The Indian Panorama

Tag: Aunindyo Chakravarty

  • Why govts avoid taxing the rich to reduce inequality

    Why govts avoid taxing the rich to reduce inequality

    No government can increase taxes on the rich since they are the fundamental power behind every throne.

    “Of course, the ‘just’ way to reduce public debt is to raise taxes on the rich. After all, they are the people who have gained from the loans that governments have taken over the years. They hold most of this debt in the form of government bonds, directly or through investments in large funds. The more governments borrow, the more they earn on these assets.
    But no government can increase taxes on the rich since they are the fundamental power behind every throne. Any attempt to raise taxes faces serious pushback from powerful sections of the media, which are owned or controlled by big corporates.”

    By Aunindyo Chakravarty

    The world around us is in turmoil and there is blood on the streets. From Nepal to France, through Indonesia and Argentina, governments are being booted out of power and popular leaders are facing protests from disillusioned supporters. The key reason is the growing inability of the average citizen to make ends meet and their governments’ failure to solve their economic problems.

    Almost everywhere, people are losing jobs. Those who are employed work long hours for low pay. Sometimes, like in the US, they work multiple jobs to make ends meet.

    Even successful profit-making companies are sacking people in anticipation of what AI might do to their industry. Often, these are well-paid middle-class employees, who are suddenly faced with financial uncertainty.

    Many governments tried to spend their way out of the crisis — by giving bailouts to corporates and subsidies to people.

    Now, their national debt has ballooned and they are trying to find ways to reduce it. In Europe, Latin America and South-East Asia, governments chose to cut back on spending. They are now paying the price for it.

    In France, Prime Minister Bayrou had to resign after lawmakers defeated his proposals to reduce government expenditure on welfare. In Argentina, President Milei is facing massive street protests after cutting aid to universities and hospitals.

    In Indonesia, President Prabowo’s austerity measures have resulted in violent protests. In Nepal, the Oli government’s expenditure cuts on social security and welfare programs caused widespread resentment, especially since the political class, and their ‘nepo kids’ enjoyed lavish lifestyles.

    In the US, Donald Trump has tried to find another path to solving the public debt problem — his infamous Trump tariffs. The key assumption is that tariffs would force exporting nations to reduce their base prices to keep their market share and, at the same time, fill the governments’ coffers.

    As it has turned out, this has only caused a sharp increase in prices in the US and huge job losses. No wonder, Trump’s net approval ratings have been negative since mid-March.

    After his initial attempts to force China to submit to his tariff tantrums failed, Trump has increasingly tried to bully India. Even Trump sympathizers admit that the 50 per cent duty levied on Indian exports, supposedly because we buy Russian oil, makes no sense since the US hasn’t raised tariffs on China, which buys more oil from Russia than we do.

    Trump’s attempt to badger India to open up our market to American agricultural and milk products is nothing but a tactic to score political brownie points among some of his core voters in rural America.

    The Modi government, on the other hand, cannot let American maize, soybean, milk and cheese enter for free because of the political price it might have to pay among India’s farming community.

    So, all Trump has achieved is to push India towards our traditional adversary — China. The bonhomie between Modi, Xi and Putin, captured by cameras and published across the world, was a warning shot fired at the US.

    It is reminiscent of India’s earlier position in the geopolitical space of a bipolar world as a member of the Non-Aligned Movement (NAM), till the USSR collapsed in 1991. At that time, India played the two powers against each other to extract maximum diplomatic value from them.

    This gradually ended as the US emerged as the sole power in the 1990s and established its role as the global Big Brother. Many observers saw India as America’s natural ally as a large market-oriented economy with a democratically elected government.

    Now, the Trump administration seems to have endangered that relationship by openly attacking India’s trade policies. Even though Trump has walked back some of the rhetoric in the past couple of days, things have soured significantly.

    Trump clearly has no answer to how to solve the US’ debt problem. Nor does any other global leader in power. Experts are advising governments to cut expenditure while the people, burdened by high prices and pay cuts, are demanding the exact opposite.

    Of course, the ‘just’ way to reduce public debt is to raise taxes on the rich. After all, they are the people who have gained from the loans that governments have taken over the years. They hold most of this debt in the form of government bonds, directly or through investments in large funds. The more governments borrow, the more they earn on these assets.

    But no government can increase taxes on the rich since they are the fundamental power behind every throne. Any attempt to raise taxes faces serious pushback from powerful sections of the media, which are owned or controlled by big corporates.

    Opinion makers who bat for corporates find easy access to newspaper columns and TV studios, which showcase their views opposing tax hikes. Any political leader who fights on the agenda of taxing the rich finds it impossible to raise funds. S/he also ends up having to deal with a hostile media.

    India, too, is not immune to such pressures. We have the problem of losing a crucial export market, which sustains millions of jobs, especially in textiles, gems and jewelry and shrimp farming. At the same time, our farmers will be hit if we reduce taxes on American farm goods.

    So, we have no option but to play hot and cold with the US and China. We need new markets for our products, which the China bloc might provide. At the same time, we cannot completely alienate the US since our corporates have close business ties with it and our middle class depends heavily on service exports to the US.

    India has no option but to ride it out as things unfold across the world. One thing is for sure: given that we are only at the beginning of the AI revolution, geopolitical and economic uncertainties are not going to disappear anytime soon and we are likely to see many more global realignments in the coming months.

    (Aunindyo Chakravarty is senior economic analyst)

  • The man who made the middle class affluent

    The man who made the middle class affluent

    The average income of the middle class more than tripled in the 10 years that Manmohan Singh was PM. This was the golden period for the professional & managerial class in India.

    “The Rao-Manmohan market reforms completely changed the ideological terrain. Now, the middle class became a facilitator of corporate profits. Its job was to maximize profits by increasing productivity in businesses. And, for that, it got a share of the returns to capital — much higher salaries than its previous ‘babu’ avatar could have got them. The post-liberalization middle class, therefore, imbibed the values of capitalism — pro-market and consumerist.”

    By Aunindyo Chakravarty

    Soon after Manmohan Singh became Finance Minister, the term multinational corporation, or MNC, entered our daily lexicon. I heard it first when a distant relative left a public sector job to join an MNC for a salary of Rs 30,000 per month. This was unheard of back then in middle-class families like ours.

    But this was just the beginning. Soon, every young person around me was looking for a private sector job. MNCs had radically altered the white-collar job market by offering fabulous pay packages. Domestic companies had to follow suit. The middle class could now aspire to a lifestyle that it wouldn’t even have dared to dream of earlier.

    Manmohan Singh, along with the then Prime Minster PV Narasimha Rao, made it possible. They unleashed policies that gave rise to a new affluent middle class.

    First, let me explain what I mean by the term middle class. It is nowhere in the middle when it comes to India’s population. In fact, it sits right at the top — between the 96th and 99th percentile in terms of income. Its ‘middle-ness’ comes from where it stands in the economic system — as an intermediary between owners of capital and blue-collar workers.

    Before liberalization gave the private sector control over the ‘commanding heights’ of the economy and set market forces to decide how resources would be allocated, it was largely controlled by the state and run by a bureaucratic-managerial-intellectual class. That was the old middle class, even smaller than it is now.

    The old pre-liberalization middle class was ideologically oriented towards state intervention — what we have come to know as ‘Nehruvian socialism’. This was because its job was to implement policy decisions that were taken by the government and other arms of the state. Salaries were low, but jobs were secure. The middle class in its own self-image was constructed as a group of ‘nation builders’.

    The Rao-Manmohan market reforms completely changed the ideological terrain. Now, the middle class became a facilitator of corporate profits. Its job was to maximize profits by increasing productivity in businesses. And, for that, it got a share of the returns to capital — much higher salaries than its previous ‘babu’ avatar could have got them. The post-liberalization middle class, therefore, imbibed the values of capitalism — pro-market and consumerist.

    By the time Manmohan Singh’s first tryst with government ended in 1996, white-collar salaries in the private sector compared favorably with corporate jobs in the developed West, especially when purchasing power parity was taken into account. Sons and daughters of government servants began earning more in a month than their parents did in an entire year.

    They bought cars, microwave ovens, washing machines and spring mattresses, retiled their bathrooms and took vacations to Phuket. They bought computers, invested in the stock markets and bought health insurance plans. Their kids now enrolled in schools with better infrastructure. When they fell sick, they went to new hospitals with private rooms that could put PSU-run hotels to shame.

    And, the rise of the corporate executive in the 1990s and its changed spending habits had a multiplier effect on the entire middle class. Bankers, stock brokers, tax advisers, doctors, architects, interior decorators, chefs, fashion designers, all flourished in the new economic environment.

    When Manmohan Singh became Prime Minister in 2004, the average income of those in the 96th-99th percentile had risen from roughly Rs 3,500 per month in 1991 to Rs Rs 16,000 per month.

    Even in real, inflation-adjusted terms, it had nearly doubled in 13 years. To understand what that means, compare it to the 13 years before liberalization, when the average real incomes of the ‘middle class’ had increased by just 17 per cent.

    This immense rise in middle class affluence was still nothing compared to what was to come in the UPA years. The average income of those in the 96th-to-99th percentile more than tripled in the 10 years that Manmohan Singh was PM. This was the golden period for

    the professional-managerial class in India and its standard of living rose manifold. Middle-class families bought premium cars and flatscreen TV sets, ate at five-star hotels, holidayed in Europe and gated themselves into the toniest parts of India’s metros.

    Manmohan Singh was only partly responsible for this. The first thrust of white-collar prosperity came from the credit-driven financial boom of the 2000s, which would ultimately end in the global financial crisis of 2008. Where the Manmohan-led UPA made a difference was in providing a massive fiscal stimulus to keep India out of a recession.

    Much of it came in the form of the Sixth Pay Commission, which was implemented in August 2008, with retrospective effect from July 2006. Government servants got a lumpsum of arrears at one go, which they spent on buying cars, renovating their homes and sustaining the overall consumption in the economy when the corporate sector had taken a beating.

    But corporate profits didn’t recover. The CMIE’s database shows that in the last five years of the Manmohan kaal, corporate earnings grew just six per cent annually, while inflation was 10 per cent. On the other hand, the corporate wage bill rose at 19 per cent per year.

    The result was that from the second half of the 2010s, the corporate sector began cutting white-collar jobs and asking people to take pay cuts, to expand its profit margins. The net result is a rise in corporate profits, while ‘middle-class’ incomes have stagnated. Between 2018-19 and 2022-23, corporate profits increased at a real, inflation-adjusted rate of 53 per cent while the real income of the professional-managerial class has increased at just three per cent per year.

    This is the inevitable result of the very market-friendly policies that created the affluent Indian middle class. It dramatically increased income and wealth inequality and, ultimately, created a shortage of demand for goods and services. That, in turn, caused corporate profits to fall, which made companies cut back on their wage bills, including what they paid their white-collar managerial staff. What would Dr Singh have done today to deal with the decimation of the middle class he helped create? We will no longer know.