Invest in the poor, tax the rich

Most rich and upper-middle class Indians are greatly under-taxed. Worse, the government annually writes off over Rs 5 lakh crores through exemptions. This practice must be ended if the growth-development disconnect is to be abolished, says Praful Bidwai.

The Human Development Report 2013 just released by the United Nations Development Programme highlights the rise of the Global South, comprising some 130 developing countries.

These have become the main drivers of the world economy. They are ascending at a pace ‘unprecedented in its speed and scale’. The ‘living conditions and prospects’ of their people have dramatically changed for the better.   

Between 1980 and 2010, says the Report, the South’s share of world economic output rose from 33 per cent to 45 per cent and that of global merchandise trade from 25 to 47 per cent.

Remarkably, ‘much of this expansion is being driven by new trade and technology partnerships within the South itself.’

Countries like China and India saw their per capita income double in 20 years -- a process that took 150 years following the Industrial Revolution in Britain, and roughly 50 years in the United States, which industrialised later.

The developing countries now account for 58 per cent of the global middle class population, up from 26 per cent 20 years ago. By 2030, more than 80 per cent of the world’s middle class is projected to be living in the South.

By 2020, the combined output of China, India and Brazil is projected to surpass the aggregate production of Canada, France, Germany, Italy, the UK and the United States. But serious gaps persist between the developed and developing world in their Human Development Index.

China, India and Brazil have HDI ranks which broadly put them in the middle rungs of the human development ladder. This speaks to a nasty growth-development disconnect.

India has reason to worry about its human development performance, gender inequality and widespread poverty. India’s global HDI rank fell from 128 in 2005 to 134 in 2007 and further to 136 (among 187 countries) in 2012.

This is five ranks lower than the HDI of war-devastated Iraq.

India’s Gender Inequality Index ranks an even lower 132nd among 146 countries, and is significantly lower than the GII for Pakistan, Bangladesh and Nepal, leave alone Sri Lanka, the sole regional state to belong to the global high HDI group.

The poverty head-count ratio for India is 54 per cent, higher than in Nepal or Pakistan. Worse, the annual rate of improvement in India’s HDI value has slowed down from 1.75 per cent in the 1980s to 1.5 per cent.

Thus, despite some recent progress, India doesn’t belong to the core group of ‘human development high achievers’, which have dramatically improved their HDI ranks, such as Bangladesh, Chile, Ghana, Indonesia, Malaysia, Mauritius, Mexico, Rwanda, South Korea, Thailand, Tunisia, Turkey, Vietnam and Uganda.

India is a proud member of BRICS (with Brazil, Russia, China and South Africa). But its HDI is 23 per cent lower than the other four countries’ average. The Indian’s life expectancy at birth is 65.2 years -- eight years lower than in China or Brazil. Why, according to a Global Burden of Diseases, Injuries and Risk Factors study, it’s lower than in Nepal, Bangladesh, Bhutan, even Pakistan.

These statistics can be multiplied. The point is, India’s human development performance is middling to poor because it has failed to fashion a proactive developmental state, with a long-term vision of shared progress, equity, distributive justice and social cohesion.

Such a state directs and regulates investment, rather than leave that to the market. And it builds people’s capabilities through provision of healthcare, food security, housing, education and other social support services.

A developmental state derives its legitimacy from delivering such services and treats investment in people not as an appendage of the growth process but as its integral part. The best examples of such states are the Nordic countries, with their highly developed public welfare systems, and closer home, South Korea, Mexico, Brazil, Venezuela, Malaysia and Thailand, which invest considerable resources in public service provision.

For decades, political scientists tended to characterise developmental states as typically autocratic or suited to despotic rule because they can gain legitimacy independently of democracy, popular consultation and participation. Many practise cronyism -- and yet deliver.

But this need not be so, and increasingly, isn’t. Enabling people to build up and live to their full human potential is eminently consistent with democracy and enriches it. It’s part of the broader agenda of building a forward-looking, progressive, compassionate and just society, with radical equality at its core.

India has at best been hesitant and half-hearted in drafting and implementing welfare schemes --despite compelling evidence that such public action is imperative if the deep-rooted, structural causes of poverty, deprivation and human insecurity are to be addressed in a severely skewed society which has denied social opportunity to millions of people for centuries, and in which entrenched interests use key positions of power to perpetuate economic servitude and social bondage.

Thus, the United Progressive Alliance launched the worthy National Rural Employment Guarantee Act way back in 2005. But it has failed to ensure that all the states pay even the minimum wage to those who get work under the Act. Worse, it has slashed the scheme’s budget by more than 20 per cent in real terms -- although it’s far from meeting its job creation targets.

UPA-2 has made a travesty of the promised food security Bill, after having callously delayed and diluted it virtually beyond recognition from its original form proposed by the National Advisory Council. Prime Minister Manmohan Singh -- who famously opposed free food for the poor even if the alternative is to let it rot -- intervened to have its coverage truncated and subsidy reduced.

His government plans to move 71 amendments to the Bill to cut grain entitlements and raise the sale price. Even the sustained campaign by the Left parties for universal coverage, with 35 kg to be made available per month per family at affordable prices, has failed to move the government.       

This trend must be reversed. If the UPA is to go into the next election with a platform that has genuine popular appeal, it must launch new welfare schemes and expand existing ones. Two schemes cry out for attention and implementation: the proposed National Right to Homestead Bill, and universal pension provision for old people, widows and the disabled.

Under the first, 15 million rural landless families, of whom 8 million are homeless, would be provided one-tenth of an acre (4,356 sq ft), with a basic house with rudimentary facilities, such as appropriate location and minimal amenities like drinking water, electricity, roads and transportation.

This will cost the Centre Rs 30,000 crores a year on a 75:25 cost-sharing basis with the states. But this expense, just 0.3 per cent of the GDP, is worthwhile given its likely contribution to the welfare of some of our poorest people. It will also strengthen local government structures like panchayats.

The demand for universal pensions was vigorously canvassed by the Pension Parishad during its March 4-8 dharna at Jantar Mantar. The rationale of the idea is persuasive. Most old people in India are unable to work or compelled to undertake arduous tasks like loading goods, transporting milk or vending vegetables, which adversely affect their health of violate their dignity. Many have no income at all. It is society’s duty to look after them.

Currently, the National Social Assistance Programme covers just 30 million people, with the old receiving a measly Rs 200 in monthly pension, and widows and the disabled only getting Rs 300. These sums are unspeakably paltry and must be substantially raised. The coverage must be tripled.  

The number of Indians who are 60 or older and need support is as high as 79 million -- even if the more affluent among them, like income-tax payers, are excluded. In addition, there are 34 million who are between 55 and 59 years of age, who deserve support. A pension of Rs 2,000 per month, as demanded by the Parishad, would cost the equivalent of 3.4 percent of the GDP.

This is not as high as it seems. If a developing country like Brazil can afford to spend 8.9 per cent of its GDP on pensions, then India can certainly spend half as much. A precondition for this is to raise our tax revenues, which are only 16.5 per cent of the GDP -- incredibly low for a country of India’s size and affluence at the top.

India’s tax system is regressive. Two-thirds of the tax revenue comes from indirect taxes, which are borne by the mass of the population. 

In contrast, the tax-GDP ratio is 50 and 49 per cent in Sweden and Denmark, and 45 per cent in France. (These figures used to be much higher before the advent of neoliberal policies two decades ago.) Even in relatively poorer countries like Brazil, Russia, Turkey and South Africa, the tax-GDP ratio is between 31 and 34 per cent, almost twice higher than in India.      

Most rich and upper-middle class Indians are greatly under-taxed. Worse, the government annually writes off over Rs 5 lakh crores (5 per cent of the GDP) through various exemptions. This pernicious practice must be ended if the growth-development disconnect is to be abolished.