The spectre is stark. Yes, the Indian economy, high-frequency indicators suggest, is pulling out of contraction. For sure, Goods and Services Tax collections show an uptick but the demand outlook is uncertain for many contributing sectors. Closures rendered over 30 million jobless and unemployment as per CMIE data was over 9% though has since moderated. A large part of the face-to-face economy, which hosts micro-enterprises and wage earners, is stranded between induced coma and vaccine optimism. There is no denying the scarring across sectors.
The Context
The recovery is verily K-shaped – a circumstance where the big do better and smaller ones suffer. Why a K-shape recovery should worry society is explained by what Robert Merton called the Matthew Effect. Merton observed initial and accumulated advantage aggravates those already disadvantaged, worsening stratification. The phenomenon is eloquently illustrated by the divergence between Dalal Street and Main Street in the broader economy. India’s stock indices Sensex and Nifty have nearly doubled since the first lockdown.
Even as small businesses went bust grounding to dust, India’s dollar billionaires added billions to their wealth.
India’s richest man Mukesh Ambani—as per the Bloomberg Billionaires Index—added over $20 billion to his net worth in the year, rising from $58 billion to $79 billion. India’s 100-plus dollar billionaires grew 40% richer between Jan. 25, 2020, and Jan. 24, 2021. Gautam Adani, the second richest Indian, added 218% to his net worth in the period with his wealth rising from $11 billion to over $35 billion.
The Case
The rise in the valuation of the wealth of dollar billionaires stems from the significant actions of the central banks of the world and governments. As per the IMF, governments across the world pumped in roughly $ 11.7 trillion as stimulus and central banks pumped over $7.5 trillion to preserve lives, livelihoods, and order in the financial markets. In India, the government and RBI through credit, liquidity, and relief packages cumulatively unleashed over Rs 30 lakh crore.
As interest rates plunged, money sought better returns in the United States and emerging markets – just in December foreign portfolio investors poured over Rs 62,000 crore into Indian stocks. The consensus opinion across markets is that the rising tide of public money lifted stocks and indices to record levels. For sure, company performance and prospects were determinants of investment. Equally, there is no disputing that the magnitude of the rise in valuations and therefore wealth of entrepreneurs was propelled by public monies.
The argument is that a small portion of the gains of private individuals be returned to the public exchequer – as a humanistic gesture in goodwill, in recognition of the humongous cost of the crisis on denizens and democracies and most importantly in keeping with precepts of stakeholder capitalism frequently articulated by CEOs.
To those who are bound to ask the question, the focus is on listed entities—and exclusion of private, unlisted entities—is determined by the correlation between the flow of public funds and rising valuation. Yes, taxation of unrealised gains seems unusual but it is already embedded in the system – in the taxation of sales made but proceeds not received and in capital gains of immovable assets.
What the quantum of taxable gains would be depends on the timeline. An Oxfam Report ‘The Inequality Virus’ states “India’s 100 billionaires have seen their fortunes increase by Rs 12, 97,822 crore since March 2020.” The extent of the gain can be ascertained by filings with stock exchanges, SEBI, the Ministry of Company Affairs and valuations are in the public domain. The quantum of the tax itself is a matter for political and policy determination. The tax would apply to those worth over a billion dollars. It would be applicable in the current financial year.
The Mechanics
How would this work? Assume the wealth of Mr. Dollar Billionaire has gone up by say $10 billion and the proposed tax rate is 10% or 5%. This means Mr. DB would have to fork out roughly Rs 7,300 crore or Rs 3,650 crore.
Entrepreneurs would not be holding that kind of cash for pay-out. To facilitate the pay-out the government would need to design options. The pay-out could be a one-time single year episode or could be spread over three years.
The government would need to allow the dollar billionaires to pay in shares.
The government could leverage the shares received in one of three ways.
- It could receive and sell them to LIC for cash.
- It could park them in a designated entity such as SUUTI for divestment through ETFs to raise cash.
- It could also create an entity, say a Bharat Billionaires Fund, to raise debt against the assets to fund welfare, recapitalisation of banks, or the new promised development finance institution.
The imposition of this tax would have to be calibrated to ensure business, institutional, and market stability. This means the government assures the promoter that the shares would be monetised in a phased manner and that there would be no threat to management.
The Social Contract
The organising principle of the social contract in any society rests on its legitimacy, in how it balances pain and gain. To quote Jean-Jacques Rousseau, the ideal is “in respect of riches, no citizen shall ever be wealthy enough to buy another and none poor enough to be forced to sell himself.” While the ideal may be utopian there is no question for the need for the state to intervene to prevent what Thomas Hobbes characterised as “the war of all against all”.
The issue of rising inequality, already a concern before the pandemic, has acquired global attention and has been heightened by the surge in the riches of the wealthy following the pandemic. In a year where nearly 500 million lost their jobs and millions of businesses were shut down, the top 0.001% benefited from unprecedented wealth creation.
As per the Bloomberg Billionaires Index, the combined wealth of the 500 wealthiest persons grew by over a third, surging by over $1.8 trillion to touch $7.6 trillion. Five individuals are in the $100 billion bracket, and 20 more are worth over $50 billion.
Global Subscription
The widening chasm has triggered the revival of debate over wealth tax across the world. In the United States, home to some of the richest, lawmakers are pushing for new wealth tax measures.
- During the confirmation hearings this week, Treasury Secretary Janet Yellen averred that “that Treasury would consider the possibility of taxing unrealized capital gains - through a “mark-to-market” mechanism - as well as other approaches to boost revenues.”
- A proposal in California moots to tax 0.4% of a resident’s net worth if it exceeds $30 million.
- In New York, legislators want a tax on unrealised gains of those worth over a billion or more in assets. Calls for taxing wealth have been a recurring theme in U.S. politics.
- Lest it be construed as a partisan liberal theme song, it is useful to recall that in 1999 one Donald J Trump had proposed a 14.25% tax on wealth of $10 million and above.
The politics of economics is driving subscription to the idea of wealth tax. Argentina initiated a one-time millionaire’s tax on wealth in December. Other countries in Latin America, Bolivia Chile and Peru, may follow suit. In the United Kingdom, an independent commission observed “A one-off wealth tax payable on all individual wealth above £500,000 and charged at 1% a year for five years would raise £260 billion; at a threshold of £2 million it would raise £80 billion”.
There is a raft of papers/studies and a rising tide of opinion on taxing wealth. Thomas Piketty, who has dubbed inequality as illegitimate, and Nobel laureate Joseph Stiglitz in a joint call declared that it makes sense to ask this group of wealthy people to contribute more to the public good and pay a wealth tax. In a 2019 paper, Emanuel Saez and Gabriel Zucman, whose work inspired many of the 2020 campaign ideas, suggest an interesting concept of a withholding tax on unrealised capital gains, to be credited back when gains are realised.
Urgent Imperative
Healing the wounds and getting the economy out of the woods and back on its feet for sustainable growth will need resources not available on the books and balance sheet of the government. The gap between expenditure and income of the centre alone is estimated at 7.7% and that of state and central governments is estimated at an unprecedented 14% of GDP or over Rs 20 lakh crore.
Even after assuming higher nominal growth and higher revenues for the coming months, and improved realisations from disinvestment, the gap between need and availability is considerable.
Rahul Bajoria at Barclays estimates the government will need to borrow around Rs 12 lakh crore in 2021-22. The Olivier Blanchard dictum states that sustainability of debt and deficit depends on the cost of servicing debt stays below nominal growth. This limits the borrowing ability of the government.
The government must pave the way with public expenditure to catalyse demand, propel investment and stimulate growth. It is instructive to remember that India migrated from slowdown to lockdown and as the RBI noted in its FSR incipient “pre-pandemic vulnerabilities have intensified and pose headwinds to a fuller recovery.” How will the government fund the spending programme?
Extraordinary times call for extraordinary measures.
Shankkar Aiyar, political-economy analyst, is the author of The Gated Republic: India’s Public Policy Failures and Private Solutions, ‘Aadhaar: A Biometric History of India’s 12-Digit Revolution’; and ‘Accidental India’.
The views expressed here are those of the author, and do not necessarily represent the views of BloombergQuint or its editorial team.
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