Modi shifted the tax burden to consumers

So what do we think of Jerry’s little jeremiad about overtaxed Indians? By the way, the average tax to GDP ratio in the world is 14.9% of GDP, and India is only 72% of the world average. Talking about overtaxing the Indians is pure nonsense.

Why did Modi find it necessary to raise taxes by 2 percentage points of GDP, on average over that of UPA years? [Average over 7 years].

There’s this old notion that tax cuts for the rich and the tycoons create more wealth and more jobs, while taxing them reduces wealth, both for the tycoons and for the economy in general . First of all, as we have seen above, the Indian economy is under-taxed, not over-taxed. The government extracts only 11% of GDP compared to the world average of 14.9%.

After knocking that ball out of the park, Modi made valiant efforts to shift the burden of taxation from corporations and tycoons to consumers, although, even under his leadership, overall taxes have fallen from 10% of GDP in previous UPA years to just under 12% of GDP in the last 7 years.

Why then does India feel so overtaxed when in fact it is undertaxed?

The answer lies in government. spend, something RW ideologues love in practice, but claim to hate in theory. [Michal Kalecki held that all incremental profits of firms in an economy come from the incremental debt that Govt takes on and spends in the economy. He was no Marxist. But he did do a theory of profits, that Capitalism still cannot provide, the irony notwithstanding].

So perish the idea that RW hates government spending. They adore him. What they hate is the fact that some of the money goes to the poor, rather than their own pockets – both in the US and in India. But back to our story.

Modi cut corporate taxes by 1.45 trillion in 2019-20. This represented something like 1% of GDP. Not because Modi had the money (it was already borrowing 6% of GDP on the market) but because he was convinced that such a measure would stimulate economic growth, create new jobs, increase exports and attract FDI from foreign manufacturers in the value chain.

What really happened?

Incomes are down, jobs are scarce

No new jobs were created. In fact, the LPR continued to decline, which started even before the pandemic. It is currently around 38%. In 2019, it was 49.3%. FDI has stubbornly remained at the $50 billion level except for a spike caused by the dilution of Reliance equity in 2020. Unemployment, even measured by the government’s faulty data, has been on the rise. GDP growth has continued to slow quarter-on-quarter since 2018. Currently, GDP is at the same level as in fiscal year 2019-20. GFCF, a measure of total investment in the economy, by private and public sector, remains below 30% of GDP (it was 28.8% of GDP in FY19-20).

On the other hand, per capita income increased from INR 1,08,645 to INR 1,07,801 (7.76%), private consumption increased from INR 62,506 to INR 59,043 (10.11%). While corporate profits over the same period have increased by at least 50% in real terms.

Not a penny of this boon to the business sector has created new jobs, increased FDI or led to additional investment in the economy. On the other hand, government debt as a percentage of GDP has risen from 67% of GDP to 90% of GDP, severely limiting further borrowing, crippling further investment in highways, so Prime Minister Modi can land C-130 cargo planes there.

Theater has replaced reality

Theater has completely replaced reality in the public imagination when it comes to growth and development.

The idea that tax cuts for corporations and tycoons create jobs and growth is the usual marketing fiction. Consumption and exports stimulate growth, incomes and jobs. Consumption and exports under Modi have stagnated since 2014. [But for a commodity led blip in exports this year.] Jerry’s economy doesn’t calculate.

One last point. The state has never been good at picking champions, whether in Japan, South Korea, the United States or the United Kingdom. Not even in China.

So what do smart governments do? They ask companies to compete in the market, in free and competitive markets, and when the market chooses a winner, they help the winner to grow their operations, NOT AT HOME, but globally, in the markets of ‘export.

This is how MITI has built the Toyotas and Sonys of the world by having them compete overseas and being competitive BEFORE overtly and covertly supporting them to expand overseas. The Chinese do the same. Those who demand industrial policy in the United States also want essentially the same thing.

This is not the model that Modi follows. It protects the domestic markets of local tycoons from foreign competition by asking Indian consumers to pay higher prices for products produced by rent-seeking tycoons.

These companies will never be competitive abroad.

India’s cheapest asset is labour. Modi-backed tycoons are in capital-intensive businesses that seek to avoid labor as much as possible. That’s why they don’t create jobs.

The only viable business India has today, other than labor-intensive products, is software services, which essentially arbitrates labor between geographies. Indian tech companies are hiding the sins of Modi’s crony capitalists. If it weren’t for their exports, India would go bankrupt in a jiffy. Irony? Modi taxes these efficient companies to foster declining manufacturing. Modi’s policies are bizarre.

The fact is that the Koch brothers in the United States and their priesthood counterparts in Indian capitalism have twisted Adam Smith’s version beyond recognition. Where Adam Smith favored business, KB corrupted it to mean wealth. While Adam Smith favored open competition among many profit-seeking small businesses, Koch Brothers practically aims for the freedom to use the pricing power of big business to snatch up consumers. Republicans seek to empty the public trough through tax cuts for themselves, funded by government borrowing, so Democrats can’t redistribute anything meaningful. Meanwhile, the plutocrats have captured democracy. This is the situation in a democracy where the institutions still function and where demagogues like Trump can be thrown out of office.

What about a democracy in India, where law and justice are largely dispensed through patronage systems, and government accountability is a fiction?

The old notions of capitalism and socialism do not hold. It’s time we stopped imposing worthless dogma on people. Better support the fascists openly if you like their program. People, as usual, will find a way around even such evil. They always have; they always will. Only the costs can be terrifying.

The poor and those in distress need urgent attention. Private consumption per capita has fallen by 11% over the past two years. Capacity utilization in the economy is just 62%. With such low capacity utilization, expecting private investment to pick up the slack is foolish. Meanwhile, with government debt rising to 90% of GDP, Modi can no longer borrow more to replace private government investment. expenses as in previous years. Without consumption growth or a substantial increase in exports, the economy will stagnate. Meanwhile, an overvalued INR is severely limiting India’s participation in global markets, while protectionism is blocking us from FTAs. So export fairy tales are just wishful thinking

The economy is in dire straits. Govt. must focus on getting the poor back to work with programs such as MNREGA. At last count, 10 million people had applied for employment at MNREGA, but none were available. Unless we can restore the lost incomes of the bottom 20%, consumption cannot recover, and neither can the economy. Pillory those who warn of stagflation [WPI inflation is persistent at 14% pa] does not help anyone, let alone the tycoons.

(The author is an independent commentator. Views are personal)

(Jaitirth Rao’s rant on Oxfam’s inequality report can be read here)