Solidarity today, new social compact tomorrow

Existential threats test the character of nations and societies. But they are also moments of peak opportunity for countries to shape their future for decades to come. So it is with the Covid-19 crisis, engulfing countries around the world. For India, the current crisis requires collective solidarity in the form of resources to be provided by the wealthy and privileged to aid those devastated by the crisis.

But this immediate solidarity should then be codified in a permanent new social contract to ensure that no Indian should ever have to face in the future the plight that hundreds of millions are facing today. The Great Depression gave America its social security arrangements; World War II bequeathed Western Europe its welfare state. Covid-19 should similarly create for all Indians a resilient safety net that can also serve as a trampoline.

Start with the present crisis. In our previous two pieces, we argued that additional public spending of at least Rs 10 trillion will be required at different levels of government. We laid out different options for funding this spending, and here we discuss the last, a national solidarity fund.

Two dividing lines deeply afflict Indian society: wealth and income, both levels as well as stability. Like elsewhere, wealth inequalities in India have become staggeringly high, especially at the very top. Meanwhile, while income inequality has also grown, there is a further chasm between the minority with stable incomes (in the organised sector) and the majority with unstable incomes. This crisis has painfully exposed this divide as hundreds of millions of Indians have lost their livelihoods. The cruel contrast is noteworthy: in financial markets, high returns come with greater risks whereas in labour markets, higher incomes are also more stable.

In a vertically stratified and horizontally fissured society such as India, the idea of fraternity has always been weak. These exacting circumstances are an opportunity to reknit this fabric of fraternity, which can be seized if the privileged and secure show solidarity with their fellow countrymen.

We must first start with India’s wealthiest. According to the Forbes list of richest Indians, as of October 2019, the top 100 had a net worth of $452 billion. The 100th on the list had a net worth of $1.4 billion. Data from the most recent Hurun Global Rich List 2020 (released this February) shows that India had 138 dollar billionaires with a net worth of $443.5 billion.
For most people, their wealth is in property, especially land (in rural India) and housing (in urban India), along with jewellery and gold. However, as wealth increases, financial assets are an increasingly bigger fraction, and for the super wealthy it is the predominant source of their wealth.

Factoring in a decline in their financial wealth by about a third because of the crisis, the net worth of India’s billionaires today would be around $300 billion. A 1.5 per cent billionaire wealth tax would yield around $3 billion or Rs 33,750 crore. Extending this to include the super-rich (net worth greater than Rs 1,000 crore or $135 million), and imposing a smaller (one percent) wealth tax on this group would yield something like Rs 10,000 crore.

 

These number are simply illustrative. Net worth is difficult to estimate, especially for the rich, and taxes can lead to evasion and avoidance. But the wealthy should remember not just how much their comfortable lives depend on the precariat, but that a tax contribution that is a tiny fraction of their wealth, will help restore the economy, boost the value of their financial assets, and hence their wealth. Solidarity will also be self-serving.

The organised sector, both public and private, with secure incomes is another privileged group. Cutting public sector incomes via tax increases or wage reductions would not be appropriate now given that many public sector employees are on the front lines, taking grave risks. A better option would be to freeze salaries and pensions in the public sector as we argued in our last piece. This could yield “savings” (from expenditures not incurred) between Rs 50,000 crore to 
Rs 1 trillion between central and state governments combined.

In the case of the private sector, underreported incomes among professionals such as lawyers, doctors, accountants etc. are pervasive. The crisis is not the moment to tinker with taxes but two options to consider are removal of egregious exemptions and taxation of property. For example, if the GST on gold was increased to 8 per cent, additional revenues of about Rs 20,000 crore could be generated.

State and local governments have the right to tax property either via stamp duties (states) or regular levies (third tier bodies). Although property values are depressed, the crisis might be a good time to levy small taxes (1 per cent or so) on properties above Rs 1 crore. This would ensure that the middle class, including retirees, who are asset rich but cash poor, are not unduly burdened.

 

 
Together, the wealth tax, salary freezes and modest taxes on gold and property can raise about Rs 1 trillion. We propose that this money be used to transfer money to all the Jan Dhan accounts so that it is clear who is providing the resources for whom, strengthening the sense of solidarity.

How can this solidarity be codified into something more permanent? Post-independence, reducing the abject poverty of India’s majority has dominated development policies. Since the early 1980s, as the poverty rate declined sharply, its nature has changed.

Researchers such as Sonalde Desai have persuasively argued that poverty must be re-thought because hardship in the new economy is caused much more by shocks (employment, health) etc. than by fixed identities and that it affects many more than just the poor. Nothing has illustrated this insight more than the Covid-19 crisis, where the vulnerability of up to 3/4th of the population is starkly manifest. That is why a UBI — or something that is close to universal — is compelling.

Moreover, the 21st century development challenge will be different. In the 20th century, economic transformation focused on moving people from vulnerable unorganised sectors (agriculture) to stable organised sectors (manufacturing). Now, the rise of the gig economy means that India’s present is the world’s future: transformation will involve moving people from some unorganised sectors to organised sectors with contract labour. Poverty alleviation and social protection will have to be radically re-configured.

Discussions on UBI focus on costs and affordability and some ideas merit collective discussion. Our first suggestion would draw upon the experience of how social security was created in the US. Textbook fiscal economics considers all taxes as fungible, but President Roosevelt’s political instinct was to “earmark taxes”, that is, create a dedicated fund for social security, so people could see a clear link between a specific tax and a specific benefit. Something similar would be needed to finance a UBI.

Second, extending our discussion of solidarity resources, this fund could be financed on a permanent basis from wealth and property taxes (on the direct tax side) and the additional revenues from elimination of middle class exemptions and subsidies and restoring previous income tax thresholds. Together, India could dedicate around 2-2.5 per cent of GDP from these sources in the long run. Today, that would provide a monthly income of about Rs 2,000 to 75 per cent of India’s 250 million households.

Discussions on wealth and property taxes can draw on work already done within the government. For a country whose political sensibility is socialist, under-exploiting its most buoyant and immobile tax base — property — has been senseless. State and local governments have been loath to use this tax source seriously, despite the erosion of their fiscal base by the federalisation of the GST. The Centre could impose a wealth tax including property and return the amounts collected back to states and local bodies. Alternatively, the Centre’s collection of wealth taxes could be adjusted to the extent that states and local governments tax property.

Third, we would suggest creating an independent government authority akin to the UIDAI — like the Social Security Administration in the US — to permanently administer this new social contract. Among its first tasks would be make the JAM architecture truly universal, without last-mile problems that exclude the poorest and most vulnerable.

Finally, while the Centre should focus on cushioning against income shocks via a UBI, states should concentrate on cushioning against health shocks. State governments cannot invoke resource constraints, given their large (Rs 1 trillion) power subsidies, the need for which would be moot if UBI were implemented. If these were instead ploughed into universal health care, the poor would benefit the most.

The Covid-19 crisis threatens to devastate not just livelihoods but also India’s social fabric. Preventing that from fraying via additional solidarity resources from the wealthy and secure to cushion the millions affected is imperative. But it must be restitched for the future via a permanent social contract that insures India’s vast vulnerable population against income and health shocks. That would be Mahatma Gandhi’s famous talisman.
Series concluded.

Read the first part
 — Fiscal space: Not if but how,

and the second part — Creating fiscal space for the states

Kapur is professor, Johns Hopkins University; Subramanian is former chief economic adviser, government of India


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