Tuesday, March 5, 2024
Wednesday, February 28, 2024
On Electoral bonds, black and elections | Arun Kumar
Black economy persists with or without electoral bonds
India’s democratic model needs an overhaul so that elections are not an expensive affair. Only that can create a more just, transparent and efficient system, argues Prof. Arun Kumar.
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THE electoral bonds scheme has been declared unconstitutional. Various legislative and administrative amendments, implemented to facilitate the scheme, have also been declared unconstitutional. This is a victory for those opposing this scheme.
The government’s argument that the scheme was needed to help reduce the use of black money in elections has not been accepted on grounds of proportionality. The right to privacy of the donors has been held to be less important than the citizens’ right to information about the candidate for whom they were voting.
This is a rare judgment in the last few years that has gone against the establishment’s view. Judgments such as those on Aadhar, demonetisation and Article 370 sided with the establishment’s view even though the court did raise probing questions during the hearings.
Be that as it may, the electoral bonds case was of little consequence for the ruling establishment, even though it has huge significance for transparency and for conducting fair elections.
The government’s argument that the scheme was needed to help reduce the use of black money in elections has not been accepted on grounds of proportionality.
The court has ordered the revelation of names of the recipients and donors— which entity paid and which party received.
Since a vast majority of the bonds were of denomination ₹1 crore and above, these were bought by the rich to donate to their preferred party. The suspicion has been that these payments were bribes in white, to get favours.
There were donations to the opposition parties also but that is an investment in the future, in case a party comes to power. Even if it does not come to power, donations could ensure that the opposition raises inconvenient questions of the government.
The Order to reveal the names is likely to be resisted. An appeal against this could be filed. Attempts will be made to connect donations to the ruling party with favours granted. Donations to the opposition parties that are in power in one state or the other can also be so branded.
But, the ruling party at the Union level is the one that can grant big favours and it has received the vast majority of the bonds. How does all this link up to black money?
Elections and black money
In India, huge sums of money are spent on fighting elections. These are way above the election expenditure limits set by the Election Commission of India (ECI), hence illegal.
If these are declared by the candidates, their election will be annulled. So all expenses above the election expenditure limit have to be funded illegally— by black funds.
Election expenditure limits are now ₹95 lakh and ₹70 lakh for a parliamentary constituency and ₹40 lakh and ₹28 lakh for assembly elections. Actual election expenditures are unofficially reported to be around ₹40 crore for a parliamentary constituency and ₹6 crore for an assembly constituency. The actual numbers for a parliamentary and assembly election are respectively 40 and 15 times the allowed limit.
The court has ordered the revelation of names of the recipients and donors— which entity paid and which party received.
The reason for the high expense by candidates is the need for high-power campaigns to overwhelm the citizens to stand a chance to win. Expenses are on maintaining vote banks, bribing voters in cash and kind, hiring workers and musclemen, paying for crowds for rallies and meetings, spending on cutouts and posters, paying media for coverage, etc., and disrupting the opponents’ campaign. These are all substitutes for a lack of adequate attention to constituencies.
Effectively, the expenditure of large sums in elections reflects the weakness of Indian democracy. The public votes for reasons other than the hard work and honesty of candidates.
Instead, candidates have to entice the voters with bribes of various kinds. Also, India is largely feudal, so the public is guided either by those in authority or by emotional issues and not by individual self-interest.
Finally, issues have become complex and the public’s understanding is minimal, which also prevents questioning of authorities. Many can be heard saying, ‘Voting for a losing candidate is wasting the vote.’
The consideration is not a better representation but who appears to be more likely to win irrespective of what they stand for.
Electoral bonds and black money
Electoral bonds were donated to a political party and not a candidate. So the money went to the party. Since there is no limit on expenditure by a political party, it can get all it needs in white and spend it.
If a part of the donation was given to the candidates then the expenditure would be reduced to come under the ceiling set by the law. So the parties did not need to give the money raised through electoral bonds to the candidates and instead could spend it entirely on a general campaign, organised centrally.
The use of black funds in elections reinforces illegality in society and thereby undermines representation and democracy.
If all the money raised via the bonds was to be given to the candidates, then only ₹95 lakh per candidate could be given for a parliamentary constituency. So, for a parliamentary election, the party would at most need ₹513 crore. But the ruling party has been getting more than a thousand crore rupees per annum since 2019.
Obviously, the money received was used for other purposes, such as setting up offices, running them, logistics and social media cells.
Political parties also engineer defections, topple opposition governments and so on. This cannot be done via legitimate money and requires black money which is donated in cash by the backers of the party.
Also read: Electoral bonds: A landmark judgment in the direction of free and fair elections
This money cannot be shown on the balance sheet of the parties and cannot be caught in an audit of the accounts of the party or the candidates. The ECI cannot catch it.
Businesses in India know how to manipulate incomes and expenditures outside their balance sheets to generate black incomes. Under- and over-invoicing and hawala are used for these purposes.
These methods keep one step ahead of the changes the tax authorities make in the laws and rules with the help of income tax lawyers and chartered accountants. Such methods are also available to political parties and candidates for their financial accounting so that they do not get caught using black funds.
So, apart from the funds made available by the electoral bonds, the parties and the individual candidates continued to use black funds. Thus, the non-availability of funds from electoral bonds will hardly change the funding pattern of the parties and there will be no impact on individual candidates.
In brief, funds received via the electoral bonds were: a) In addition to the money received in black and, b) The amount received was small compared to the total requirement.
What to do?
The use of black funds in elections reinforces illegality in society and thereby undermines representation and democracy. Parties and individual candidates who accept large sums of black money are indebted to the donors and do their bidding when they get into power.
Currently existing parties and candidates are unlikely to change, so new parties are needed that have dedicated workers.
This is the implicit and explicit understanding between the two parties. A nexus forms. Outwardly, parties and candidates make a show of wanting to curb the use of illegal funds but that is not the reality.
Also read: Electoral bonds: No solution to illegal political funding
Democracy gets diminished when people vote for the corrupt who largely appear at the time of elections and make promises that they do not deliver on once in power.
People do not get genuine representation from their representatives who serve the interests of a few powerful entities. But people are helpless since the candidates put up by the parties for elections are all similar— they are beholden to the vested interests and do their bidding once they come to power.
Politics will be cleaned up if the public does not get swayed by emotionalism, sectarianism, etc., and voted on objective factors impacting them.
Currently existing parties and candidates are unlikely to change, so new parties are needed that have dedicated workers. Citizens have to become politically savvy to look after their long-term interests.
Since this would undermine the current ruling parties, they will create impediments to the emergence of new parties and honest candidates. The entire State machinery is available to them to coerce and harass and defeat their opponents.
Conclusion
In brief, it is not that in a robust democracy, elections need to be expensive. It is in the imperfect democracy that prevails in India where accountability is weak that elections become expensive.
In such a situation, an instrumentality such as the electoral bonds adds to non-transparency without impacting the black economy or the use of black funds in elections.
Actually, to survive, the black economy needs to control politics so that dishonest parties and candidates come to power.
Monday, February 5, 2024
K shaped it is. Why deny? | Arun Kumar
The K is Indian GDP’s reality: Why deny?
Supporters of the government deny the K in India’s GDP growth, despite overwhelming evidence. What other forms of inequality— gender, regional, between agriculture and non-agriculture, capital and labour and caste inequality— will the officialdom deny, asks Arun Kumar.
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THE K-shaped pattern of growth within the Gross Domestic Product (GDP) pointed to by critics has riled officialdom and its supporters because it implies not only growing inequality but an overestimation of GDP and its growth.
The supporters deny any possibility of a dichotomous K-shaped growth pattern on the basis of data on income tax returns, labour force participation, consumption, etc. In doing so, they commit a methodological error.
Types of inequality
There are three different kinds of inequalities in an economy— wealth, income and consumption. The government supporters mix them up. There is a hierarchy between them with wealth inequality greater than income inequality greater than consumption inequality.
The reason for this ranking is that everyone has to consume a basic minimum to survive. The poor consume almost their entire income and hardly save. Often they borrow to consume so that their consumption is larger than their income. People at higher income levels save. The higher the income bracket, the more the savings.
Everyone has to consume a basic minimum to survive. The poor consume almost their entire income and hardly save.
So, as one goes to higher and higher income brackets, consumption becomes a smaller and smaller fraction of the income. So, the ratio of consumption to income falls with income. That is why income disparity is greater than the consumption disparity.
Further, the savings are invested and become part of one’s wealth. The higher the income, the more the savings and the accumulation of wealth. The poor have almost no savings and may be in debt, that is, they have negative wealth.
Thus, the wealth curve rises even more steeply than the income curve. The wealth of the wealthy yields an additional income and that leads to more inequality.
These theoretical aspects need to be kept in mind in the debate on inequality. A bare perusal of the arguments of the supporters of the official line shows a mix-up of these three kinds of inequality. What does the actual available data reveal?
Factors underlying growing inequality
First, the GDP data has huge errors since it does not independently account for the contribution of the non-agriculture unorganised sector. This component of GDP has been declining since demonetisation when it was hit hard and hardly recovered from this blow.
However, this decline is not officially measured since it is proxied by the growing organised sector. This gives an upward bias to the GDP and incomes of the marginalised sections, resulting in the false claim that inequality is declining.
Second, the growth in the organised sector is at the expense of the unorganised sector and that is the K to which critics point. This is visible in various industries.
For instance, e-commerce (in the organised sector) is growing at the expense of the unorganised sector trade. Similar reports are available from other industries such as fast-moving consumer goods (FMCG), leather goods, luggage and pressure cookers.
E-commerce (in the organised sector) is growing at the expense of the unorganised sector trade. Similar reports are available from other industries such as FMCG, leather goods, luggage and pressure cookers.
This applies to most of the industries where an item is produced both in the unorganised and organised sectors. Reserve Bank of India (RBI) data shows rapid growth in the sales of the corporate sector when the economy is mostly stagnant.
That can only imply the growth of this sector at the expense of the other component— the unorganised sector.
Third, taxes are paid mostly by the organised sector and the well-off. The unorganised sector is exempt the Goods and Services Tax (GST). For a turnover of below ₹50 lakh, there is no GST and for turnover up to ₹1.5 crore, tax rate is 1 percent under the composition scheme. Former Union finance minister, late Arun Jaitley, used to say, 5 percent of the units pay 95 percent of the GST.
Corporation tax is mostly paid by the big companies. Income tax is paid mostly by the well-off. Out of around eight crore tax returns filed by individuals, effective tax is paid by only 1.5 crore of a population of 141 crore. That is 1.1 percent population.
So, even if income tax data shows a reduction in disparity, that is only from the return filers, who constitute 5.5 percent of the population. That cannot tell us about inequality in the entire population. For example, 30 crore unorganised sector workers are registered on the e-shram portal. Around 94 percent of them report an income of below ₹10,000 per month, way below the taxable limit.
High tax buoyancy of GST, corporation tax and income tax only reflects the rapid growth of the organised sector. In a stagnant economy, this growth is at the cost of the unorganised sector and that increases disparity.
Further, it is the well-off who generate black money by hiding their incomes. In other words, their incomes are actually higher so inequality is greater.
It is the well-off who generate black money by hiding their incomes. In other words, their incomes are actually higher so inequality is greater.
Fourth, due to inflation, incomes rise but their real value may fall if the rate of inflation is higher. Further, as people earn more they go to a higher tax slab and pay more tax. This is called ‘bracket creep’.
So, increased tax payment does not necessarily mean an increase in people’s real income. That is why the level at which individuals begin to pay tax has been raised from ₹2.5 lakh to ₹5 lakh and now to ₹7.5 lakh.
Fifth, there is an increased production of FMCG in the organised sector but not necessarily of consumption. The market share of the big FMCG companies has increased at the expense of smaller units.
So, organised sector units are producing more and because this is at the expense of unorganised sector units, overall production is not rising. Since the well-off are consuming more, especially premium products, it is people in the lower income brackets who have cut consumption. Thus, FMCG consumption is not an indication of a decline in disparities.
Sixth, Periodic Labout Force Survey (PLFS) data shows an increase in employment in the rural sector. This is mostly distress employment. The poor are too poor to be able to afford not to work.
So they do residual work such as pulling a rickshaw, doing head-load work and selling peanuts on the roadside. This is self-employment and not work generated by the system. It yields low incomes and aggravates disparities.
Further, many workers lost work during demonetisation and lockdown and had to depend on the Mahatma Gandhi National Rural Employment Guarantee Act, 2005 (MGNREGA) at wages below what they were earning earlier. This again leads to a growth of disparities.
Seventh, the government giving free ration or gas to the poor increases consumption but not income. So income poverty persists even if consumption rises. Giving 5 kg of foodgrains free to 81 crore Indians is itself an admission that income poverty persists.
Finally, while money wages have risen due to inflation, they mostly lag inflation so that real incomes have fallen. So, who is getting the benefit of an increase in national income— the businesses?
RBI data shows corporate profits have soared. That is why the stock markets have reached new heights. Hence the incomes at the upper rung of the income ladder have risen and so has inequality. This should not be confused with the increase in the wealth of the well-off due to the rise in the valuation of stocks.
The government giving free ration or gas to the poor increases consumption but not income. Giving 5 kg of foodgrains free to 81 crore Indians is itself an admission that income poverty persists.
Conclusion
All the arguments used by supporters of the government to show a decline in inequality and, therefore, an absence of a K-shaped growth pattern, when carefully analysed, prove that indeed a K-shaped pattern of growth exists.
Their argument is based on the denial of the decline of the unorganised sector and the growth of the organised sector at its expense. Since the data is almost entirely based on the organised sector, it masks the K-shaped pattern of growth.
There are also other forms of inequality— gender, regional, between agriculture and non-agriculture, capital and labour and caste inequality.
In addition to K, what else will the officialdom deny?
Thursday, January 25, 2024
Friday, January 12, 2024
Thursday, January 4, 2024
What Do We Really Know About India's GDP? | Arun Kumar (The Wire - 4 Jan 2024)
There are two inter-related problems with the GDP data. The infirmity in the data and the invalidity of the method to calculate the GDP.
This is the first article in ‘India Black Boxed’. Read the series introduction here.
Controversy refuses to die down about the size of India’s GDP and its growth rate. It all started when the new GDP series with base 2011-12 was released in 2015. Not only did analysts point to problems, the government itself was unhappy that it showed a higher growth during the UPA’s ten years compared to the post-2014 NDA period.
The pandemic in 2020 severely dented the economy and the economy witnessed its steepest decline since Independence. The recovery from this low base was also steep. This has led to the official claim that India has done well in spite of the pandemic and the war in Ukraine to become the fastest growing major economy in the world. Is this the correct picture of the economy? That depends on the accuracy of the numbers and the policies formulated on that basis.
Pre-pandemic controversies
Doubts about the accuracy of data in the new series from 2011-12 have risen on several counts. To begin with, when the new series was announced in 2015, there was no back series to compare it with. It was said that the new series was based on the MCA21 data base of the industrial sector, which was more complete than what was used till then, the IIP data. It was stated that the back series could not be generated both because the MCA21 data base had not stabilised earlier and the relevant data on employment became available from 2011-12.
But
neither of these should have mattered since the MCA21 data base goes
back a long time and earlier employment figures could have been used as
has been often done. The real reason appeared to be political. Namely,
to show higher GDP growth during the NDA period compared to the UPA
period.
The next controversy was the government’s claim that the Indian economy grew at an average of about 7% during 2015-2020, which made it the fastest growing large economy in the world. This was undermined by A. Subramanian (2019). He showed that the growth rate was over estimated by up to 2.5% after 2014.
The next blow came when NSSO reported in 2019 that out of a sample of 35,456 companies taken from MCA21 data base, 38.7% were ‘out of survey’ units. These units are either not traceable or misclassified. So, data is either missing or mis-specified. Thus, the use of MCA21 for GDP calculation could be leading to errors in estimation.
The government argued that the inclusion of the ‘out of survey’ companies brings the output closer to the true production and there is no over-estimation of GDP.
A committee was set up to work out the missing back series. Its report showed that the rate of growth was higher during the UPA period compared to the NDA years. The government rejected it and in an unprecedented move, asked the NITI Ayog to rework the series. The NITI Ayog obliged and presented a back series showing that the rate of growth was higher during the NDA period compared to the UPA years.
Upward bias in GDP
The problem with the GDP data becomes clear when the official data shows that the highest rate of growth during the decade of the 2010-20 was in the year of demonetisation, 2016-17. From all accounts, starting November 2016, output was severely impacted in that year. Even if it is assumed that the output was growing up to October 2016, and declined after that, the average GDP growth became negative. This points to the flawed methodology used to measure GDP which gave an 8% upward bias to GDP in 2016-17. Even this flawed methodology showed the official growth rate declining from 8% in Q4 of 2017-18 to 3.1% in Q4 of 2019-20. So, the real actual rate of growth would have become negative even before the pandemic
Pandemic and the lockdown severely impacted the economy in 2020 and more particularly the unorganised sector. Subsequent recovery has been K-shaped – namely, some sectors growing while others (unorganised sector) declined. This decline has not been captured in data leading to over-estimation of the GDP. This becomes clear when one looks at the method of estimation of GDP, especially the quarterly GDP, which is what is usually discussed in public discourse.
Official methodology
I have previously analysed the official document which presents the `Methodology of Compiling Quarterly GDP Estimates’. It mentions three factors that need to be noted regarding the calculation of GDP from the supposedly more accurate production side:
- “The production approach used for compiling the QGVA estimates is broadly based on the benchmark-indicator method.”
- “In this method, for each of the industry-groups, estimates of GVA are compiled…”
- “In general terms, quarterly estimates of Gross Value Added (GVA) are extrapolations of annual series of GVA.”
These three points clarify that for the quarterly estimates of GDP based on the production approach, most current data are not available so, benchmark indicators from an earlier reference year have to be used. The last survey of unincorporated enterprises was carried out in 2015-16 so that the reference year is now dated and does not capture the current reality.
Further, the methodology states that current figures are obtained by extrapolations of the annual series of GVA of previous years. But if the previous year figures are incorrect, how can their extrapolation be correct? This has been the case post the demonetisation, introduction of the Goods and Services Tax and the lockdown. Each of these three occurrences administered a shock to the economy and caused disruption.
Finally, in some cases, the procedure adopted is to make annual projections and then to divide them by four to give the quarterly figures. Two problems arise. First, there are varying levels of activity in the different quarters. For instance, there is heightened activity during the festive season, while it is low at the start of the financial year. So, division by four cannot be correct. Second, errors in the figures of the previous year get projected to the next year.
Shocks undermine the method
The methodology outlined above relies on a smoothly functioning economy. But it will not apply when there are big unexpected changes, called a shock, like due to demonetisation or the sudden lockdown. The shocks impact the basic parameters of the economy. Like the ratio of the unorganised to the organised sector or the real output in the agriculture sector. So, with a shock, neither the ‘benchmark-indicators’ will be valid nor will it be correct to extrapolate from a normal year to the next one that has experienced a shock.
The Indian economy has suffered several shocks since 2016. Demonetisation in 2016 followed by the introduction of the structurally faulty GST in 2017, the NBFC (non-bank financial company) crisis in 2018 and finally the sudden lockdown in 2020. Each of them impacted the unorganised and the organised sectors differentially, thereby changing the ratio between the two and invalidating the old benchmark indicators.
Further issues with quarterly data
The problems related to methodological issues were compounded by the data deficiencies. Even for the organised sector, only limited data is available. For instance, the corporate sector data representing industry is available only for a few hundred firms. In the case of agriculture, it is assumed that targets set by the ministry are achieved. But that has not been the case in the last few years due to heat or late rains or inability of perishable crops to come to the market during the lockdown and demonetisation, so that it rotted in the fields and agricultural output declined while it was taken to have increased. The method for estimating the unorganised sector in the GDP needed to be modified, but this has not been done.
In brief, there are two inter-related problems with the GDP data. The infirmity in the data and the invalidity of the method to calculate the GDP.
The problem was further compounded by the government’s lack of faith in its own employment data which it rejected in 2019 because it showed that unemployment had reached a high of 45 years. Since employment data is used in the calculation of the GDP, if it is rejected, the GDP calculation also becomes unreliable.
To persist with the methodology in the 2017 official document, new indicators are required based on fresh surveys. But no new survey of the unorganised sector has been conducted since 2015. Even the Census has not been conducted in 2021 and that compounds the problem.
Further, each of the shocks listed above impacted the economy differently. So, without a change in the method and resolving the data issues, errors get compounded and reliable GDP numbers cannot be generated.
Stance of international agencies
The government claims that international agencies, like the IMF and the UN, have supported its claims on GDP. Their figures for GDP growth differ from the official figures by a small percent. But that is not surprising since these agencies are not data collecting agencies and use the official data. Even the RBI uses the official data on a host of macro variables.
Effectively, all of them reproduce the errors in the official data and none of them have more accurate data. The surprise is that all these agencies ignore the data-related issues when the errors are glaring. Worse, if Indian data has such huge errors, other developing countries are likely to have similar or even greater errors, making international comparisons meaningless.
Impact on other macro aggregates
GDP data is the base used to estimate other macro aggregates, like consumption and savings. These affect the measurement of poverty and growing inequality. If growth is strong then it would imply strong growth in employment. But this link is broken since growth is in the organised sector while the unorganised sector is declining. The former hardly creates employment while the latter which provides a bulk of the employment is losing employment. So, this lopsided growth has broken the link between growth and employment.
Further, if the unorganised sector declines then the overall demand becomes short, leading to low capacity utilisation and decline in the investment rate and even the organised sector rate of growth will fall. This was visible in the period 2017-18 and 2019-20 (before the pandemic).
The incorrect GDP numbers should impact the fiscal situation. This is reflected in the revenue and expenditures often missing the targets set in the budget. The final figures differ considerably from the budget and revised estimates. But these revisions are not as stark as the errors in the GDP data should lead to.
The reason for this smaller error is that the budget is largely for the organised sectors and of the organised sector. The revenue collection is largely from the organised sector. Most expenditures are also for the organised sector. Where the expenditures pertain to the unorganised sectors like on food, rural development, education and health, revisions are made when the deficit in the budget increases. Thus, the budgetary calculus is not as seriously impacted as the large errors in GDP data ought to lead to.
Conclusion
To conclude, India’s GDP numbers are vitiated due to methodological and data-related deficiencies. This suits the ruling party’s political narrative of a well-functioning economy. By continuing to harp on these incorrect numbers and hiding the true facts, it adds to the non-transparency in the government’s functioning.
Arun Kumar is the author of Understanding Black Economy and Black Money in India.
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.
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