The flawed economic reforms enhanced the wealth disparity in India

As per “Global Wealth Report 2018” released by Credit Suisse, there are 3,43,000 Dollar millionaires in India, collectively accounting for more than $1 trillion of personal wealth. In simple terms, in a country of 85 crore adults, a tiny fraction of 0.05% (less than half percent) of the adult population hold 20% of country’s total personal wealth of $ 6 trillion. It also means, that the average personal wealth of these 3.43 lakh Dollar millionaires is 500 times more than the average personal wealth of an Indian of just $7,020. Adding concerns over rising inequalities, India created a whopping 7,300 more Dollar millionaires during the 12-month-period to mid-2018. More than 90% of Indians hold a modest personal wealth of less than $10,000. According to the report, the top 10% of India’s population had 56 per cent share in the national income in 2018.

Global household wealth rose 4.6% in the 12-month period to June 2018, whereas India recorded a modest 2.6% growth in household wealth in the same period. Slower growth in household wealth in India is partly due to depreciating Rupee against Dollar and, partly, due to sedate GDP growth.

In the corporate governance report of any listed company, the ratio of CEO’s salary to the mean salary of company’s employees is mentioned. If this ratio exceeds 100 times, the concerned company is considered to be governed in non-egalitarian ways. In the country’s governance report, a high ratio of elites’ average wealth to the mean wealth of an adult citizen of over 500 times reflects adversely on the economic policies of the country.

Economic policy reforms like demonetisation and GST implementation are meant to fight against black money and tax evasion. The implicit benefits of such policy objectives should be to reduce wealth disparities and bring in a more egalitarian society. In reality, these reforms enhanced the inequalities. Demonetisation helped many rich people to convert their black money into white money, of course by paying a price to the bankers, auditors, officials and middlemen. As per RBI report, 99.3% of demonetised high-value currency notes of ₹15.42 lakh crore have returned to the banking system. The informal estimates by experts on the extent of “parallel economy,” or black money in the economy, range anywhere from 6% to 40% of the GDP. Taking the lowest estimate of six per cent as black economy, at least 6% of banned high value currency notes of ₹500 and ₹1000 notes (specified bank notes or SBN’s), that is at least ₹1 lakh crore of banned currency should have been thrown into canals and rivers by the rich people, but surprisingly everything returned to the banking system. If we consider the higher estimates of the extent of parallel economy, then a third of SBN’s that is over ₹5 lakh crore of banned currency should not have returned to the banking system, but it returned. There were reports that the Modi government was initially expecting ₹3 to 4 lakh crore of black money to get extinguished outside the banking system. But the crafty financial brains, corrupt bankers and wily rich have beaten the whole plan of the Modi government and almost all the banned currency got an official burial in the banking system.

Black money generally sleeps and is not put to active use in the economic activity. Post demonetisation, the converted or rejuvenated black money of rich has become active in the economy in terms of fearless investment of the same in mutual funds, big business and real estate activity, enhancing the wealth of rich in the process. In a year after demonetisation, the assets under management (AUM) of Mutual Fund industry crossed ₹21 trillion mark, showing a stupendous growth of 30 per cent in the one year period between November 2016 and October 2017.

According to CMIE data, the estimated total employment during January-April 2017 was 405 million, compared to 406.5 million during the preceding four months, September-December 2016. Hence, as per CMIE estimates, the number of persons employed fell by 1.5 million during January-April 2017 period, post demonetisation, be it in the tea gardens of Darjeeling or the hosiery industry of Tirupur or the woollen industry of Ludhiana or in SME’s elsewhere. This has obviously slowed the growth in the incomes of average Indians.

Hasty implementation of GST has also badly affected the supply chains, adversely affecting the cottage and tiny industries which can’t afford or don’t have the necessary wherewithal to adopt GST in their businesses. Such cottage industries do not require to register for GST based on their turnover. Unfortunately, many of these cottage and tiny industries, who do job work for big industry, are losing orders due to their lack of GST registration, as big industry cannot claim “input tax credit” (ITC) on the bills raised by such unregistered suppliers or job workers. In the process, established and big business are growing faster as the tiny industry decays. This naturally makes rich richer and poor poorer. In the whole process, during the last two tumultuous years of economic and tax reforms, unemployment and economic inequalities have significantly increased.

(The author is an alumnus of IIM, Ahmedabad and a retired finance professional. Views expressed are personal)

This article first appeared in National Herald on Sunday