Destined to Dustbin

The latest apprehension     about a most likely fall in tax collection in the fiscal year 2019-20 provides the scope for some reflections about the state of the economy. In an economy with a positive, however low, rate of growth, the quantum of tax collection is certain to grow every year. But the phenomenon is going to be reversed this year. When demonetisation was put into effect some three years ago, there was much distress in the informal sector and the common money-using people were faced with much hardship. The official excuse was that demonetisation would bring many more into the tax net and unearth much black money. As things turned out, 99% of the demonetised currency notes returned to the banking system and the second claim was proved false. The falsity of the first claim is going to be demonstrated with the revelation of a probable fall in the amount of aggregate tax collection.

One important reason for this likely fall in tax collection is definitely the reduction in the corporate tax rate. One is reminded of the Reaganomics of the early eighties of the last century. Advocates of Reaganomics argued that tax cuts for the big corporate houses would enhance the spirit of investments and enterprise, would boost growth and thus would actually increase the amount of tax collection. This prescription did not prevent the US economy's downturn. Investments in speculations came to dominate, which ultimately culminated in a meltdown that spread all across the globe. Thus Reaganomics was thrown into the dustbin of history, and the US government came to the rescue of big financial giants.

Modi's India is in a somewhat similar situation. The share market shows no sign of decline as yet, but reduction in corporate taxes to the extent of more than one trillion rupees has failed to boost private investment to the slightest extent. The reason advanced by the corporate lobby is lack of demand. This is, however, not untrue.

Aggregate effective demand lagrely depends on the pattern of income distribution, and the latest Oxfam report suggests a staggering picture in this respect. If the broad masses of people are to be endowed with enough purchasing power so as to boost the level of effective demand and spur the level of investment, public or private, the super rich must be taxed effectively and the money thus obtained must be spent on the social sector. This is desirable not only from a social and humanitarian point of view, but also from the point of view of economics as well. But Narendra Modi can ill-afford to do so, because it is on the patronage of this class that his political career depends. When the economy is in a shambles with growth rate faltering, unemployment rising and inequality of income and other capabilities taking a dreadful shape, the only option left is to ladle out some fake patriotism. To label any voice of criticism and dissent on any policy issue as pro-Pakistan is a clever ploy to display this 'patriotism', which is the last weapon of the successors to British rule in India, who are now clinging to the coat tails of Donald Trump. But one cannot cheat all the people for all the time.

The capacity of the Modi government to increase welfare expenditures seem limited in the coming years because of reduction in employment and demand in market, both here and abroad, as people are seeing in the stagnation in GST collections. Reduction in employment is due to advance of Robots and Artificial Intelligence (AI). The adverse impact of Robots and AI can be competed only by increasing budgetary allocation on higher education. No, Modi doesn't want to spend money on education, higher education to be precise. Instead he is doling out tax rebate to his corporate backers.

29.01.2020

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Frontier
Vol. 52, No. 32, Feb 9 - 15, 2020