Economic design the world follows actually widens inequality.

Image courtesy: axios.com 

When I say perhaps you would not believe it. “The share of wealth held by public actors is close to zero or negative in rich countries, meaning that the totality of wealth is in private hands. This trend has been magnified by the Covid crisis, during which governments borrowed the equivalent of 10-20 per cent of GDP, essentially from the private sector.” 

Simply put, this observation from the World Inequality Report 2022 means that over the years the governments across the globe are witnessing a unique trend – increasingly they find their treasuries are getting empty. So much so that even the interest rate on small savings are being reduced to help bridge the deficit in revenue collections arising essentially from huge stimulus packages being periodically doled out to big business. It is therefore quite obvious that while the government coffers are getting depleted, the rich are amassing wealth in an unequal proportion. This does mean that the resources are in a way being transferred from the government treasury to the private lockers. 

That’s perhaps what must have prompted the British MP Zarah Sultana to say that the super rich don’t create wealth but they are given wealth. “The wealth of billionaires in UK rocketed £106,500,000,000 during the pandemic. The super rich – and not the working class – should pay more tax.” Another study by the New Economic Foundation shows the rich have a runaway success while the poor have been squeezed in the past two years. The widening inequality is not only restricted to UK but has emerged as a global phenomenon, a disquiet outcome of the neoliberal economic design that was thrust upon every nation. 

While more than 800 million people in India live on less than $2 a day, the combined wealth of the top 1 per cent rose by 35 per cent during the pandemic. While India added another 40 billionaires during the pandemic, nearly 50 per cent of its population is barely surviving on Rs 4,500 per month. This is the average, but don’t forget the shocker that the Economic Survey 2016 had brought out. The average income of farmers in 17 States of India, which means roughly half the country, stood at a paltry Rs 20,000 ($ 267) a year. Imagine how the farming families must be surviving with an average income of less than Rs 1,700 a month. 

“India stands out as a poor and very unequal county, with an affluent elite,” the report rightly observed. With the top 10 per cent having 20 times more wealth than the bottom half, the inequalities obviously galore. Similarly, at the international level, the richest 10 per cent hold 52 per cent of global income. The poor are left with only 8 per cent. As if this is not enough, the gulf between the rich and the poor has further widened during the pandemic. In America alone, the combined wealth of its billionaires has increased by a whopping 44.6 per cent during the pandemic, a study by the Institute of Policy Study had brought out. 

Interestingly, the World Inequality Report draws attention to a faulty perception that has been created in public thinking about the failure of socialism in restricting the economic divide. Between 1951 and 1981, the report shows that inequality was far less than what has been witnessed in the reforms era beginning early 1980s. And as Dan Price, a Seattle-based CEO tweeted the other day: “One of the biggest myths of capitalism is that the rich are job creators. In the pandemic, billionaires’ wealth is up $2.1 trillion and the number of jobs is down 4.2 million. The myth is so dangerous because it leads people to idolise the rich and give them whatever they want.” 

True. In India, whenever a question is raised on the need to provide more stimuli to raise rural demand, a chorus immediately emerges on giving more tax concession and economic stimulus packages to the supply side, meaning the industry, saying it will lead to more job creation. The official statistics have however belies this flawed argument, with almost six million salaried jobs lost in November alone.   

The economic design we follow is so built that it actually widens inequality. To illustrate: if only the annual Rs 1.45-lakh crore tax bonanza that was given to the Indian industry in Sept 2019 was instead provided to farmers , an additional Rs 12,000 per year could go to each land owing farmer, increasing the entitlement under PM Kisan Samman Nidhi programme to Rs 18,000. Such a decent direct income support would have not only helped bridge the existing economic disparity but would have helped create an increased rural demand thereby adding on to country’s economy. Providing more money in the hands of farmers would be the right step ahead in making agriculture economically viable thereby reducing the pressure on the cities for creating jobs. This makes strong economic sense given the speed with which automation is happening in the industry.   

Take another example. In the US, General Mills has already announced that given the high rate of inflation, it will be forced to raise the prices of its grocery products from the beginning of the New Year. What it did not say, and as Dan Price pointed out: “GM Mills paid a $ 300 million dividend to investors, brought back $ 150 million in stock to enrich execs and investors, and pays its CEO $ 16 million. It makes $ 2.1 billion a year in profit. It is raising prices by 20 per cent and blaming ‘inflation’.” Globally it has been seen that co's flush with cash (thanks to tax cuts, bailouts and stimulus) do not invest in creating jobs but use it for buying back shares. India is no exception. Media reports show that Indian companies had bought back shares worth Rs 2-lakh crore in the past five years. 

Inequalities also exist within the corporate houses. A significant proportion of the economic stimulus packages go towards meeting the staggering salary bills plus bonuses for the top executive or used for stocks buy back. As Robert Reich, former US Labour Secretary explains one way is to look at the CEO-to-worker pay ratio. Coca-Cola CEO has an income package that is 1,621 times higher than a median worker’s salary. Similarly, Levi Strauss: 661-to-1; McCormick & Co: 585-to-1; Carnival: 490-to-1; Unisys: 313-to-1; and Tyson Foods: 294-to-1. As per a media report, the basic salary of Star Bucks CEO was 12,617 per cent higher in 2020 than the media employees salary. This mind-boggling pay structure provides a basic salary of $ 1.54 million to the CEO while the average income of a farmer growing coffee beans is less than the international acute poverty line of $1.9 per day. The inequalities that makes the top executives walk away slush with money therefore is woven in the company’s balance sheets, and similarly I find the distressing level of inequalities we see globally are also entwined in the way reforms are designed. #

Source: Providing more stimuli to raise rural demand key to bridge economic disparity. Bizz Buzz. Dec 17, 2021. https://www.bizzbuzz.news/opinion/providing-more-stimuli-to-raise-rural-demand-key-to-bridge-economic-disparity-1085902

 

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Pandemic: time for haircut and write-offs

Source: TaxGuru.in

An additional 230 million people have quietly slid below the poverty line during the first year of the pandemic, reports the Centre for Sustainable Employment at the Azim Premji University (APU). In another study, the Pew Research Centre had computed the middle class to have shrunk by an estimated 32 million. This estimate is again for the first year of the pandemic. However, both the studies are a grim reminder of the severe blow of the pandemic that struck the middle class and the poor.  

We still do not know how severely (or relatively softly) the devastating second wave has impacted. While all sections of the society have been hit in varying proportions, with household savings coming down drastically, and unemployment soaring, forcing the government to extend till November the 5-kg free ration scheme for the 800 million needy, the good news is that the corporate net profits of listed companies have soared by 57.6 per cent in the last fiscal. At a time when economy is struggling to cope with the impact, the stock markets, fuelled by surplus money, too have been rallying high. While the wealth of India’s billionaires has gone up by 35 per cent, Bloomberg says the wealth of top two – Ambani and Adani – has jumped to $ 84 billion and $ 78 billion, respectively. 

The rich continue to amass wealth, while the pandemic has driven the poor against the wall.

Let’s dig still deeper. The increase in corporate profits does not however translate into higher tax collection from the rich. In reality, while the rich get hefty tax concessions and easy money, the rest of the country ends up paying more taxes. Corporate tax collections have declined significantly, reaching its lowest in ten years. The systematic reduction in corporate tax is in sync with the global trend. The Finance Minister had in Sept 2019 lowered the corporate tax base from 30 to 22 per cent, and reduced the corporate tax for the new manufacturing companies from 25 to 15 per cent. This costs the exchequer Rs 1.45-lakh crore by way of revenue foregone every year.  

Now let us take a look at how the tax base has shifted from the corporate to the average households. Against the direct tax collections – corporate and personal income tax -- for 2020-21, which amounts to Rs 9.45-lakh crore, the indirect tax collections have exceeded it, and reached a high of Rs 11.37-lakh crore. In addition, the common person in the street ended up paying over Rs 5.70 lakh crore as taxes (excise and VAT) on petrol and diesel, with roughly 60 per cent of fuel tax coming from two-wheelers. Add to it the electricity duty that consumer pays along with taxes on real estate registry and excise duty on liquor, the share of indirect tax that a common person finally ends up paying is enormous. At least now the individual tax payers cannot claim they alone provide resources for development. The non-tax payers too have made a significantly higher contribution in generating revenue. Let’s not forget, even a labourer wearing a plastic chappal (bathroom slipper) pays GST. In fact, it should now be abundantly clear: everyone pays tax.   

What may appear baffling is that at a time when the share of corporate profit in the country’s GDP has reached a 10-year high of 2.63 per cent, Indian banks had written-off a whopping Rs 1.53-lakh crore of corporate bad loans in 2020-21. As per RBI estimates, non-performing assets (NPAs) of banks are expected to increase further. Meanwhile, the total write-off in the past four years, since 2017-18, stands at a staggering Rs 6.96-lakh crore. A lot of hue and cry erupts whenever farm loans are waived but the periodic NPA write-off by the banks goes rather unnoticed.

As if this is not enough, a newspaper report, based on an RTI reply, showed how Rs 5-lakh crore of bank money is struck in frauds. Accordingly, the top 50 credit accounts contributed 76 per cent to these dubious transactions. 

Interestingly, the Insolvency and Bankruptcy Code (IBC) was enacted with the aim to punish the chronic defaulters but has left much to be desired. The two recent insolvency proceedings, where the banks/lenders have been forced to take a ‘haircut’ of 93 to 96 per cent, have evoked a lot of public anger. In a resolution plan, approved by the National Company Law Tribunal (NCLT), the bidder -- Twin Star Technologies of Vedanta group -- gets control of 13 companies of the debt-ridden Videocon group by ‘paying almost nothing’. Against the admitted claims of Rs 64,838.63-crore, Vedanta group walks away by paying only Rs 2,962.02-crore as one time settlement which is merely 4.15 per cent of the total amount. In other words, the creditors, including banks, have agreed to waive the remaining 95.85 per cent of the outstanding amount. 

In another insolvency resolution, lenders of the Shiva Industries and Holdings, including several banks, have agreed to take a ‘haircut’ of 93.5 per cent. Of the total outstanding of Rs 4,863-crore, the creditors will get only Rs 313-crore. Of this, the company has agreed to pay upfront only Rs 5-crore. Quipped the well-known financial journalist and author, Sucheta Dalal: “Now take a bicycle loan and see how banks treat you.” 

There are numerous such cases, where the bidders have walked away with cheap deals, leaving the banks (and other lenders) to take a heavy cut, often in the range of 80 to 95 per cent. The general impression is that it is public money that is being siphoned-off through a legitimate route. After all, the banks hold public money, and any write-off means public money lost. 

Probably this is what irked industrialist Harsh Goenka who tweeted: “Promoters stash away money on the side, take the company to the cleaners, get a 80-90% haircut from bankers/NCLT - that’s the new game in town.” he wrote, adding: “A lot of institutions cleansed by the government – NCLT next please @PMOIndia. We can’t have our hard earned money being stolen.”

Public money write-off calls for accountability. The Tribune. June 28, 2021. https://www.tribuneindia.com/news/comment/public-money-write-off-calls-for-accountability-274934 

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