Tax the Rich

Lessons for India from the Human Development Report
22 March 2013

The Human Development Report 2013 highlights the rise of the Global South as the main drivers of the world economy, but rapid economic growth does not always equate to improvements in human development as India's experience shows.

They are ascending at a pace unprecedented in speed and scale. Their peoples’ “living conditions and prospects” have dramatically improved.

Between 1980 and 2010, the South’s share of world economic output rose from 33 percent to 45 percent and that of global merchandise trade from 25 to 47 percent. Countries like China and India saw their per capita income double in 20 years – a process that took 150 years in Britain, and 50 years in the United States. Developing countries now account for 58 percent of the global middle class population, up from 26 percent 20 years ago.

But serious north-south gaps persist in the Human Development Index (HDI). By 2020, the combined output of China, India and Brazil is projected to surpass the aggregate production of Canada, France, Germany, Italy, the UK and the US. But the three top developing countries’ HDI ranks put them in the middle of the global development ladder. This speaks to a nasty growth-development disconnect.

India must worry about its recent human development record. Its global HDI rank fell from 128 in 2005 to 134 in 2007 and further to 136 (among 187 countries) in 2012. This is five ranks lower than the HDI of war-devastated Iraq. India’s Gender Inequality Index (GII) ranks an even lower 132nd among 146 countries, and is significantly lower than the GII for Pakistan, Bangladesh and Nepal. The poverty head-count ratio for India is 54 percent, higher than in Nepal or Pakistan.

Worse, the annual improvement in India’s HDI value has slowed down from 1.75 percent in the 1980s to 1.5 percent. Thus, despite recent progress, India isn’t in the core group of “human development high achievers” such as Bangladesh, Chile, Ghana, Indonesia, Malaysia, Mauritius, Mexico, Rwanda, South Korea, Thailand, Tunisia, Turkey, Vietnam and Uganda.

India is a member of BRICS (with Brazil, Russia, China and South Africa). But its HDI is 23 percent lower than the other four countries’ mean. The average Indian’s life expectancy at birth is 65.2 years – eight years lower than in China or Brazil. Why, it’s lower than expectancy in Nepal, Bangladesh, even Pakistan.

The point is India’s human development performance is middling to poor because it has failed to fashion a proactive developmental state, with a vision of shared progress, equity, distributive justice and social cohesion. Such a state directs and regulates investment, it doesn’t leave it to the market. And it builds people’s capabilities through provision of healthcare, food security, housing, education and other social services.

Developmental states treat investment in people not as an appendage of the growth process but as its integral part. The best examples are the Nordic countries, with their highly developed welfare systems. Closer home, there are South Korea, Mexico, Brazil, Venezuela, Malaysia and Thailand, which invest considerable resources in public services.

Enabling people to live to their full human potential is eminently consistent with democracy and enriches it.

For decades, political scientists characterised developmental states as autocratic or suited to autocracy because they can gain legitimacy independently of democracy, popular consultation and participation. Many practise cronyism. But this need not be so, and increasingly, isn’t. Enabling people to live to their full human potential is eminently consistent with democracy and enriches it. That’s part of the broader agenda of building a forward-looking, progressive, compassionate, egalitarian and just society.

India has at best been half-hearted in implementing welfare schemes – despite compelling evidence that public action is imperative if the deep-rooted, structural causes of poverty, deprivation and human insecurity are to be addressed in a severely skewed society which has denied social opportunity to millions for centuries, and in which entrenched interests perpetuate economic servitude and social bondage.

Thus, the United Progressive Alliance (UPA) launched the worthy National Rural Employment Guarantee Act way back in 2005. But it has failed to ensure that all the states pay even the minimum wage to those employed. Worse, it has slashed the scheme’s budget by more than 20 percent in real terms – when more money is needed.

The UPA-2 has made a travesty of the promised food security bill, after having delayed and diluted it beyond recognition from its original form proposed by the National Advisory Council. Prime Minister Manmohan Singh – who famously opposed free food for the poor even if this means letting it rot – had its coverage truncated.

This trend must be reversed. If the UPA is to go into the next election with a popular platform, it must launch new welfare schemes. Two of these cry out for implementation: the proposed National Right to Homestead Bill, and universal pension provision for old people, widows and the disabled.

Under the first, 15 million rural landless families are to be provided one-tenth of an acre (4,356 sq ft), including a house with appropriate location and minimal amenities like drinking water, electricity, roads and transportation. This will cost the Centre Rs30,000 crores a year. But this expense, just 0.3 percent of the GDP, is worthwhile given its likely contribution to the welfare of some of India’s poorest people.

The demand for universal pensions was vigorously canvassed by the Pension Parishad during its March 4-8 Delhi dharna. Its rationale is persuasive. Most old people in India are unable to work or compelled to undertake arduous tasks like loading goods, transporting milk or vending vegetables, which adversely affect their health of violate their dignity. Many have no income at all. It is society’s duty to look after them.

Currently, the National Social Assistance Programme covers just 30 million people, with the old receiving Rs200 in monthly pension, and widows and the disabled getting Rs300. These sums are unspeakably paltry. The coverage must be tripled.

The number of Indians who are 60 or older and deserve support is as high as 79 million – even excluding the more affluent, like income-tax payers. In addition, there are 34 million who are between 55- and 59-years-old, who need support. A universal pension of Rs2,000 per month, as demanded by the Parishad, would cost a doable 3.4 percent of the GDP.

If developing Brazil can afford to spend 8.9 percent of its GDP on pensions, then India can certainly spend half as much.

If developing Brazil can afford to spend 8.9 percent of its GDP on pensions, then India can certainly spend half as much. But to do this, India must raise its tax revenues, which are only 16.5 percent of the GDP – incredibly low for a country of affluence at the top. India’s tax system is regressive. Two-thirds of the tax revenue comes from indirect taxes, which are borne by the mass of the population.

In contrast, the tax-GDP ratio is 50 and 49 percent in Sweden and Denmark, and 45 percent in France. (These figures used to be much higher before the advent of neoliberalism two decades ago.) Even in poorer countries like Brazil, Russia, Turkey and South Africa, the tax-GDP ratio is between 31 and 34 percent, almost twice higher than in India.

Most rich and upper-middle class Indians are greatly under-taxed. Besides, the government annually writes off over Rs5 lakh crores (five percent of the GDP) through various exemptions. This pernicious practice must be ended if the growth-development disconnect is to be abolished.


Image by Kounosu