Corporate Tax Cut v/s Cut in Indirect Taxes

The growth of any country rests on four engines - government expenditure, private investment, private consumption and exports.

Private consumption will increase if there is an increase in demand, and demand will increase if people will buy more, and they will buy more only if there is a consistent increase in their income. 

Private investment will increase if there is an increase in growth of the private sector, and there will be growth if there is demand, and there will be demand if there is growth in people's income.

Government/Public expenditure can happen if the public sector earns revenue, and the revenue is added up by direct and indirect tax collection. If people buy more, then they pay more indirect taxes, and if they earn more, they pay more direct/income tax. How much they buy and how much they earn depends on the rise in their income.

Exports depend on global demand. But they also depend on how much we produce here, and that again depends on the economic conditions back home.

Now the thing common in all four engines is demand and rise in income levels. On November 8, 2016, Mr Narendra Modi sucked out 86% of the cash (by value) from the market by demonetising 500 and 1000 rupee notes. With no cash available in the market, there was a direct reduction in demand, and it remains the root cause of the current economic slowdown. To all who were drenched in Modi euphoria in the first few hours of the announcement of demonetization, please follow the pattern above to know how economic slowdown happens.

Now, what?

The Finance Minister has announced a corporate tax cut, and the Prime Minister has as usual termed it historical (what according to him is not?)! The Corporate Sector will see a reduction in expenses, and hence an increase in profit. But will they be able to increase their revenues?

Their revenues will increase only if people buy more, and they will buy more only if they can spend more. And they will spend more only if the government cuts indirect taxes.

Direct tax is income tax, and it is as per the income earned by people. It has a bracket, and hence all do not pay direct taxes. Indirect taxes, on the other hand, are paid by all.

Currently, the elephant in the room is the GST, an indirect tax. If the government cuts this tax, then it will boost spending, which will increase demand and it will lead to growth. Cutting corporate taxes will benefit organisations, and it 'may' revive growth in the long run. But cutting indirect tax will benefit everyone, and most importantly, the common man, and it will immediately resume spending.

But when was this government pro-people? Hence, the root cause of everything we face today is a flawed GST and demonetization as mentioned time and again by Dr Manmohan Singh.

Image Credit: mbarendezvous.com/general-awareness/top-five-challenges-of-indian-economy/

Why is India's growth slow? The Talasari example

Newspaper articles, dining table conversations and conferences on economics have one statement in common - 'Look at China's growth story! India should have walked that path at least two decades back, and now we have missed the bus.' 

I am not a trained economist. Hence I am not involved in graphs, surveys and projections. However, I feel that there are many social aspects associated with a place or a region, and even the country and they should be taken into consideration while talking about the growth story. Popular terms like Vikas often do not account for these factors, and we have to admit that they are purely rhetorical and hence without a strong foundation. A couple of visits to Talasari, a place just about 170 kilometres from Mumbai made me realise this, and also made me relate that to the broader growth story of the country.

Talasari is a taluka that forms a part of Maharashtra's Palghar district. The Gujarat border is close to 50 km from this place, and hence Marathi converges beautifully with Gujarati, and to add to this confluence, a sizeable tribal population contributes with their dialects. For the urban population of Maharashtra which is majorly Mumbai and Pune, this place signifies a popular tourist attraction, and to stretch that further, 'Adivasi tourism.' And as they are tourists, they harbour a universal sentiment which is 'Adivasi culture should remain intact' and 'we should not uproot them from their roots' (after conveniently forgetting that their lifestyle is different from their grandparents!). However, my visit to Talasari was aimed at understanding people, their lifestyle and the concept of change involving them rather than the one imposed and imagined through an outsiders' lens! 

Some months back, the Maharashtra government initiated a drive of administrating measles-rubella vaccine, and Talasari was no exception to this development. The drive was over when I visited the place this earlier this year, in February. The most popular feedback I got from the area was, "it is difficult to convince the locals about the importance of this vaccination, and it takes time for many to understand its significance." The government representatives, I was told, had a tough time in reaching to the last man/woman in the line of locals. Now, why was this the case? The government circular is in Marathi -  the typical 'government Marathi' ( sarkari bhasha) which is difficult to follow for even an educated Maharashtrian. The pamphlets (or related materials) that are distributed or even the announcements that are made in Marathi (the official language of the state) are challenging to follow for the locals as they speak in dialects which do not have a written script, and hence for many, Marathi remains as good as a 'foreign language.' Therefore, a typical government work related to healthcare (a critical human development indicator) takes a lot of time, and one can imagine what happens to all the other development work associated with the region. Now, extrapolate that to all tribal areas of the country, and ask yourself this question again, "why is India's growth slow?"

But the most severe counter-argument to this problem is, "why don't they learn and get educated?" The answer to this question is, again, the complex linguistic problem mentioned above. The official language of Maharashtra is Marathi, and hence the language of learning in the state government schools is also in the same language. A family whose children are first generation school goers have no back-up of the 'foreign language' they study at school (Marathi) from their parents who speak one of the dialects of the region, a language that has never been reproduced on paper before! On what basis do we expect the people from this region to 'get educated?'

Let us now extrapolate this problem to the lifestyle of the region, and finally to the growth of the place. The primary occupation of this region is agriculture, and because of the problem of languages, a large part of the population prefers to remain static and very few migrate to other places for work. The industries around them attract employment, but it is restricted to menial jobs, as the 'language' of the skilled jobs is either Marathi, Gujarati or English - all of them foreign to this land! As very few people move from one place to another, the frequency of state transport buses to nearby places like Dahanu and Palghar is extremely low!

Now, let us look at the complexity of the problem. Growth of the region would require an expansion of transport facilities. These facilities will, however, work only if a sufficient number of people are willing to move to other places. They will move only if there are enough new opportunities available for these people apart from agriculture. These new opportunities will be available only if the people from this area are skilled to avail them. These people will be skilled only if they are educated, which means they should learn well. And for them to learn well, the educational content should be in their language. But how, if the languages they speak, do not even have a written script and a developed grammar? And if we include all such regions of our country, we come close to answering the question - "why is India's growth slow?"   

The effects of Demonetization - The Amul Example

I visited the Amul factory at Anand, Gujarat at the beginning of this year. While the visit was significant for understanding the business model of Amul, it added to my curiosity and keenness in knowing and understanding the rural economy of our country in great detail. Also, through an interaction with one of the staff members, I could understand how the decision of demonetization brought in disaster and disruption to one of India's best examples of a robust cooperative movement!

Before we move to the decision, let us first understand the famed 'Cow to Consumer' model of Amul. The cooperative movement begins in villages where families agree to participate and milk their cows and/or buffaloes and bring the milk to the milk collection centre. In almost all the villages, this is a daily exercise. Each milk producer brings in the milk, and he/she is paid as per the fat content in the liquid. It is significant to note that every family is paid as per the fat content of their milk, and they DO NOT compete with each other in prices. (Amul provides feed and veterinary service for the cattle so that they produce more milk and these families can increase their earnings). In most of the places, the participating families get paid in cash once every five days. The milk is then transported to the District Union, and from there it reaches the Gujarat Cooperative Milk Marketing Federation, which is Amul. GCMMF then manufactures various dairy products and sells them to us customers.

Before we jump onto the demonetization impact, let us admit to a few things of rural India. The rural Indian landscape does not have the same density of bank branches as compared to their urban counterparts. Of the limited number of banks present, the number of private sector banks is close to nil (especially in very remote villages). In many villages, people spend an entire day travelling to and from the bank and hence their visits are once or twice a month. A visit to a bank for a daily wage labourer implies a sacrifice of that day's wage, and hence it requires meticulous planning. Whether you agree on it or not, but cash becomes a way of life in all these villages.

Demonetization sucked out close to 86% of the cash from the market, and the management at Amul decided to transfer the money to the bank account of the participating milk producers. It was not possible to pay these milk producers by cash as there was a shortage of currency notes in the market. But it changed the equations for the participants. They got the salary, but they had to travel to those banks to withdraw the cash. However, there was a cash shortage, and long queues greeted them when they reached the bank. Also, they could not go to work on that particular day and had to either wait there for another day or get back home and do the same travelling exercise the next day. The result? Loss of daily wages for more than one day (at least). This affected their spending and loss of productive hours. As there was an absence of cash, economic activity slowed down, and it also led to an overall decrease in demand. The participating milk producers requested Amul to not transfer money to their bank account and instead get back to the mode of payment as before, that is cash! However, the cash shortage continued for close to seven to eight months, and it resulted in losses for many dairies, and Amul's business also suffered.

While people in the cities thought that the crisis (if they felt it was a crisis) of demonetization had stopped when cash was refilled in their neighbouring ATM centre, the picture in rural India was more dismal and horrible. Loss of daily wages, delay in accessing money, reduced demand - all cumulatively crippled the rural economy. As I end this article quoting what Amul wrote in its Annual Report for 2016-17, I request you all to think- what did the exercise of demonetization actually achieve?

"Demonetisation by the Indian government in November 2016 has affected our industry too. Due to demonetisation, our dairy witnessed considerable losses in business as farmers shifting to private vendors for want of cash. Distribution of Amul products was adversely affected due to decreased demand in the market." 

Why Minimum Income Guarantee?

Rahul Gandhi recently announced that if voted to power, his government will ensure a minimum income guarantee for the poor under a scheme called NYAY. P. Chidambaram clarified that it is not the Universal Basic Income (UBI) that many economists are discussing. A minimum income guarantee implies ensuring a basic income for the poor, whereas UBI means everyone - regardless of their income - is assured the same basic pay.

Now let us see the background of this decision: The Multidimensional Poverty Index, 2018 says that "The incidence of multidimensional poverty has almost halved between 2005-06 and 2015-16, climbing down to 27.5 per cent from 54.7 per cent. There are 271 million fewer poor people in India." Please note that these are UPA years (2004-14). ( http://www.in.undp.org/content/india/en/home/sustainable-development/successstories/MultiDimesnionalPovertyIndex.html)

Now, what is the Multidimensional Poverty Index? It is developed by the 'United Nations Development Program' and uses different factors to determine poverty going beyond the income-based listing. Which are these factors? Perhaps many, but it drops down to education, healthcare and standard of living. The UPA government passed rights-based laws as per inputs from the Sonia Gandhi-led National Advisory Council. A closer look tells us that these laws provided a safety net which helped us reduce multidimensional poverty, and they were the Right to Education, the Right to Food, the Right to Employment (MGNREGA) and the National Health Mission. When we speak of poverty alleviation, we need to ensure that the family/individual moves out of the poverty trap through access to education, healthcare and income. A doubling in school enrollment at 8th grade from 2004 to 2014 (from 11 million to 22 million, source: ASER 2017) gives us room to assume that a family getting access to income sends its next generation to school.

Now, what has happened in the near-five years of the Modi government? No change in the real wages in agriculture (Source: Economic Survey, Government of India) for the past four years and loss of jobs due to foolish decisions like demonetisation. The result is acute rural distress and a probable push-back of many families below the poverty line! As school enrollments have risen, more people are demanding (and are eligible) for jobs and generating jobs will be the biggest challenge in the coming decade. Add to this the job losses due to automation, and you end up staring at an even more significant problem. Moreover, decisions like demonetisation and a badly-implemented GST have destroyed small and medium-scale industries which are otherwise the job creators. As the country stares at the risk of an increase in the number of its poor, it becomes a priority for the government to ensure that their income rises.

The announcement by Rahul is therefore essential, and if the Congress is voted back to power, 'an assured income' will be an additional safety net to alleviate poverty along with other safety nets of education and healthcare. Moreover, employment could no longer remain an assured safety net in the coming years, as it is already tampered because of loss of jobs due to decisions like demonetisation and GST.

We have to wait for the Congress Party Manifesto to understand the exact nature of this scheme. 


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