AI are likely to squeeze human employment. Tax policy traditionally favours capital investment via tax rebates, rather than human capital development -- the key resource in a service-led economy. The wealth of an economy is the competitiveness of its workforce and the efficacy and resilience of its institutions, not the volume of land or physical and financial capital alone. An additional 300 million Indians will boost the population by 2060. Enhancing public expenditure for education and healthcare are, consequently, the surest way to dilute constraints on economic growth, with lightly regulated private industry and services generating new jobs.

Memories are short in the social media age. India has a history of wealth appropriation. Ceilings on the ownership of land were imposed in the 1970s through state government-level legislation and surplus land was redistributed. In 1971, the privy purses -- guaranteed amounts under the Constitution, paid annually to the erstwhile hereditary rulers of colonial India in exchange for their voluntarily merging with India -- were terminated and judicial scrutiny of the Constitution-amending act barred under Prime Minister Indira Gandhi. Large-scale nationalisation of industry followed. No government since has implemented privatisation of India’s mammoth public sector, after Atal Behari Vajpayee’s 2000-2003 push floundered. In 1978, Prime Minister Morarji Desai of the Janata Party diluted the fundamental right to property, making it subject to legislated constraints. In 1985, the Estates Duty Act 1953, a quasi-inheritance tax, was abolished by Rajiv Gandhi’s Congress government. In 2015, the wealth tax of 1955 was abolished by Narendra Modi’s first government, citing low revenue performance.

So, are new taxes on wealth and inheritance the answer to the twin problems of unfunded welfare and infrastructure needs -- the latter increased by the investment demands of the energy transition and low revenue collections of around 19 per cent of current GDP for Union and state government combined?

This is a chicken and egg question. The generation of private, domestic wealth is a choice to defer present consumption for future gains via investment -- a significant input into economic growth. Bleeding the rich and the near-rich can reduce the incentive for savings-led investment in India. The establishment of the Gift City in Gujarat as an international financial hub insulated from the domestic economy only serves to preserve a part of the resultant value addition from international financial transactions, as do Singapore, London, or New York. The outward flow of domestic capital is still regulated. The INR is still a managed currency. Taxing wealth or inheritance can aggravate the undesirable, financial sub-culture of undercover operations, to stash wealth overseas in tax havens.

Far better to make India a competitive and efficient economy first, which attracts more capital than it exports -- like the United States. Once this is achieved, imposing a wealth and/or inheritance tax to generate public resources and level the playing field across individuals becomes an option. More likely though, the process of making the economy competitive would automatically build human capital and create enough merit-based opportunities, making family wealth only a residual input into the future value of an individual. Social divisions like caste might also matter less. Till we get to Ram Rajya (good governance), populist, Robin Hood-style “quick fixes” can only score a self-goal.