Sanjeev Ahluwalia | Course corrections vital to steer India's ship of state

Big business prefers elections with minor ripples, leaving unperturbed the mighty ship of state and preserving an image of democratic vigour. Middle-class India — much of it dependent directly on big business or the government — about 121 million strong, agrees.

Consider the case of electoral bonds (EBs) — a device legislated in 2017 and started in 2018 — to anonymize donations to political parties. They were struck down by the Supreme Court in February this year — a justly acclaimed decision, a plus for transparency but a minor ripple in party financing. Layered shell companies can serve corporates chary of public disclosure. Despite tall claims of ending black money via electoral bonds in 2018, the amounts channelled through the scheme are trivial — Rs 0.17 trillion over five years. Since April 2019, the market valuation of the

National Stock Exchange has doubled to about Rs 400 trillion. The annual flow of donations via EBs was just 0.011 per cent of the median market value of Rs 300 trillion over the five years starting in 2019. This “quasi good-relations tax” amounted to 1.1 paise per Rs 100 of corporate market value.

Compare this with the bonanza the government gave to corporates in 2019-20. Corporate tax was reduced from 30 to 22 per cent if existing firms gave up tax exemptions and from 18 to 15 per cent for new firms. Fortune magazine July 2021 referenced a research paper by the State Bank of India, which estimated that the tax cut added 19 per cent to corporate top-lines — not a bad bargain at all for an investment worth just 0.011 per cent of their market value. Government support for large corporates has continued apace and is the primary driver of the near doubling in the market value of listed stocks since May 2019. The party isn’t over yet.

If the government was to impose a wealth tax at the same rate, the average middle-class person (per international standards, monthly income between Rs 1 to 4.8 lakhs for a family of four) would gain even after paying Rs 110,000 per year on every Rs 1 crore (10 million) of wealth if the income-tax rates range between five per cent for Rs 12 lakhs (1.2 million) to 22 per cent for Rs 60 lakhs (6 million) per year. It would also encourage the financialisation of savings, now overweight in low-return real estate.

Middle-class folks are the government’s cash cow. Income tax and Goods and Services Tax on purchases eat up 40 per cent of their income, leaving them with just Rs 600 for every Rs 1,000 of income.

Big business — growing at about 13 per cent per year (current terms) since 2019, has bolstered annual economic growth (excluding the Covid-19 slump 2020-2021). Nor was the government shy in pressing the spend button to combat Covid-19. The fiscal deficit widened from Rs 9.3 trillion in 2019-20 to Rs 18.2 trillion in 2020-21 and remains at 17.8 trillion in 2023-24 (current terms). Versus the doubling of the fiscal deficit, the economy grew by about one half in current terms from Rs 200.7 trillion to Rs 294 trillion.

Private consumption benefited from the trickle-down effect of rapid growth in business market valuations. By March 2024 there were 151 million demat accounts, though the number of stockholders is lower because having multiple demat (online) accounts is allowed. Stockholders and stock-owning employees have enjoyed the income effect of surging market valuations. The share of private consumption in GDP increased from about 59 per cent earlier to 60-61 per cent but remains far from the 62-64 per cent share in the Atal Behari Vajpayee years 2000-2004.

One major downer for private investment is the high-inflation busting RBI policy rate of 6.5 per cent, which translates into personal loans at between 10 to 12 per cent. Reducing the interest rate can accelerate the rate of private consumption and investment. But this step is dependent on the government normalising its high fiscal deficit quickly, after the ongoing general election. The difficult part is junking low economic efficiency and politically-driven Budget allocations. The window for fiscal tightening is narrow — a hard Budget once the votes are in — for three continuous years, before the familiar quinquennial spending spree.

Party-boosting votes are with the 1.2 billion low-income earners in India, who are one-third of the global low-income population, much higher that our share of 17 per cent in global population. At income levels below Rs 1 lakh (Rs 0.1 million) per month, for a family of four and at least about one half of it being spent on food — freebies matter significantly. Aspiring families — as this set of Indians is labelled by kind spirits — spend out of their pockets on education and health. Public facilities are tragically derelict. Freebies provide an illusion of equity, responsiveness and demonstrate a caring government.

Most freebies could, however, be “given up” if high-quality, education linked to employment, health, and social security benefits were available — a chicken and egg problem. Enhancing outlays for these sectors means cutting back on non-merit political subsidies. Future value lies in productivity via research and development capacity, for which, our children must be evenly equipped with globally competitive, STEM capabilities.

India’s stately ship of state can sail smoothly if four course corrections are made.

First, shrink State ownership of industrial, infrastructure and financial assets to guarantee resources for education, health, and social security via public private partnerships with government providing land, partial guarantees to de-risk projects and state level facilitation.

Second, restart the abandoned programmes to make doing business in India easier.

President Xi Jinping’s China did the opposite — by cutting business to size — and is reaping what it sowed, in low growth.

Third, scale back tariff walls and open the economy to competition. India is too populous and too poor to follow the US template for creating jobs and stalling the rise of China. The welfare loss for Indian domestic consumers, and prohibitive import cost for producers from high import taxes, in a global economy with surplus capacity and low demand, exceeds the production benefits to narrow sections of Indian and foreign business, mostly focused on domestic supply. Minimising the cost of doing business in India should precede enlarging a debt-funded, oversize external engagement. Our time shall come, but not if we ignore fiscally stability or sustainable asset endowments.

Finally, China has only one de-facto constitution: the wish of the Paramount Leader.

India is different. Constitutional power is spread widely. Usage has deepened institutional roles for checks and balances. Better to preserve and promote this legacy, not subvert it for narrow near-term gains.