QUESTION : Critically evaluate the reasons behind India’s increasing income inequality as far as current scenario is concerned.
WHAT ?
Re-examination of the fundamental economic policies
WHY IN NEWS ?
This article evaluates the current economic policies in India and argues for a change keeping in view both the short and long term needs of the Indian economy
Background:
Income inequality:
- Income inequality is a critical issue plaguing the Indian economy. The prevalent trend indicates that income inequality in India is rising independent of absolute incomes.
THE GINI COEFFICIENT (GC) :
- The GC is indicative of income inequality in India. It is a statistical measure to gauge the rich-poor income or wealth divide.
- The Gini Coefficient for India is estimated to be close to 0.50, which would be an all-time high.
- Its value varies between zero to 1, zero indicating perfect equality and one indicating the perfect inequality.
- A Gini figure below 0.40 is generally considered to be within tolerable limits by economic experts.
- A general rise in the Gini Coefficient indicates that government policies are not inclusive and may be benefiting the rich as much as (or even more than) the poor.
SOME CONSEQUENCES OF INCOME EQUALITY :
- Economic inefficiency: growing inequality is not good for the economic growth of the country
- Rigid social institutions like caste
- Failure of productive jobs for poors and migrants
- Lack of skill development
- A divide between poor and rich
- As Matthews says in Matthew’s Effect – Poor will get more poorer and rich more richer.
3 SOLUTIONS & ISSUES WITH THEM :
1) Freeing up the markets –
- It is suggested that markets should be freed up for agricultural products so that farmers can get higher prices; and freed up for labour to attract investments.
- Without adequate incomes, people cannot be a good market for businesses.
- In fact, it is the inadequate growth of incomes that has caused a slump in investments.
- Ironically, the purpose of freeing up markets for labour is to reduce the burden of wage costs on investors just when wages and the size of markets must be increased.
2) Increasing productivity –
- Productivity is a ratio of an input in the denominator and an output in the numerator.
- The larger the output that is produced with a unit of input, the higher the productivity of the system.
- Improvement of ‘productivity’ is key to economic progress.
- Economists generally use labour productivity as a universal measure of the productivity of an economy.
- Humans are the only ‘appreciating assets’ an enterprise has. They can improve their own abilities.
- The values of machines and buildings depreciate over time, as any accountant knows.
- Whereas human beings develop when they are treated with respect, and are provided with environments to learn.
- For capital-scarce and human resource-abundant countries, such as many developing countries, the correct ratio of productivity is output per unit of capital.
- This must be the driver of business as well as national strategies.
- This was the strategy of ‘Japan Inc.’ to make Japan an industrial powerhouse.
- This was E.F. Schumacher’s insight also.
3) Use of technology –
- Schumacher, best known for his seminal idea ‘small is beautiful’ understood where capitalism powered with technology would be heading.
- In his essay he wrote: “If we define the level of technology in terms of ‘equipment cost per work-place’, we can call the indigenous technology of a typical developing country (symbolically speaking) a £1-technology, while that of the modern West could be called a £1,000-technology.
- The current attempt of the ‘developing ‘countries, supported by foreign aid, to infiltrate the £1,000-technology into their economies inevitably kills off the £1-technolgy at an alarming rate.
- This results in destroying traditional workplaces at a much faster rate than modern workplaces can be created and producing the ‘dual economy’ with its attendant evils of mass unemployment and mass migration.
- Schumacher had warned there was a malaise brewing beneath the drive to ‘Westernise’ and ‘technologise’ economies.
WAY FORWARD – Social contract between society and workers :
- Workers provide the economy with the products and services it needs.
- In return, society and the economy must create conditions whereby workers are treated with dignity and can earn adequate incomes.
- Good jobs require good contracts between workers and their employers.
- Therefore, the government should create a good society for all citizens, must regulate contracts between those who engage people to do work for their enterprises, even in the gig economy.
- Government should push innovation in socially more beneficial directions to augment rather than replace less skilled workers.
CONCLUSION :
The power balance must shift. Small enterprises and workers must combine into larger associations, in new forms, using technology, to tilt reforms towards their needs and their rights.
NOTE : The coronavirus pandemic has dealt a huge blow to India’s middle and low-income groups. This is likely to further widen the wealth gap between India’s rich and poor.
A January 2020 study by rights group Oxfam India suggests that India’s richest 1 per cent hold more than four-times the wealth held by 953 million people who make up for the bottom 70 per cent of the country’s population. The study added that India’s top 10 per cent of the population holds over 74% of the total national wealth.
QUESTION : Elaborate the reasons for the declining financial health of the States in India and implications for the States suggesting ways to deal with this issue.
WHAT ?
Weakening Financial Health of States
WHY IN NEWS ?
The ability of the States to expand revenue has been constrained since the Goods and Services Tax (GST) regime was adopted.
ROLE OF STATES IN DEVELOPMENT :
- State governments drive a majority of the country’s development programmes.
- Greater numbers of people depend on these programmes for their livelihood, development, welfare and security.
- States need resources to deliver these responsibilities and aspirations.
FACTORS RESPONSIBLE FOR DECLINING FISCAL CAPACITY OF THE STATES :
1) Declining devolution to State
- Finance Commissions recommend the share of States in the taxes raised by the Union government and recommendations are normally adhered to.
- The year 2014-15 commenced with a shock: actual devolution was 14% less than the Finance Commission’s projection.
- Between 2014-15 and 2019-20, the States got ₹7,97,549 crore less than what was projected by the Finance Commission.
2) Cess and surcharge
- Various cesses and surcharges levied by the Union government are retained fully by it, they do not go into the divisible pool.
- This allows the Centre to raise revenues, yet not share them with the States.
- Hence, the Union government imposes or increases cesses and surcharges instead of taxes wherever possible and, in some cases, even replaces taxes with cesses and surcharges.
- As a result, the States lose out on their share.
- Between 2014-15 and 2019-20, cesses and surcharges soared from 9.3% to 15% of the gross tax revenue of the Union government.
- This systematic rise ensures that the revenue that is fully retained by the Union government increases at the cost of the revenue that is shared with the States.
- This government has exploited this route to reduce the size of the divisible pool.
3) GST shortfall
- Shortfalls have been persistent and growing from the inception of GST.
- Compensations have been paid from the GST cess revenue.
- GST cesses are levied on luxury or sin goods on top of the GST.
- GST compensation will end with 2021-22. But cesses will continue.
- With the abnormal exception of this year, the years ahead will generate similar or more cess revenue.
- Hence, many States have been insisting outside and inside the GST Council that the Union government should borrow this year’s GST shortfall in full and release it to the States.
- The Union government will not have to pay a rupee of this debt or interest.
- The entire loan can be repaid out of the assured cess revenue that will continue to accrue beyond 2022.
- Of the nearly ₹3 lakh crore GST shortfall to the States, the Centre will only compensate ₹1.8 lakh crore.
- The States will not get the remaining ₹1.2 lakh crore this year.
- In fact, it flies against the need of the hour to revive the economy.
- Governments ought to spend money this year to stimulate demand.
4) Declining grants from the Centre
- Central grants are also likely to drop significantly this year.
- For instance,₹31,570 crore was allocated as annual grants to Karnataka.
- Actual grants may be down to ₹17,372 crore.
IMPLICATIONS FOR THE STATES :
- To overcome such extreme blows to their finances and discharge their welfare and development responsibilities, the States are now forced to resort to colossal borrowings.
- Repayment burden will overwhelm State budgets for several years.
- The fall in funds for development and welfare programmes will adversely impact the livelihoods of crores of Indians.
- The economic growth potential cannot be fully realised.
- Adverse consequences will be felt in per capita income, human resource development and poverty.
- This is a negative sum game.
ABOUT THE FINANCE COMMISSION :
- The Finance Commission is a Constitutional body that is at the centre of fiscal federalism.
- Set up under Article 280 of the Constitution, its core responsibility is to evaluate the state of finances of the Union and State Governments, recommend the sharing of taxes between them, lay down the principles determining the distribution of these taxes among States.
- The Finance Commission has to be reconstituted every five years. The Constitution doesn’t talk about whether it should be continuous or not continuous.
- It is a quasi judicial body.
- Its recommendations are advisory in nature.
The 15th Finance Commission: The interim report of the 15th Finance Commission (FC) under chairmanship of N.K. Singh has been tabled in Parliament this budget session.
- The 15th Finance commission makes recommendations for the period of 2020-2025 (5 years).
WAY FORWARD :
- COOPERATIVE FEDERALISM :
it is important to have provisions for a higher devolution to the state governments in order to fiscally achieve the goals of the nation.
- DECENTRALISED APPROACH :
In fact, all tiers should be fiscally empowered to achieve state-specific targets of fiscal deficit, rather than adopting a top-down approach.
- FUTURE OBLIGATIONS :
Future legislations issued by the New Delhi in relation to states should enact more provisions for cost-sharing to aid them in fulfilling their duties.
- FOCUSSING ON LIBERALISATION :
Liberalizing the financial system, and increase the role of the private sector should reap benefits.
- FUTURE ECONOMIC REFORM :
It must therefore include substantial changes in the system of intergovernmental fiscal relations, with the ultimate objective of substituting market discipline of state finances.
- NO-BAILOUT POLICY : If such a policy lacks credibility, and as a consequence states prove reluctant to push ahead with reforms, there would appear to be no alternative but to rely on tight borrowing restrictions .
CONCLUSION :
States are at the forefront of development and generation of opportunities and growth. Strong States lead to a stronger India. The systematic weakening of States serves neither federalism nor national interest.
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