Redistribution, but not at the cost of growth

Amitabh Kant

In the years since Independence, redistribution of wealth took priority over economic growth in India. However, the redistribution policies failed to make a serious dent in poverty levels, and kept economic growth subdued. While the liberalisation efforts of the early 90s led to an explosion in wealth creation and a substantial reduction in poverty, the reform agenda lost steam in the coming decades. Building on the impressive growth brought on as a result of reforms and increases in infrastructure spending, large scale redistributive policies were launched in India in the late-2000s. However, as the economy slowed down in the aftermath of the Global Financial Crisis, the scale of government spending became unsustainable.

This is not to say redistribution should not be pursued. However, the means through which redistribution is undertaken is crucial. Cash transfers, progressive taxation and investments in human capital are the key instruments through which redistribution is undertaken, according to an IMF paper. There are of course, limits through which the first and second instruments can be utilised. For instance, take the early 1970s, where the highest personal income tax bracket was in excess of 95%. In a progressive taxation system, efforts must be made to increase government revenues through a widening tax base, and not through increasing marginal tax rates.  Similarly, cash transfers, while important, must be accompanied by efforts to increase access to government benefits & services. Investment in human capital must also be regularly monitored and evaluated, not in terms of inputs alone, but also in outputs and outcomes.

Large scale redistribution programmes come with a fiscal cost. Government revenues can either come from tax revenues or non-tax revenues. Tax revenues form a lion’s share of revenues in India. Tax revenues, in turn are crucially linked to the overall health of the economy. The logic is simple, as people earn more, more taxes are collected. Important also is the tax collection mechanism, which should encourage voluntary compliance. Deficit financing is employed when government expenditures are greater than revenues. This means that the government is borrowing money from markets to fund their expenditures. This is what has been termed as the fiscal deficit.

Now that we have established that the state of the economy is crucial in determining tax collections, we can infer that to increase tax collections, boosting the economy, i.e., increasing the size of the economic pie is crucial. Consider the case of the Nordic Countries. These have been consistently cited as the best places to live. Yet, their economies are amongst the most dynamic as well. These countries have consistently ranked high on the Economic Freedom Index, which measures the degree of economic freedom in a nation. New Zealand, which has been ranked at the top, both in the Economic Freedom and Ease of Doing Business Indices, has been lauded for its strong social security nets. Therefore, key to running sustainable and transformative redistribution policies is a robust & dynamic economy.

Crucial structural reforms, governance reforms and regulatory reforms have been undertaken by the current government to formalise the Indian economy and unlock long standing inefficiencies. A new tax regime has been rolled out, both in direct and indirect taxes. The new system promotes voluntary compliance and trust, compared to the adversarial regime that had built up in India’s taxation system. Faceless assessment and appeals, reduction in corporate & personal income tax rates, a resolution mechanism for pending disputes, GST with input tax credit are testament to the fact that a rules based, voluntary compliance system of taxation is being ushered in.

In India, we have seen all three instruments of redistribution policies at play now and in the past as well. However, access remained a key hurdle. The money being spent by the government was not reaching its intended beneficiaries. I remember in my early days as an officer, where the then Prime Minister said that for every Rupee spent by the government, 85p was leaked. There has been a paradigm change since then, primarily over the past few years. A key differentiator over the past few years has been a focus on service delivery, accountability and transparency, enabled through technology. Addressing issues of access are of immense importance in combating inequality. Access to healthcare, sanitation, drinking water, electricity, cooking gas, internet, houses and finance are just some areas in which giant leaps have been taken. The record speaks for itself. By addressing issues of access, a huge impediment towards greater wealth and income equality has been overcome. This has been achieved without any substantial increase in marginal taxation. Large scale cash transfers are also taking place, through the PM-KISAN scheme and through direct benefit transfers (DBTs). Human capital has also been receiving due attention. The world’s largest health insurance scheme is run in India. The focus has shifted towards measuring quality of education, achieved access to education. A new National Education Policy has been launched, the first in over three decades.

Much has been done in India to battle inequality over the past years, with the emphasis being on improving access to government benefits and services. This has been achieved not through any substantially larger increase in expenditure alone, but through a combination of many factors. First, budgetary were increased. However, this was accompanied by governance reforms that promoted accountability and transparency. Technology played a crucial role as an enabler of robust monitoring and evaluation systems. The result was efficient delivery of services to the bottom of the pyramid. At the same time, efforts have been made to boost the economy’s potential growth rate through a series of structural reforms, each of which addressed inherent inefficiencies in the economy. Redistribution and growth need not be competing policy goals. A robust economy is crucial in financing redistribution programmes. In turn, these investments in redistribution have a multiplier effect on the economy in the long run.

*The writer is Chief Executive Officer, NITI Aayog. Views are personal.