Christmas celebrates the birth of a child who symbolizes the start of a process of mitigating the suffering of the marginalized. It reminds us of the dawn of a new era. 2,000 years later the suffering of the marginalized persists because of the ambitions and actions of the powerful in society. The day comes and goes. We celebrate the birth but seldom act on what it symbolizes.
To really celebrate the occasion and give meaning to our greetings to each other, we must endeavour to mitigate the suffering of the marginalized. For that, we need to strive to change our thoughts and our actions. The emphasis has to shift from outward to inwards – from mechanically greeting our loved ones and acquaintances to resolving to change our thinking and our actions. This has become more critical in the present fraught times what with wars, increasing number of extreme weather events and growing social strife and atomization.
In the year going by, heart rending scenes from Gaza are a reminder of what has been a reality in many parts of the world – in East and North Africa, West Asia, Ukraine, etc. Destruction is increasing due to extreme weather events in the Himalayas, Kerala and overbuilt urban areas of India, forest fires and unseasonal heat and rains in various parts of the world, melting polar ice cap and the glaciers, etc.. These impact the marginalized, the most vulnerable, the most.
It is for us, the common people, to act to check the unbridled power of the rulers to create wars and destruction, check the power of the military-industrial complex, control our growing consumerism pushed by high powered advertising, check the misuse of the social media to create false narratives, etc. If we begin to act even bit by bit, change will come that will herald a new dawn that Christmas symbolizes and that will give real content to our greetings to each other.
My best wishes this Christmas for change in us and all around
Thursday, December 28, 2023
This Christmas Act to Change for a New Dawn | Arun Kumar
Tuesday, December 12, 2023
COP28 sidesteps real issue of consumption of rich | Arun Kumar (in The Wire)
by Arun Kumar
Reports are that in 2023, there have been times when the global temperature has been higher than 2 degrees Celsius above the pre-industrial level. This level of warming has been flagged as causing irreversible change. Already at the current average annual temperature level of about 1.3 degrees Celsius above pre-industrial levels, the number of extreme weather events has dramatically increased, resulting in growing distress, especially for the poor.
COP28 needed to plan for reversal of average global temperature from its current levels. But this does not seem to be on the agenda. A mitigation fund with paltry contributions has been proposed. The steps being discussed and the urgency required to reverse the rising average temperatures are not visible.
The challenge today is not just global warming but the multi-faceted environmental pollution. Oceans and fresh water bodies are being severely polluted. There is impact on marine life and contaminants (like micro-plastics and chemicals) are entering human food chains. Heavy chemicals and elements are damaging various human organs with consequences for human health and leading to the proliferation of diseases like cancer.
Production, consumption and pollution
Energy is required for the production of goods and services, their distribution and finally for consumption. Different forms of energy are available like electricity, wind power, burning coal, gas and petroleum products. Some are more polluting than others. For instance, burning fossil fuels like coal and diesel pollutes more than wind power or electricity from solar panels. Solar panels directly convert the sun’s rays into electricity while wind and hydro-electricity come indirectly from solar energy. These sources directly produce little or no greenhouse gases. However, production and setting up of solar panels and wind turbines also results in pollution.
Fossil fuels are stored green matter over millions of years and their burning produces greenhouse gases. Since they are easily available, their consumption has risen dramatically over time and that is leading to a massive increase in greenhouse gases in air and global warming. So, one is talking of what is less polluting and which releases the least amount of greenhouse gases.
Currently there are two problems. First, most of the energy is being derived from the wrong kind of sources, which pollute more than others and produce more greenhouse gases. Second, consumption is on the rise, so more energy is required. Consumption is of all kind of goods and services. They have to be produced, transported, distributed, etc. – all of which requires energy.
Further, as production becomes more concentrated, there may be economies of scale but more transportation and distribution are required. It is visible in the long supply chains and distribution networks. So, in spite of greater efficiency due to use of more energy efficient methods of production and transportation, overall energy consumption has continued to increase.
Essential and luxury consumption
Production and distribution is related to consumption by humans for improvement in their welfare. A part of the output is for investment, to enable production to both continue and increase. Another part of consumption is in the form of public goods which are jointly consumed, like army, parks, sewage and public health. So, to address the problem of pollution, one needs to address private consumption, government consumption and investment.
Consumption may also be characterised as essential and inessential. Food, water, clothing and housing are essential for life. Agriculture and livestock rearing which produce food are blamed for much of release of greenhouse gases. Apart from curbing waste in production of food, nothing much can be done about it. Public services are required for a civilised existence of citizens, so here too one can try to provide these more efficiently but these are required.
What can be curbed is inessential and luxury consumption. This has become huge amongst the well-off, government bureaucracy and the corporate sector, and can be curtailed to reduce pollution. Unfortunately, consumption has become the yardstick of standard of living. Vacations, eating out, travel, throwing away usable things, discarding rather than repairing gadgets, etc., have become a part of the practice of the well-off.
Due to the demonstration effect from rich countries, the well-off in the developing world have copied wasteful consumption. The poor and the middle classes in the developing world try to emulate these consumption patterns. Advertising is used by producers to induce more consumption, not only among the well-off but among the less well-off and the poor. They are euphemistically defined as aspirational or those who want to consume more and can be induced to consume more in the future.
Consumerism has become ingrained in life. It stands for consumption for the sake of consumption. Tremendous amount of waste is generated in producing and throwing away things or in fancy packaging, luxury five star living, etc. The poor are not a part of such behaviour.
Skewed consumption pattern
So, who is consuming how much and therefore responsible for how much of the pollution?
The Delhi socio-economic survey of 2018 can be used to get the approximate consumption pattern. Translated to the all-India level, it suggests that 90% of Indian families spent less than Rs 10,000 per month. So, about 120 crore Indians consumed less than Rs 2,000 per month. This gives an annual consumption of less than Rs 28.8 lakh crore. 98% of the families consumed less than Rs 20,000 per month. Assuming an average of Rs 15,000 per month of family expenditure for those between the 90% and 98%, each individual in this bracket was consuming Rs 3,000 per month. Their consumption would be Rs 3.8 lakh crore. This 98% has little spare resources to waste or spend on luxury consumption.
Only 2% of the families in India were rich and consumed the maximum. In 2018-19, national income was about Rs 167 lakh crore. Of this about 58% was private consumption amounting to Rs 96.9 lakh crore. Subtracting the consumption of the 98%, the consumption of the top 2% turns out to be Rs 64.3 lakh crore or Rs 23.8 lakh per person. Their consumption was 66.36% of the total and they are the real polluters because they have the money to spend on luxury items and inessentials. The picture today will not be very different from that in 2018.
The poor in India are also recyclers of a lot of the waste produced by the well-off. So, their net environmental impact is smaller than implied by their consumption. The poor do cut corners and pollute but that is done for survival and not for luxury. Finally, the poor are also forced to produce cheaply for the developed world.
The consumption of the well-off requires a lot of imports of automobiles, electronic items, specialty items, etc. Even when these are produced in the country, a lot of their parts are imported. To balance trade, exports are required. India exports a lot of the low and intermediate technology products like, textiles, leather goods and toys where it faces competition from the other developing world nations. So prices have to be kept low (competitive). This is achieved by sacrificing environmental standards and paying workers low salaries. In other words, the developing world accepts a polluted environment for the sake of the developed world.
COP not discussing the real issue
The 28th Conference of Parties is taking place but the real step required, namely, cutting consumption globally, is not on the agenda. Use of cleaner energy sources will help but it will not be enough.
There is the free rider problem – each nation expects others to take the steps required. The rich nations are blaming India and China for being the big polluters now. The latter blame the rich nations for the historical accumulation of greenhouse gases and is asking them to pay for it and to make available new technologies to reduce production of greenhouse gases. The rich nations are not offering to lower their per capita consumption. They see this as a lowering the standard of living their people. The developing nations like India are not offering to pursue policies that would reduce the consumption of the well-off. They see this as a reduction of their growth rates.
Both the rich and the developing nations are protecting the interest of their corporations and their well-off whose growing consumption leads to higher profits. Both want to persist with growing consumption of their elite, corporate culture and wasteful governments. This shows where the real political power in the World lies – the slogan 1% against the 99% is apt. The cost of deliberate obfuscation falls on the marginalised – whether the poorer nations or the poor in each of the countries.
Conclusion
In brief, climate change and growing pollution are upon us and imposing heavy costs on all. Yet, the political will to take the drastic steps required is missing. The time for taking incremental steps is over. The fear that cutting consumption and production will reduce welfare for the elite and reduce employment is unfounded because these can be achieved by cutting social waste and inessential consumption which will enhance everyone’s well-being by reducing pollution. A study from the SA showed that in 1980, 50% of the production was a waste. For India, in 2006, 25% was a waste.
So, for COP to make progress, the agenda of both the rich nations and the ruling classes of the developing countries has to be cutting wasteful consumption.
Arun Kumar is the author of Understanding Black Economy and Black Money in India.
Wednesday, December 6, 2023
Thursday, November 30, 2023
Income Tax Data Reveals That Increase in Compliance Is Marginal | Arun Kumar
(This article appeared in The Wire on Nov 27, 2023)
The income tax data released recently points to the highly skewed nature of income distribution in the country, with only about 0.68% people paying effective taxes.
Income tax is paid by a minuscule percent of the population. Official data shows that 7.4 crore individuals filed tax returns in FY2022-23 and 6.75 crore in FY2020-21. In this earlier year, there were also 2.1 crore people who did not file a tax return but paid Tax Deducted at Source (TDS). So, in FY2020-21, effectively there were 8.85 crore people in the tax net – which was 6.6% of the population. Since we do not have corresponding data on those not filing tax return but paying TDS for FY 2022-23, we do not yet know the total number of entities in the tax net in 2022-23.
Anyone paying income tax or filing a tax return has to have an income above the income tax exemption limit and therefore has to be among the top income earners in the country. What is their distribution?
The exemption limit for determining tax liability is now Rs 3 lakh but has been Rs 2.5 lakh, with some concessions for senior and super senior citizens. With a standard deduction of Rs 50,000 and rebate under Section 87A, till now an individual did not have to pay any tax up to a taxable income of Rs 5 lakh. Of India’s per capita annual income at current prices of Rs 1,50,007 in 2021-22, this is 333%. From the current financial year, tax will have to be paid at income of above Rs 7.5%, 414% of the likely per capita income of about Rs 1,81,000. So those in the tax net are in the tail of the income distribution.
With so much concession, for FY2020-21, out of 6.76 crore e-returns filed, 4.46 crore paid nil tax (67.3% of the total). The 2.1 crore who did not file a return but paid TDS must have had an income below Rs 2.5 lakh, otherwise they would have had to file a return. Adding these two numbers, effectively, 6.6 crore returns out of a total of 8.85 crore (73.4%) were filed by those with low incomes. 91 lakh (10.3% of those in the tax net) had taxable incomes above Rs 9.5 lakh and who can be called well-off in the Indian context. About 2.15 lakh declared income above Rs 1 crore and maybe characterised as wealthy.
In brief, people in top rung of the income ladder in the country were those who were in the income tax net (6.6% of the population) even if they did not pay income tax. Out of these, only 0.68% of the population were the really well off who effectively paid income tax. Further, 0.016% declared an income above Rs 1 crore and had a share of 38.6% of the taxable income.
Caveats
This picture of the well-off, characterised by those who effectively pay income tax, is incomplete. Two additional factors need to be taken into account. First, the rich families split up their incomes. This enables them to take advantage of concessions on each of the returns filed and each of the incomes may then fall in the lower income bracket on which a lower tax rate may apply. Second, the well-off resort to black income generation by not declaring their true income.
The first point implies that the 0.68% people who paid significant amounts of income tax belong to an even smaller percent of the families. So, the actual family income of the well-off is much higher. Since the poor face unemployment, under employment and joblessness, their family income is not much higher than what a poor individual earns. The implication is that the gap in family incomes between the well-off and the poor would turn out to be much larger than gap in incomes shown by the data on individuals paying tax.
Further, black incomes are generated by the well-off, who have substantial incomes. Those who have an income below the taxable limit don’t need to hide their income. They do not have to file a return or declare their income to the tax authorities. Those who have a taxable income of, say, up to Rs 9.5 lakh, need pay only a few percent of it as tax, if they take advantage of deductions under 80C, 80D, 80TTA, etc. So they will hardly benefit from hiding their income and will not be generators of black incomes.
It is the well-off, especially businessmen and professionals who declare a lower income to tax authorities so as to pay a smaller portion of their income as tax. Some of them completely escape the tax net by not filing a return or by showing an income below the taxable limit.
All these factors lead to the official data underestimating the skewedness of income distribution in the economy.
Has compliance increased
The organised sector has higher incomes and contributes most to direct taxes. It produces 55% of the GDP. Its share of GDP would have risen during the pandemic, which disproportionately hit the unorganised sector. The GDP was Rs 1,98,00,914 crore in FY 2020-21, the Covid year. So, Rs 1,08,90,000 crore should have been captured in the tax net from the organised sector. Some more should have come from the few well-off businesses in the unorganised sector.
Detailed data for FY 2020-21 shows that the taxable income declared by all return filers was Rs 69,59,552.48 crore. This is about 35.15% of the GDP and about 63.9% of what should have been shown as declared incomes by the organised sector. On this declared income, the tax collected was Rs 9,47,176 crore. The tax to GDP ratio was a very low 4.78%. If black income generation were taken into account, it would be even lower.
In FY2021-22, GDP recovered from its low during the pandemic, and became Rs 2,36,64,637 crore. The direct tax collection increased to Rs 14,12,422 crore, so that the direct tax to GDP ratio rose to 5.97%. In 2018-19, this figure was even higher at 6.02%. But, even this figure is low compared to many developing economies.
The government claims that more and more people are filing tax returns and presents this as an indication of better tax compliance and a reduction in the black economy. According to the data just released, the number of people paying direct taxes has risen from 7,42,49,558 in FY2016-17 to 9,37,76,869 in FY2021-22. This is impressive, but the catch is that most of the people entering the tax net declare nil income or a low income, as pointed out above.
A reduction in black income generation would have meant that many more of the individuals with high incomes would have come into the tax net, and the direct tax to GDP ratio should have risen sharply instead of hovering between 5.5% and 6% since 2014-15.
The increase in the number of tax returns is due to the constancy of the income at which a tax return needs to be filed remaining unchanged at Rs 2.5 lakh, while incomes have risen due to inflation. The per capita net national income, which tells us how much an average citizen is earning, is 30.1% higher in 2022-23 than it was in 2019-20.
Thus, someone with an income of Rs 2 lakh in FY2019-20, pre pandemic, would be earning Rs 2.6 lakh in FY2022-23. In 2019-20, she would not have had to file a tax return while in 2022-23 she would have to file a return. Thus, the number of tax return filers would automatically rise. But the tax they pay would not rise, so their entry into the tax net does not impact the tax to GDP ratio.
Conclusion
The income tax data released recently points to the highly skewed nature of income distribution in the country with only about 0.68% people paying effective taxes. The percentage of families they belong to would be even smaller. If tax manipulations by the wealthy and black income generation are taken into account, then the income distribution becomes even more skewed. Finally, the increase in the number of tax filers is due to inflation but this has hardly led to an increase in the direct tax to GDP ratio since most new entrants in the tax net file either nil return or are exempt from tax. So, tax compliance in the country has hardly changed.
Arun Kumar is the author of Understanding Black Economy and Black Money in India.
Sunday, November 26, 2023
Critics are priceless and not unreasonable | Arun Kumar
(Published earlier in The Leaflet, November 26, 2023)
A brief but powerful meditation on the politics of reasonableness and unreason.IS it not reasonable to expect reasonableness in discourse?
A doctor friend set me thinking when she commented that such and such person is reasonable. In TV debates, after a critical comment, the anchor often asks the panelist, is there one thing that the policy maker has done right? In heated conversations, often it is said: be balanced— which is similar to saying be reasonable.
What does it mean to be reasonable? The dictionary meaning is ‘in accordance with reason’ or ‘moderate’. But aren’t these subjective categories? What is ‘in accordance’ with reason or ‘moderate’ is not agreed to by all in society.
Often, it depends on the individual’s situation in society or on society’s stage of development and the dominant discourse set by the ruling elite. Here, the focus is on the economic aspects but this analysis could also be extended to social and political aspects.
System’s idea of reasonableness
In a feudal society, the landlord holds the land and extracts rent from the farmers. Being reasonable might mean not being too exploitative lest it leave the farmers destitute.
Even if moderate, exploitation persists. In this system, any talk of eliminating landlords and giving land to the tillers would be considered unreasonable. But, with the advent of capitalism, (Adam) Smith and (David) Ricardo characterised landlords as wasteful and argued for ending their dominance. Were they being unreasonable? In the old framework, yes, but not in the evolving framework.
What does it mean to be reasonable? The dictionary meaning is ‘in accordance with reason’ or ‘moderate’. But aren’t these subjective categories? What is ‘in accordance’ with reason or ‘moderate’ is not agreed to by all in society.
Capitalism is even more wasteful than feudalism. Enormous waste is generated by consumerism deliberately promoted by advertisements and the example set by the corporate culture and government. The result is environmental damage, climate change and extreme weather events. But, would the ruling elite accept this as a reason to eliminate capitalism and go for, say, a Gandhian alternative? Undoubtedly much needs to be fleshed out about such an alternative, especially, given the technological changes that have occurred since M.K. Gandhi’s time.
Also read: How viable is Gandhi’s village today?
Talk of a Gandhian alternative to create a better world is considered unreasonable by the current ruling elite. They are already well off and not sure that in the new world their privileges will survive.
So, in their self-interest, they are status quoist and would characterise talk of alternatives as not only utopian but unreasonable. Clearly, reasonableness is associated with individual and class interest and not societal interest.
Gandhi in Hind Swaraj critiqued British parliamentary democracy. He argued that political parties work for narrow interests and not for society as a whole. He argued that leaders work for their self-interest and the PM for the narrow interest of his backers.
Further, the members of Parliament do not have the freedom to represent public interest since they have to follow the party whip. So, politics is all about exercising power to serve the interests of the financiers of the party. This is visible in post-Independence India where politics is controlled by black money and vested interests.
So, the current ruling dispensation would characterise Gandhi as unreasonable. But not openly. He was striking at their interests. He was asking people to reject the present set of rulers— not through violence since he believed in non-violence. He propagated change through making people conscious about who they should choose as their representatives. In today’s circumstances, this would even be termed as seditious.
Individual’s idea of reasonableness
The ruling elite identify with the existing system since that has given them privileges that they may lose in an alternative. Thus, they would term any major change as unreasonable and would work against it.
Since the elite set the public discourse, critics of the system are in a minority and overwhelmed by the dominant narrative. It requires courage for critics to stand against the tide since they have to pay a price for their defiance.
Also read: GDP growth: The gap between reality and rhetoric
But workers in a capitalist system would not consider the critique to be reasonable? For workers, there is a daily struggle for survival while for the well-off, the goal would be to preserve and advance their gains.
Because of low wages, the elite can afford servants, drivers, gardeners and office peons. Life is comfortable. For the workers, a higher salary or wage is essential to improve the prospects of their family. This proposition is not unreasonable for workers but the elite would consider this as unreasonable. But the workers do not set the agenda of the public debate and get marginalised and so do the critics.
In a feudal society, the landlord holds the land and extracts rent from the farmers. Being reasonable might mean not being too exploitative lest it leave the farmers destitute.
In brief, the individual’s viewpoint on reasonableness depends on her situation in society. Some members of the elite may accept the need for an alternative but such critics of the establishment comprise a tiny minority and are branded as unreasonable by the ruling elite.
Critics of policy
Should not the policies that sustain rapacious capitalism and lead to growing inequalities be critiqued? Can this be termed as unreasonable? In public debates, the critics are often asked, is there not something right that is being done by a policy?
A trick question that sidesteps the important time dimension. Namely, over what time frame is the policy under discussion being analysed? While in the short-run, a policy may appear to be necessary, but over the long-run, they may lead to growing problems, like environmental decline and growing inequality.
The role of policy is to make things better. Even if the government does not do much, the economy has its own momentum. Technology is changing and new and better products become available.
Automatically, there will be transition from typewriters to word processing and landlines to mobile phones. The role of policy should be to optimise change, enhance people’s welfare and resolve society’s problems.
By definition, governments justify their actions. Using selective data, they present their policies in a positive light and downplay the negatives. A phalanx of media, politicians and favoured experts rise to reinforce the government’s views. The government spends enormous resources to create a climate of acceptability in society.
Also read: Technological challenges to becoming a developed country by 2047
In contrast, critics who point to alternative facts or faulty official methodology and hold a mirror to the policy makers are branded as unreasonable.
Since the elite set the public discourse, critics of the system are in a minority and overwhelmed by the dominant narrative. It requires courage for critics to stand against the tide since they have to pay a price for their defiance.
What is needed is data-based critique of policy pointing to its long term consequences for society. This has to be theoretical since it is about the future for which data has not been generated yet. Only projections from the past are possible.
Hence, one is talking of a hypothetical change. A critique then helps devise better policies or prevent society from going astray. After all, many ‘solutions’ proposed by policy makers from which some sections gain materially have turned out to be ‘non-solutions’ leading to growing social problems.
Consider the completely misconceived policies of demonetisation and Goods and Sales Tax (GST). The problems these policies have led to in the long-term were ignored for short-run considerations. In the short-run they seemed to be rational and reasonable to the ruling elite but critics pointed to the problems that will follow in the long-run. Were they unreasonable?
Conclusion
In brief, calling something unreasonable is relative to one’s position in the system and is often determined by the self-interest of the ruling elites. In spite of all the ‘social progress’ since Gandhi’s times, we now recall what Gandhi cautioned us about and the alternative he proposed is becoming more relevant.
Society needs critics who look at the long-term perspective since they point to the pitfalls and the correctives required. There are perks for being with the system so it is costly. But critics come for free— they are priceless.
Society needs critics who look at the long-term perspective since they point to the pitfalls and the correctives required. There are perks for being with the system so it is costly. But critics come for free— they are priceless.
Tuesday, November 14, 2023
MSMEs in India: Nation’s Progress Depends on Them | Arun Kumar
Published in ’Communique’ Pp.35-39 Annual. September 2023. (Magazine of Apex Chamber of Commerce and Industries of NCT Delhi) also reproduced in Mainstream Weekly (November 11 & November 18, 2023)
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Introduction: Diverse Economy
Indian economy is the most diverse in the world. The usual sectors primary, secondary and tertiary are there but these are further sub-divided between public and private and organized and unorganized sectors. The primary, secondary and tertiary sectors are further sub divided into agriculture, manufacturing, finance and so on. So, there are roughly 27 sectors to contend with.
Beyond these sub-divisions there are the large, medium, small and the micro sectors in non-agriculture sector. In agriculture there are the large, medium, marginal farms and the landless. The technologies they use and the productivity they have are also vastly different so that the incomes differ widely across sectors. The divides are also between the rural and urban areas and backward and advanced states.
The largest sector in GDP is the tertiary sector, then the secondary and lastly the primary sector. Agriculture provides 46% of the employment but only contributes 14% of the GDP. Since it is largely in rural areas, they have a much lower income than the urban areas. Unorganized sector of which agriculture is an important part employs 94% of the work force but contributes 45% to the GDP. Thus, incomes here are very low compared to the organized sector where 6% of the workers work and produce 55% of the output.
Agriculture has a large amount of disguised unemployment since work on the farm is declining with mechanization in agriculture. More use of tractors, harvester combines and threshers are displacing labour. Such labour has nowhere to go since non-farm employment is not available. Unorganized sector in non-agriculture is often a residual sector because those who do not find work resort to some kind of self-employment to sustain their family.
Unorganized Sector: Issues
The share of employment in the unorganized sector has hardly changed in the last 30 years. This is a result of the increasing mechanization and automation in the modern organized sectors. While most of the investment goes there, it generates little work. So, people remain stuck in the unorganized sector. In this sector to, while investment is low it is also mechanizing, like, in agriculture. So, employment generation here is also inadequate.
The unorganized sector consists of the small and the micro sectors. The average employment in a micro sector unit is 1.7 workers. In agriculture every small farm (below 5 hectares) has the entire household involved. Consequently, there are no scale economies and they mostly depend on low technology, resulting in low productivity. They also do not have the wherewithal to upgrade technology. They also lack marketing and finance. Often, they have to borrow at high interest rates from the informal money markets. The result is high costs and low profits. To increase profits, they have to squeeze wages.
The unorganized sector producers supplying to the large and medium
scale businesses do not pay them in time and squeeze the sector,
resulting in working capital shortage. It could ultimately lead to
closure of the unit.
In brief, the unorganized sector constitutes a low profit and low wage
island in the economy. Due to the low per capita income, they consume
very little. This reduces demand in the economy. The impact is
substantial since it employs the vast majority. That slows down the
economic growth.
Role of Education and R&D
Imports from China are impacting the market for both the organized and the unorganized sectors. This is because the Chinese are able to produce at scale and their labour is highly productive so that they are able to produce cheaply. Not only are they producing high technology goods like APIs but also India’s cultural symbols, like Ganesh statues and Diwali lights.
Technological up gradation and entrepreneurship depend on the quality of education. The vast majority of children get poor education. This is testified to by the ASER reports since 2005. Many businesses say that youth is unemployable. According to NHFS-5 literacy has risen in the country to about 80%. Most children are in school but teaching and infrastructure are poor so that very few enter higher education and its quality is found wanting. The definition of literacy needs to be changed to `capacity to absorb modern technology’ and not just ability to read and write.
R&D is not only weak, investment in it is small by world standards. Consequently, we mostly import technology. That further sets back R&D in the country. It leads to a) inability to absorb modern technology, b) innovate, c) weak entrepreneurship and d) lack of employment. There is also `Jugad’ and poor quality production.
Mechanization and Artificial Intelligence are already posing a challenge to the unorganized sector. Due to their small scale of operations, they cannot afford to adopt it even if they had the skill to do so. This challenge is only going to grow in the coming years and one needs to prepare for it from now.
Policies
Of late, this sector has been hurt by policies. First, demonetization in 2016, then structurally faulty GST in 2017, NBFC crisis in 2018 and the sudden lockdown in 2020. Each of them damaged the unorganized sector while favouring the organized sector. It has not recovered from these shocks. Unfortunately, this decline in the contribution of this sector to GDP is not measured. It is assumed fallaciously that the unorganized sector is growing at the same rate as the organized sector. That may have been true prior to the shocks but not after that. The methodology of measurement of GDP needed to be changed but it has not happened. The result is that the contribution of the unorganized sector is overstated.
Since GDP growth is overstated it looks good. Consequently, the government has not taken special steps to boost the unorganized sector. The result is that this sector is marginalized in data and therefore in policy. Not only this, Government’s focus in on boosting big industry and businesses. That shows in the rise in stock markets which have become the barometer of the health of the economy. The unorganized sector is not represented in the stock market which consists of only a few thousand companies. The unorganized sector has 6 crore entities.
As demand shifts from the unorganized to the organized sector, it is like colonization by the organized sector. The result is the narrowing of the base of the economy’s growth. Consumption and private investment slow down. The economy then gets dependent on the other two engines of growth – net exports and public expenditures. These two helped in achieving high growth between 2003 and 2008. After that there is has see-sawed due incorrect policies.
Consequences of Neglect of Unorganized
The growth of the organized sector at the expense of the unorganized sector has huge consequences. Because the latter employs 94% of the workers, its decline has led to growing unemployment. Even before the pandemic, official data showed that unemployment had reached a 45 year high. Labour force participation rate is abysmally low. 190 million individuals in the relevant age group have stopped looking for work. The position of women and educated youth is particularly worrisome.
Consequence can also be seen in the dramatic rise in inequality in the economy with a large number of billionaires in a poor country. India is at 139 position in the world rankings of per capita income. The result is economic, social and political instability which spoils the investment climate. The government argues that the UN, IMF and Moody’s also certify that the economy is doing well. But these are not data gathering agencies. Their analysis is based on the official data and they replicate the errors in the official data.
Reforms required
The above points to the linkage between the various problems facing the economy and the decline in the unorganized sector. Most of these problems are policy induced. So, there is urgent need to change policies and support the unorganized sector. Currently policy is promoting the organized sector and doing little for the unorganized sector.
There is need to support the unorganized sector by promoting access to finance, technology and marketing. Cooperatives need to be formed to enable this to happen. Government’s steps in this direction are rather inadequate. Expenditures on education and R&D need to be sharply increased. GST is a last point tax. So, it should be collected at the last point only and not at each intermediate point of production and distribution. That will simplify the tax without causing any loss of revenue. As Arun Jaitley used to say 5% of the units pay 95% of the GST. The complications associated with ITC, e-way bill and so on will then get eliminated, business climate in the country would improve and the unorganized sector will revive.
(Author: Arun Kumar, is a retired Professor of Economics, JNU, New Delhi, and is the author of ’Ground Scorching Tax’. 2019)
Thursday, November 9, 2023
Four Videos in Hindi on -- Economy & unorganised sector, Indian Agriculture, Demonetisation & Politics
1. Video in Hindi on Issue of the state of the economy with reference to the unorganized sector.
https://youtu.be/5HIOr7gW0RE?si=nYWf_dbgSmAazxej
2. Video in Hindi on the problems of Indian agriculture and Reforms needed.
https://youtu.be/rUeTt1IuF0U?si=FdPsOFHkpfNq4n6Z
3. Video in Hindi on Policy Induced Crisis - demonetization and GST. And, Is population a burden?
https://youtu.be/LFz9npG9ZVw?si=W26P83CgK0UPP3hP
4. Video in Hindi on why Freebies are a result of loss of credibility of politicians and parties.
https://youtu.be/qAJjCJ2Bu8k?si=U7lbPD9VBKXjzFrX
Wednesday, October 25, 2023
Links to articles, discussions and interviews by Arun Kumar from July to September 2023
links to select recent articles, discussions and interviews after three months.
1. Challenges of becoming a developed economy by 1947. In the Leaflet Sept 17. It is at: https://theleaflet.in/technological-challenges-to-becoming-a-developed-country-by-2047/
2. Interview on India’s economic performance. Channel 4 PM September 17. It is at: https://youtu.be/j_ieEocgqzE
3. Interview on G20 outcome failure and Indian Economy. It is at Jeevansathi.com Sept 15. It is at: https://youtu.be/Ms3ITm1ypdo?si=wSyXvWmshRDdWJ3I
4. G20 serving the interest of the Global landlords. In the Wire Sept 14. It is at: https://thewire.in/world/g20s-new-delhi-declaration-serving-the-interest-of-the-global-landlords
5. Talk on `Adani Scandal - PM silence’. Organized by SundarayyaVignana Kendram. Sept 5, 2023. It is at: https://fb.watch/nr_kCJTdKX/?mibextid=RUbZ1f
6. GDP `discrepancies’ explained. Two articles
a. In News9live on Sept 3. It is at: https://www.news9live.com/opinion-blogs/decoding-the-significance-of-7-8-gdp-growth-for-indian-economy-expert-speaks-2270756
b. In the Wire on September 5. https://thewire.in/economy/understanding-gdp-growth-through-discrepancies-and-why-the-major-push-is-not-visible
7. Discussion on likely further revelations on Adani affair. On HindiSatya.com. August 25, 2023. It is at: https://www.google.com/search?sca_esv=569887179&tbm=vid&q=Hindi+Satya.com+With+Mukesh+Kumar+on+Adani+affair&sa=X&ved=2ahUKEwjr9uPixtWBAxWjS2wGHdZcC9sQ8ccDegQIDRAH&biw=1024&bih=710&dpr=1.25#fpstate=ive&vld=cid:4bc75314,vid:r4NglZUPOB8,st:0
8. Discussion on de-dollarization and the Emerging World Order with Air Marshal Matheswaran. Organized by the Peninsula Foundation. August 22, 2023. It is at: https://youtu.be/Fsrnh1QCyXM?si=K273Tfi74svjVZqQ
9. The truth of the official claims: Data is incorrect. In the Wire on August 18, 2023. It is at: https://thewire.in/economy/the-hollowness-of-modi-governments-tall-claims-and-self-praise-on-economy
10. What should G20 agenda should be from people’s perspective?. Talk at the Conference titled We20: People’s Summit on G20 in New Delhi. August 18. It is at: https://wgonifis.net/2023/08/18/economists-social-movements-political-leaders-give-clarion-call-to-stand-up-to-the-anti-people-policies-of-g20/
11. In Hindi How can India become 3rd largest economy soon? In the Hindustan. August 17, 2023. It is at: https://www.livehindustan.com/blog/latest-blog/story-hindustan-opinion-column-17-august-2023-8583185.html
12. Discussion on Hurdles to Becoming an Economic Superpower. Mint. August 16. It is at: https://www.youtube.com/live/YnF2N7FBORM?feature=share
13. In Hindi. What is wrong with Economic Policies? Analysis of the PM’s Address on Independence Day. ABP, Uncut. August 15. It is at: https://youtu.be/cj_eMbD71T4
14. In Hindi. Mood of the Nation: Economic Aspect. Public India August 12. It is at: (From 1 hour onward). https://www.youtube.com/watch?v=P2z7O4tjMOQ
15. Panel discussion on release of Neerja’s book, `How Prime Minister’s Decide’. August 8. It is at: https://youtube.com/live/BgFG-cfmLUs?feature=share
16. Reduction in Multi-dimensional Poverty in India: Is it for real? In the Leaflet, August 6, 2023. It is at: https://theleaflet.in/is-the-decline-in-multidimensional-poverty-in-india-real/
17.Minimum Guarantee Bill of Rajasthan Govt. – an Analysis. In the Wire, August 5, 2023. It is at: https://thewire.in/rights/rajasthan-minimum-guaranteed-income-bill-intent-marginalisation
18. India for Democracy Conclave. Talk on economic inequality and other aspects. August 4. It is at: https://youtube.com/live/GyZxHbYrdmw?feature=share
19. In Hindi. Why India will not the 3rd largest economy anytime soon. Article in the Print on the 28th July and interview in The Public on 27th July. It is at:
a. https://youtu.be/yCDD2k6GTHg
20. Long article on ‘Intricacies of GST’ and why it has not fulfilled its promises. In Mainstream, July 29. It is at: http://www.mainstreamweekly.net/article13636.html
21. Development gone rogue – Underlying causes of high floods in Delhi. In the Wire, July 20. It is at: https://thewire.in/environment/development-rogue-flood-delhi
22. Why 28% tax on Online Gaming is justified. At News9live, July 12. It is at: https://www.news9live.com/deep-dive/imposing-28-gst-on-online-gaming-will-not-lead-to-the-collapse-of-the-industry-expert-opines-2210136
23. Interview on technology from US under the Indo-US Accord during PM’s visit. The Public on July 2, 2023. It is at: https://www.youtube.com/watch?v=ZXHVv-uPHsM
24. Assessing Impact of Six Years of GST. In the Leaflet. July 1, 2023. It is at:
https://theleaflet.in/a-taxing-tale-assessing-the-impact-of-six-years-of-gst/
25. Long Article: Modi Rule vs Nehru’s Era: Comparing the Incomparable. In Mainstream. July 1. It is at: http://www.mainstreamweekly.net/article13565.html
26. How much employment needs to be generated in India? In the Hindu. June 29. It is at:https://www.thehindu.com/data/data-how-much-employment-generation-does-the-economy-need/article67030514.ece
27. Asymmetric technology relation between India and US and what it tells about our R&D. In the Wire. June 28. It is at: https://thewire.in/tech/indias-weak-r-and-d-culture-behind-asymmetric-indo-us-deal.
28. Brief talk on decoding current inflation. At Lallantop. June 28. It is at: https://www.youtube.com/watch?v=vs8RhVOyF_4
29. Interview on Rich Indians leaving India and Broader Issues at HW News. June 20. It is at: https://youtu.be//SutPv0MCCuQ
30. Short Interview in Hindi on why rich Indians are leaving the Country in large numbers. In the Wire, June 17. It is at: https://youtu.be/CJPllYj8vtk
31. Article on Why PLI scheme is sub-optimal. In the Wire. June 16, 2023. It is at: https://thewire.in/government/pli-scheme-subsidies-demand-shortage-jobs
32. Panel discussion in Hindi on India’s federal structure being damaged. It is at News Time, June 16. At https://www.youtube.com/live/k9nisfsVw7Q?feature=share
33. Article in Hindi on strengthening Indo-US relations. Hindustan June 15, 2023. It is at: https://www.livehindustan.com/blog/latest-blog/story-hindustan-opinion-column-15-june-2023-8305724.html
Monday, January 30, 2023
Electoral bonds: No solution to illegal political funding | Arun Kumar (Jan 30, 2023, The Leaflet)
Electoral bonds: No solution to illegal political funding
How do donations via electoral bonds funded by legal or illegal money help curb undue influence on policy makers? Electoral bonds provide an additional of such funds.
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THE Union Government initiated the Electoral Bonds scheme, which was announced in the Union Budget 2017–18, on January 2, 2018. The aim was “to cleanse the system of political funding in the country”. While many other issues are also germane, the moot question is will this goal be achieved.
These are bearer bonds that private entities can buy from a designated bank (presently the State Bank of India) and donate them to a political party. They are supposedly an anonymous way of donating funds to political parties, since the identity of the donor is not disclosed. The bonds become available around the time of elections, presumably to provide ‘legitimate’ funds to political parties.
Data shows that most of the funds go to the ruling party and help them consolidate their hold over power.
The scheme
To maintain anonymity of donations, the income tax department cannot investigate the donations, the Election Commission cannot ask for their details, and the public will not know who is donating. The then Election Commission was not in favour of such non-transparency. The Reserve Bank of India did not approve of such a scheme. In fact, neither of the two were consulted prior to the announcement of the scheme. In the Parliament, the Finance Minister had mentioned that people wanted anonymity but when asked through the Right to Information Act who these people were, there was no response.
Given the opacity of the bonds (for the public), a quid pro quo is possible between the ruling party and the donor for favours bestowed. In effect, it can be a bribe in white.
While the public and the Election Commission cannot find out who is donating to whom, the party in power can access this information. The bank issuing the bonds has a record of the entity donating and the party encashing the bond. Given that the bank managements are largely under the control of the Union Ministry of Finance, the information can be accessed by the ruling party.
Further, given the opacity of the bonds (for the public), a quid pro quo is possible between the ruling party and the donor for favours bestowed. In effect, it can be a bribe in white. Since there will be no investigation, the donated money could be illegal.
Given these asymmetries and the opacity, public spirited entities went to court against the scheme in 2018. Since then, the matter has been sub judice. The Supreme Court, in its wisdom, has refused to grant an interim stay on the scheme.
Black money in elections
To fight Indian elections, whether for local bodies or state or national legislatures, much illegal funds are used. In a survey of 14 successful Parliamentarians in the 1998 Lok Sabha Elections, this author found that the average expenditure was eight times the allowed expenditure. This multiple has increased over time. The Parliamentarians interviewed added that the donors expected favours from them if they won.
Since any expenditure above the election expenditure limit is illegal, it has to be surreptitious. It cannot enter into the book of accounts, and has to be from illegal sources/black incomes. The Election Commission’s checking during elections has made little dent.
The quid pro quo results in subversion of policies and marginalisation of the common voters, who usually receive a bribe to vote for certain candidates. However, what the voters get at the time of elections is peanuts compared to their loss when policies are subverted against them. In contrast, the vested interests funding the candidates make a multiple of their illegal donation. It is the best investment for businesses since they get favourable policies, contracts, and protection from prosecution for wrong doing, among other things.
Clearly, the welfare of the nation and the common people requires freeing the politicians running the government from the influence of the black economy. How do donations via electoral bonds funded by legal or illegal money help curb undue influence on policy makers? The bonds provide an additional of such funds.
Why the bonds?
Can the use of Electoral Bonds serve the larger purpose of curbing black income generation in the country? A couple of lakh crore rupees are used in various elections in a five year cycle – about Rs. 40,000 crores per annum. Of the current Gross Domestic Product (GDP) of about Rs. 270 lakh crores, it comes to 0.15 per cent. The electoral bonds of a few thousand crore rupees issued annually are an even smaller percentage, both of the GDP and of the black economy. Since electoral bonds are only an addition, they cannot be the solution to the problem of use of black incomes in elections.
Election expenditures over and above the election limits have to be via illegal funds. The electoral bonds can neither be used to fill this need nor do they accrue to the individual candidates, so the need for illegal funds does not disappear.
Auditing of accounts of political parties can hardly stop the use of black incomes in elections. Companies’ accounts are audited, yet they generate black incomes through various means. Political parties also adopt the same devices to hide the actual sums surreptitiously received. Thus, even if the electoral bonds are based on legitimate funds, they cannot prevent the use of illegal funds raised by political parties.
Crucially, election expenditure limits are applied to the candidates and not political parties. The Electoral bonds can only be donated to political parties and not individual candidates. So, the individual candidate’s huge expenditures over and above the election expenditure limit has to be met through illegal funds. The winning candidates will have to continue to honour the quid pro quo and illegality will persist – bonds or no bonds.
Also read: Electoral Bonds: How compromised is our democracy
What makes Indian elections expensive?
The rich who donate substantial sums to politicians and parties do so in black since they do not want their name to be up front. They donate to all parties but don’t want the ruling party to know this. The political parties also do not want the public to know which businessmen are obliging them since in a poor country that could tarnish their image. Why do candidates need so much money to fight elections?
Electoral democracy has come to India when feudal consciousness persists. People vote for a variety of reasons, and not just on the basis of the candidate’s performance in the constituency. Often, people vote for candidates of their caste and community, however corrupt they may be. They expect this person to do their right or wrong work. Nowadays, work, whether right or wrong, requires pull. Often, bullies get elected because they can deliver. People say that they do not want to waste their vote, irrespective of the performance or the honesty of the candidates.
Seldom do NGO leaders who help people in myriad ways win elections. At times, candidates who do not even belong to a constituency win because of their equations within the constituency. Clearly, the public is looking for something other than performance when voting.
Candidates try to demonstrate to the people in their constituency that they have clout and can deliver. To show clout, big rallies, road shows, posters, cut-outs, flooding of social media, maintenance of vote banks, and so on are required. Cash and gifts are distributed just before Election Day. All these require a lot of funds.
Delhi Chief Minister Arvind Kejriwal has advised people to take gifts from political parties, but vote for his Aam Aadmi Party’s supposedly honest candidates, but this did not succeed because of the prevailing feudal consciousness: ‘namak khaya hai’.
Electoral bonds cannot achieve their ostensible goal
Indian elections have become expensive since feudal consciousness prevails in society and voting is seldom based on the performance of candidates. So, elections become expensive. Election expenditures over and above the election limits have to be via illegal funds. The electoral bonds can neither be used to fill this need nor do they accrue to the individual candidates, so the need for illegal funds does not disappear.
For political parties, the bonds give additional funds over and above what they collect illegally. Auditing of party accounts cannot help since that is only of the declared funds. Thus, the electoral bonds scheme cannot succeed in cleansing political funding.