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Mihir S Sharma: Handouts for the well-heeled

Budget must end populism that targets the upper and middle classes

Mihir S Sharma 

If Finance Minister is “losing sleep” over “the enormity of subsidies” he has to provide for in next month’s Budget, it should surprise nobody. Government subsidies this fiscal year on food, fuel and fertiliser have already ballooned by Rs 1 lakh crore; they were budgeted at Rs 1.34 lakh crore. Meanwhile, tax receipts are likely to be considerably lower than predicted, given that the economy isn’t growing at the rate it should be. Once again, India is living well beyond its means, and the man in charge is sleepless because it seems impossible to fix that. How can one man, one Budget, stand between this juggernaut of populism and the fiscal cliff it’s heading towards?

Handouts for the well-heeledAfter all, the standard argument runs, Mr Mukherjee is handicapped by being from a government that believes itself elected by the working class and rural poor. It will do little or nothing to dismantle the transfer economy that feeds its votes. The aspirational middle class, which would welcome a more dynamic economy, is being hobbled by the soft subsidy state.

I certainly don’t know who the Congress, and the United Progressive Alliance, think elected them. But I do know that the beneficiaries and defenders of India’s subsidy-driven political economy aren’t the poor. In this, as in so much else, India’s is a government for, of and by the middle class.

This was made painfully evident this past week, when a group of ministers – chaired by Mr Mukherjee – examined the woes of the airline sector. Their answers were instructive of where social power and spending priorities really lie. First: helping Air India, Rs 43,000 crore in debt. Most of its short-term debt was to be recast as government-guaranteed long-term debt. If Air India goes under – as it will, who really doubts it? – the government stands answerable for overall sums comparable to some estimates for the increase in food subsidies urged by drafts of the

Their second idea was to “stimulate” the airline sector. That serves, remember, essentially the top one per cent of the population — which, given its global benchmarking, inaccurately calls itself the middle class. How? By allowing it to avoid state taxes on fuel, and import fuel directly. Fuel will be bought from, say, the Gulf, brought in through ports, and trucked to airports. (According to some reports, Reliance is already in talks to handle these millions of tonnes.) Think about it: this amounts to a transfer of thousands of crores from deficit-ridden states to foreign exchequers, airlines, and whoever gets the transport contracts. All to ensure the airline sector remains “healthy”, or more accurately, survives its inefficiencies. Populist, perhaps. But is that anything but middle-class populism?

The entire structure of the subsidy state is riddled with such “populism”. Small and marginal farmers control a quarter or so of arable land, frequently land least responsive to fertiliser; fertiliser subsidies thus overwhelmingly help the wealthy. Larger farmers also own an even more disproportionate share of tubewells, ensuring power subsidies are doubly regressive. Fuel subsidies have similar effects: in a very few years, if nothing changes, half of the private cars on Indian roads will run on diesel.

So what stands in the way of changing this? More and more, the answer is apparent: appeasement of the middle class. Consider the continuing debate over water privatisation. The idea we’re being sold by elitist activists is that it is a World Bank conspiracy to gouge the poor, and end cheap access to water. Of course, in Delhi, for example, the only people who actually have subsidised water, at a couple of hundred rupees a month, are the middle class. In its slums, people pay around Rs 600 a month to brokers for wholly inadequate, brackish water. Nor can they afford tubewells.

Middle-class concerns stand in the way also of reforming the transfer system. It isn’t just the continued concern that cash transfers will hurt the poor — a concern that recipients of subsidies notably do not share, since they presumably are aware that they won’t “drink away the cash”. It’s visible also in the attitude to the Unique ID project, continually stymied by elitist (and misplaced) panic about its privacy implications. Those lining up in poorer neighbourhoods across this country for biometric verification and a shot at an actual identity already live with harassment by coercive arms of the state. The UID, they recognise, brings hope of redress and accountability, something the middle class takes for granted.

When Mr Mukherjee sits down to consider government finances, therefore, he will be constrained not by aam-aadmi populism, but by bourgeois entitlement. Nor can he point to the tax structure as going some distance towards correcting the gross inequality that warps our political economy. Abhijit Banerjee and Thomas Piketty of MIT point out that, while in 1998-99, the share of pre-tax income of the top percentile of taxpayers was about nine per cent of taxpayer income, that share exploded to 30 per cent in a decade. Indeed, only the top 0.1 per cent of taxpayers has had income grow at faster than the per capita figure for the economy!

The strength and endurance of top-percentile income growth are clearly visible through this slowdown. Overall growth has dipped to below seven per cent; but we don’t have figures on the regional or class break-up. So look at other indicative data, say from consumer durables. Flat-panel TVs appear recession-proof, growing by 50 per cent or more. Overall car sales went up by only four per cent last year; SUVs – especially diesel SUVs – by over 13 per cent. If the finance ministry is looking to expand the tax net, luxury purchases are an obvious target; the only thing likely to hold them back is the fear of middle-class anger. Heaven forbid that LCD TVs cost a thousand or so more. All this, mind you, as rural demand appears to be imploding.

Meanwhile, after has avoided raising income taxes, or broadening their net. Comparisons to China are always infuriating, but consider this: in China, the income-tax base has increased from less than 0.1 per cent in 1986 to about 20 per cent in 2008; in India, it has remained at two or three per cent of the population. Mr Piketty and another collaborator, Nancy Qian, expect that in China income tax revenues will be over five per cent of GDP in a few years. In India, they’re around 0.5 per cent.

So it isn’t aam-aadmi transfers that are giving Mr Mukherjee sleepless nights. It’s what India’s vociferous middle class, which expects pampering from its government, will do and say if its cash-cow state reforms itself. If the were to actually consider itself a party of the bottom 90 percentile, it wouldn’t hesitate. This year’s would raise taxes, restructure subsidies, and stimulate agrarian and industrial growth.