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Fiscal fires ravaging family budgets

The angst is visible in bazaars and audibly vocal in living rooms and WhatsApp family calls.

Published: 27th June 2021 06:30 AM  |   Last Updated: 27th June 2021 06:30 AM   |  A+A-

Reserve Bank of India, RBI

A security woman guards at the RBI headquarters in Mumbai. (File photo| PTI)

The angst is visible in bazaars and audibly vocal in living rooms and WhatsApp family calls. It is a common factor in RBI’s surveys and voter opinion polls. The rising cost of living has led to the depletion of optimism as families struggle to make the proverbial ends meet in a landscape of pay cuts, pink slips and unemployment.

In June 2021, a one-year deposit fetches less than what a savings account did five years back. For nearly a year, consumer inflation, the measure used by RBI to define the cost of money, has been higher than returns offered by banks on deposits. Effectively — with retail inflation at 6 percent and the rate for one-year deposits at around 5 percent — the return on hard-earned tax-paid money is negative.

Arguably, lower interest rates are necessary to spur investment. Have lower interest rates boosted investment and job creation? Evidence is less than inspiring — RBI data shows credit growth is stranded at around 6 percent. And the most needy, small and medium enterprises, are still charged double digit interest rates.

The flip side of the equation of falling returns on savings is the painful spectre of inflation. In India’s urban markets, vegetables prices are hawked at palatable per 250 grams rates rather than kilograms. Social media is replete with memes on fuel price lampooning central and state governments. It is true that inflation has gone up world over. Equally, it is necessary to parse the specific from the general. The criticality lies in what is driving inflation.

The receipts section of Budget 2021 is revealing. The mantra of equity and efficiency demands that taxes on income — corporate and personal — should outweigh taxes on consumption. In 2021, collections of indirect tax — the taxes everyone from rich-to-the-poor pays on consumption — is higher than taxes on income.

The conventional thesis about inflation states that it is about too much money chasing too few goods. In India, it is more about too many taxes chasing one segment to fund bloating expenditure. Petro products are subjected to a dozen levies by the Centre and the states — cess, royalty, customs duty, national calamity contingent duty, excise duty, service tax, the GST triumvirate CGST/IGST/SGST, octroi and entry tax.

Petro taxes deliver the highest tax mileage to governments. Consider the data points. India imports roughly $ 110 billion or Rs 8 lakh crore worth of petroleum. In the past 12 months, the Centre and the states raked in over Rs 5.6 lakh crore in revenues — that is roughly over Rs 64 crore an hour. That energy, a factor of productivity, is taxed so heavily speaks volumes about the state of public finances.

Essentially, the issue is the cost of governance. In 2009-10, the Centre and states together spent Rs 18.52 lakh crore — that is Rs 211 crore every hour. In 2019-20, even before the pandemic and attendant expenditure visited the economy, central and state governments spent Rs 66.34 lakh crore — that is Rs 750 plus crore per hour. Even though the incidence of taxation has risen, the government needs to borrow to bridge the yawning gap between revenues and expenditure. This year, the government will spend Rs 92 crore every hour or Rs 8.09 lakh crore just to pay interest on its borrowings — that is just under 50 per cent of its tax revenues and 25 per cent of its total expenditure.

Despite all the borrowing and spending, citizens live in want for the most basic of public services. The pandemic exposed the consequence of poor allocation on health and underspending on education which has left the system broken. India spends barely 1.25 per cent of GDP on health and needs to double it. Spending on education needs to be ramped up from 2.5 per cent to 6 per cent of GDP. Even if the spend were to be hiked by just one per cent of GDP, it would add over Rs 2 lakh crore to the cost-sheet.

Yes, a developing economy needs resources to fund infrastructure and spur employment. Who should pay the fair share is not about morality but pure economics. Dollar billionaires have recorded stunning gains in wealth. Companies reported record revenues and profits to bourses boosting stock indices to new highs. Yet, corporation tax collection was lower than taxes on income.

The route to sustainable growth requires interrogation of necessary and sufficient conditions. The algebraic equation of growth states that GDP = Consumption + Investment + Government Spending + Net Exports. Consumption is the spark that ignites investment. Without the critical ‘C’, which is doused by inflation, growth will only splutter — and corporate tax cuts or lower interest rate can at best mitigate emission.

Resource mobilisation is not just about taxation. Thirty years after liberalisation, the government continues to be the largest business house — presiding over loss-making PSUs and destruction of public wealth. Must there be a ministry for everything in the Centre and states? The fundamental principle of development in a resource-scarce economy rests on what the money is spent on and what it is not spent on.

India’s potential is detained by the size and shape of the Leviathan aka government and what it costs to run it. Indians can and will harvest the demographic dividend — if the government redesigns governance and gets out of the way.

Shankkar Aiyar
Author of The Gated Republic, Aadhaar: A Biometric History of India’s 12 Digit
Revolution, and Accidental India
shankkar.aiyar@gmail.com



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  • tmranganathan

    mismanagement of economics by ill informed finacial knowledge deficient ministers.
    2 months ago reply
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