The poor and the middle class taxed like never before by the '56 inch' economy

India’s GDP growth had started slumping much before the pandemic struck.

The persistent slump that began since the second half of 2018 was sought to be corrected through stepped up Govt. spending in infrastructure.

For all practical purposes, despite the massive tax cuts in corporate taxes, the much hyped “production-linked-incentives”, and slogans ranging from “Make In India” to “Atamnirbharta, not to mention the countless favors handed down to favored crony tycoons, the one thing that has refused to pick up in private investment in the economy.

So all the incremental investment had to come from Govt. Given Modi’s aversion to social spending even on crucial sectors like health and education that contribute hugely to productivity growth, most of the Govt. spending was channeled into infrastructure, where returns on investment are very slow in coming.

It would have helped if the Govt swiftly recycled such infrastructure spending by privatizing such assets and investing in new projects, but that hasn’t happened. The net result of the persistent slow down has been that Govt borrowing as proportion of GDP has shot up without generating any real returns thus aggravating fiscal deficits further.

Since 2018, and especially after the massive slump caused by the pandemic, Govt debt as percentage of GDP now stands close to 90%. This means, the margin for error has narrowed, and any further increase in Govt spending should be channeled to areas where it can quickly ignite growth; rather than in infrastructure projects that do not yield quick returns.

The pandemic has had two major fallouts on the economy. Firstly, there have been massive job losses due to Modi’s unplanned and abrupt

lockdown, that caused GDP to slump by as much as 28% in a single quarter. Jobs lost during the period have not returned. Second, lost incomes from job losses, and general slump before the pandemic, has caused consumption expenditure in the economy to slow even further.

Disposable income of consumers since 2018 has similarly falling as the graph below shows.

Basically, Modi has followed a policy of surreptitiously taxing the middle class and poor, through indirect taxes such import duties on consumer goods, excise duties on petroleum products, and across the board duty protection to commodity producers, and funneling this pool

of taxes to fund subsidies and tax cuts to corporates.

The amounts involved are not small. A rough estimate is that incremental duties on petroleum products alone amount to incremental taxation on consumers to the extent of about INR, 2 Trillion or about 1% of GDP. Add up all of them, and my guess is that since 2014, consumers have been taxed to the extent of 2% of GDP, directly or indirectly, and these funds have largely gone to the corporate sector via tax cuts and other subsidies, disguised either as protection from imports and/or production linked incentives.

As you can see from the Graph of disposable income of consumers, Modi’s tax measures have flattened consumers’ disposable income since 2018. Given the general slump in the economy, the prospects of a consumer led recovery in the economy are pretty slim. Also not shown here for lack of space, there is considerable evidence that consumers had binged on credit before 2018 and are now de-leveraging.

The fact is that if the 2% of GDP that has been skimmed from consumers to the corporate sectors had led to an similar increase in private investment in the economy, GDP growth would not have tapered off, and the need for Govt to prop up growth through borrowings, would not arise. But the harsh fact is, while tycoons love the additional profit bonanza coming their way, they have used these to pair down borrowings, rather than invest, and this shows the extent of their faith in the sustainability of Modi’s policies. His capricious decision making doesn’t inspire confidence either.

So the 2% of GDP that Modi has scrounged from the middle class and gifted to tycoons has borne no fruit for the economy. Perhaps not even for Modi, unless you count buoyant contributions to anonymous electoral bonds as returns. Incidentally, they have proved to be the best investment for tycoons considering the 2% in GDP that has accrued to them as windfall profits in return.

On the employment front, the situation is rather alarming. First consider the big picture before the pandemic as shown in the graph on employment.

Employment rate has been falling since 2012, and has further dropped from 49.9% in 2014, to 47.3 in 2019. Each percentage drop in employment rate translates roughly into half a million jobs lost. These job losses are in the organized sector only.

In the un-organized sector for which no statistics are available, on a conservative basis, a percentage point drop in employment rate means job losses of about 2.5 million. Since 2014, India has lost about 6 million jobs in the economy, before the pandemic struck. Forget about job growth for a growing population. We have fewer jobs now than in 2014.

Hard to say how many jobs have been further lost in the due to the pandemic. Statistics indicate about another 0.35 million jobs lost in the organized sector. That would mean the pandemic has caused job losses of the order of 2 million more in addition to those lost in the general slump preceding the pandemic.

The labour participation rate has similarly fallen from 53% in 2012, to 49.8% in 2018. This largely reflects women leaving the workforce in large numbers after Modi came to power with his regressive social agenda. The pandemic has only made the situation worse. Women forced out of the labour market may never return.

We now come to another sector of the economy that is usually the savior of all developing economies, but where, not surprisingly, Modi has had the usual disastrous effect: merchandise exports.

India’s export growth since 2014, has been abysmal; in fact over last 7 years of Modi, his “Make India”, “Atamnirbharta” and talk of integrating India in global value chains, growth in exports from India over 7 long years are near zero.

The recent blip in exports has been caused by a global surge in commodity prices which led to a surge in exports of cotton, sugar, and some cereals. The surge is a one time affair. The trend still points to zero growth.

Technology services exports continue to buyout and the blessed sector is what is keeping the economy and India afloat. Without it, we would be a basket case by now.

Be that as it may, how does one craft a stimulus package for a stalling economy where the Govt is essentially broke, the consumer is tapped out, exports buoyancy is zero? The Indian economy is like a plane in mid-air whose engines have flamed out and crash is imminent. We have to reignite the engines to avert a crash.

It is no longer a stimulus about squeezing out some extra growth. If the flamed out engines are not ignited, an economic failure along the lines of Latin American countries stares us in the face that will entrench fascist policies further.

We can find a way out of the mess. It is difficult but not rocket science. We have done it before. And can do it again.

( The writer is a Consultant and Independent trader in financial markets. Views are personal)