Price rise and tax burden: Poor are the worst-affected

Prices are going through the roof, people have no jobs, business have shut down due to first demonetisation and then Covid and the economy is in great distress.

A counter to this argument has also been that nothing has really quite changed. As one can see, the cricket stadiums are buzzing during the IPL matches currently underway, and the malls and movie halls are all reporting improved business. Railway tickets are just like pre-Covid times and are once again waitlisted. Most flights are showing good loads and metro coaches are also back to being packed.

At the same time, e-commerce platforms are doing well and so are Swiggy and Zomato which are growing and planning their quick commerce strategies. And last but not the least, travel destinations from Kashmir to Goa are witnessing crowds in the name of revenge tourism.

So what explains the paradox?

Trying to flesh out the economics of this, Madan Sabnavis, Chief Economist, Bank of Baroda says that the price rise is pinching everyone and that though no one is really spared people don’t protest on these kinds of issues in India. “There are protests when it comes to religion or citizenship, but when people are affected by economic things it’s different. As a broader question, one can say, why don’t people actually protest that they are not getting jobs or when taxes are raised and the people are unhappy. While these are serious issues, people are generally fatalistic, or one just accepts things as they come along,” he says.

Dr. Manoj S Kamat, an academician, and an expert in finance, economic policy, and econometrics feels that people are far more resilient today. “People know nothing really happens. What will you do when prices rise? A reaction of outrage is for the opposition party to galvanize. But if the opposition is quiet or not able to evoke enough reaction, how will people respond?” he asks.

Dr. Kamat, explaining that the crowds at the IPL or people going to the movies and travel picking up, says that a comparison is being attempted to be made between now and the last two years when nothing was happening. “We are back at the levels of somewhere around 2017-18 and these activities must go on. If this is also to stop then the entire economy will be down and we will be like Sri Lanka. So, even in the worst of conditions, people will still buy cars and travel by air as the economy is opening,” he explains.

Sabnavis points out that the effect will eventually be felt by everyone. “For people who are better off, it affects our savings. Discretionary spending has come down, and this is one of the reasons why the consumer goods industry has not done well even before the pandemic. It is primarily on account of lack of job creation and today the prices have actually added to it,” he says.

An example of what these experts point out can be seen in education, medicines, and even recreation, which of course, is discretionary and becomes expensive. Even the services have become expensive. Also, since the third quarter of last year, most manufacturers have said in India Investor Presentations that they have started passing on the higher input raw material costs to the consumer.

“And so, biscuit packets have become smaller. Manufacturers don’t increase the price but Rs.10 now gets you 40 grams, which was earlier 100 grams and came down gradually over time,” Sabnavis explains.

As an economist, Sabnavis points out everyone’s adjusting and that this was not beneficial to the country as a whole. “For many years, interest rates have come down to such an extent that savers are being taken for a ride. But no one is protesting. The only notion is that interest rates must come down so that the industry is able to invest. But what is happening is that while they are earning higher profits, we don’t see corresponding investments taking place. What has happened is that financial savings in India have come down, but investments are not increasing,” he says.

He explains that the stock markets are doing well as the valuations are very good, earnings per share (EPS) is also very good and the Price-toEarnings (PE) ratio is going up. “The benefit has actually been transferred from savers to financial investors, and not to physical investors. When our savings go down it has to benefit someone. Usually, it is the businesses that benefit and put the money into an investment to benefit the country. But that is not happening and the investment rate is also stagnant,” Sabnavis points out.

So where is the money going? Experts say that it’s actually being transferred in the form of a higher stock market. “Why is the Sensex so high when the economy is not doing well? The answer is simple. Companies are doing very well because profits are good. Interest costs are one component. Not all salaries are being increased, and not everyone is hiring. This has kept costs under control,” they add.

Economists like Sabnavis and Kamat agree that the poor are the worst affected. In a column titled ‘Don’t burden the poor with fuel prices hikes, tax the rich’, published on an online portal Newsclick, Dr. Soma Marla, a retired principal scientist at Indian Agricultural Research Institute says, “It is the poor who carry the tax burden. The poor are hurt the most as they spend a larger portion of their income to cover inflation. The taxes on fuel we pay are part of indirect taxes, collected from excise and GST on goods and services. Direct taxes include wealth tax, corporate tax, import tax, income tax, and others collected from the rich.

“While the share of direct taxes in the government’s receipts has decreased, the share of indirect taxes, including the excise duty from petroleum products and the GST, has increased. In other words, it made up for the fall in taxes collected from the rich by raising the taxes on the poor.”

Though Sabnavis and Kamat believe the government is doing all that it could, data shows that after taxing the poor and the middle-class the government made available Rs 2,68,349 crore in two years for proving food grains, Rs. 30,000 crore as onetime cash allowances were paid to women and Rs. 50,000 crore was spent on paying Rs. 6000 a year to farmers.

But ironically, as former union finance minister P Chidambaram points out, the annual outgo was far less than the annual fuel taxes collected by the government of India.

Meanwhile India turns on its head as the rich grow richer and the poor become poorer.

(This was first published in National Herald on Sunday)