A Socialist Mirage

THE SPECTRE OF class war is not new to India’s politics. Come elections and India witnesses co­lourful political rhetoric. In the past, socialist poli­cies made nationalisation of banks a morally virtu­ous exercise. In much of the 1960s, ’70s and even the ’80s, the Planning Commission was testimony to efforts to fashion social results in accordance to political goals that identified ‘enemies’ but did not offer solutions. Despite the tri­umph of liberalisation in the years that followed India’s coming out party in 1991, the 2024 election is turning out to be very different. Congress, in its recently released manifesto, has made economic promises which when seen alongside the statements made by its leaders, cannot be ignored as mere vote-attracting devices.

In three key places, the Congress manifesto makes exceptional promises. Some of these promises are kept deliber­ately vague. But when seen together, they add up to a desire to take India in a far-left economic direction, something reminiscent of the 1970s when being wealthy was looked down upon. The discussion might perhaps have remained somewhat diffused but the noisy debate unleashed by Prime Minister Narendra Modi’s accusation that Congress poll pledges amount to a socialist-style redistribution of wealth with a bias towards Muslims has reig­nited a fierce argument over the utility of such policies.

Some of these promises are worth recapitulating. In the section on the economy, the Congress manifesto promises: “We will address the growing inequality of wealth and income through suitable changes in policies.” (Paragraph 21, page 28). In the section on farmers, it states: “We will appoint a Permanent Commission on Agricultural Finance that will report periodically on the extent of agricultural credit and the need for loan forbear­ance.” (Paragraph 4, page 17). For women, among other things, the manifesto promises: “Congress resolves to launch a Mahalakshmi scheme to provide Rs 1 lakh per year to every poor Indian family as an unconditional cash transfer. The poor will be identified among the families at the bottom of the income pyramid.” The very next paragraph adds: “The amount will be directly transferred to the bank account of the oldest woman of the household.” (Paragraphs 1 and 2, page 15).

The redistributive impulse of these promises is obvious im­mediately. Consider the promise of “addressing” inequality. The manifesto cites a study by the French economist Thomas Piketty and says, “India under Prime Minister Narendra Modi is more unequal than even under the British Raj. The share of national income earned by India’s top 1 per cent is today at its highest historical levels and is among the highest globally. The rise of inequality has been particularly pronounced between 2014 and 2023.” The party is clearly undeterred by the implication that it must bear significant responsibility for India’s inequality, too, if Piketty’s politically coloured conclusions are indeed correct.

It is well-known that India is an unequal country. But it is also a fact that all fast-growing economies experience rising inequal­ity before they settle down to more reasonable levels of inequal­ity. There is no such thing as “perfect equality” unless one lives in a primitive hunting-gathering economy. But even by India’s unequal reality, data shows that inequality in India is declining. Data on the Gini Coefficient—a measure of inequality where 0 indicates perfect equality and 100 perfect inequality—from two different sources, the World Bank and State Bank of India (SBI) Research, shows that inequality in India is declining. The World Bank data shows that after rising to a high of 35.9 in 2017, the Gini Index fell to 32.8 in 2021. This should be con­sidered against other historical points in the same data set: 32 in 1983; 32.5 in 1987; 31.6 in 1993. From 2004 to 2011, the Gini Index rose steadily from 34 to 35.4. The trend highlights several things. One, higher growth often leads to higher inequality even as lack of it can mean stagnant incomes and stubborn poverty. Two, rising inequality was a trend observed during the UPA years from 2004 to 2011. Inequality actually fell in two dif­ferent phases during the Modi years: from 35.4 in 2011 to 34.7 in 2015 and then, after rising, another round of decline from 2017 until the present time.

The result is that inequality—which is a product of growth, the ability to make use of economic opportunities and education—is not a political variable as the Congress mani­festo states.

The latest data from SBI Research that uses data from income-tax returns shows that the Gini Coefficient has declined from 0.472 during Assessment Year (AY) 2014-15 to 0.402 for AY 2022-23. (SBI has normalised the Gini Index to 0-1 instead of 0-100 used in the World Bank data). Clearly, inequality in contemporary India being “worse than the British Raj” is a rhetorical flourish that is at odds with credible data.

Manmohan Singh is remembered for ‘reformist’ credentials but he presided over a government more interested in redistribution in the pursuit of social welfare than economic reforms

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But the political point from the Congress manifesto and state­ments made by its leaders is obvious: if elected to power, India is in for a round of higher taxes—which will fall most heavily on an already harried middle class, its entrepreneurs and other wealth generators—something Congress tried in the 1970s with poor results. That experiment not only killed economic growth in India, impoverishing it for decades before its middle class emerged from the dark period, but also unleashed the worst au­thoritarian tendencies as also corruption in the Indian system.

The promise of the Mahalakshmi scheme is not worded clearly. Its unit of transferring money is the “family” and not the individual. Reliable numbers of “families” living below the pov­erty line (BPL) are not available. The available estimates of poverty are for individuals and these range from 2.5 per cent (some 34.3 million persons based on National Accounts data by Surjit Bhalla) to 10.2 per cent (140.04 million by Roy and Van der Wilde). Both estimates are for 2022. There are other estimates as well. It is hard to calculate the number of BPL “families” from these numbers. As an illustration, consider the amount necessary to transfer ₹1 lakh to 10 million “families” or one crore families. The sum involved is ₹1 lakh crore every year.

From a purely political vantage, the number of poor families at one crore is too low for any electoral gain: there will be a strong urge to bump up the number of ‘poor’ by revising poverty lines by includ­ing ever more goods such as housing, trans­port, education, and health in the basket of goods necessary for living. The result will be a strong upward bias in the money needed for such politically committed expenditure. It is a feature of India’s politics that once such “welfare schemes” are launched, they cannot be scaled down, let alone shut down.

The most extraordinary—and more con­crete—promise in the Congress manifesto relates to loan waivers for farmers. The party that pioneered periodic loan melas on the eve of the elections now wants a Permanent Commission on Agricultural Finance as a statutory body that will, at regular intervals, simply put its stamp on loan waivers for farmers. While couched in ‘sophisticated’ language—the Commission will “report on loan forbearance”—the intent is clear: loans extended to farmers will be waived off on a regular basis.

A more damaging economic policy measure will be hard to find in the annals of India’s policymaking. Some of the consequences are obvious. For one, it will lead to a crisis in banking or farming depending on how the government handles the issue. If banks are not forced to lend to farmers, they will simply stop extending loans, for the risk of default will be close to certainty. This is because the planned Permanent Commission on Agricultural Finance will be designed for waiving off loans. The other possibility is that banks are asked to set aside a portion of their credit specifically for farmers, a return to the damaging “priority sector lending” era. That will have ripple effects throughout the Indian economy. Even now, the promise of loan waivers in state elections has seen farmers reneging on mortgages in anticipation of the promised relief. In Madhya Pradesh, the shortlived Congress government that assumed office in 2018 failed to implement the waiver, and hundreds of farmers became defaulters.

It is difficult to presage what will transpire but three conse­quences are obvious. One, it will create difficulties for the bank­ing system to keep the credit-deposit ratio stable. A portion of the savings of depositors will end up being frittered away and unless replenished by constant infusions, the profitability of banks will come under a cloud. There is no dearth of ‘econo­mists’ who say that banks “generate their own credit”, but the reality is very different from such voodoo economics. In an economy with open financial markets, savers will take their deposits elsewhere. Which leads to the second issue: unless financial repression is undertaken, the scheme of waiving off loans will head to a crisis at some point. Three, it is certain that the Indian economy will stagnate: farmers will have no incentives to move to more productive sectors of the economy. This will have its own consequences.

Sam Pitroda, an associate of the Gandhis, talked about inheritance tax. hH said taxes on the middle class would increase and this section should be ‘large-hearted’

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What these three promises will do is to transfer a massive amount of earnings of the middle class of India to other sections, and that too in an unprofitable manner. There is no economic rationale for these promises but the politics is very apparent. A party that doesn’t believe in generating wealth for all sections of Indians wants to indulge in a massive destruction of prosper­ity and stagnation of the Indian economy.

SINCE THE PUBLICATION of the manifesto on April 5, there has been plenty of controversy over the Congress’ ‘wealth redistribution’ promises. Supporters of the party claim that nowhere does the manifesto promise such redistribu­tion. The three promises in the manifesto highlighted above go a long distance in that direction. But there is more than the mani­festo alone.

At different points, the party’s senior leader Rahul Gandhi has talked of “X-raying” the economic struc­ture of India in a bid to ascertain who owns what and how much. The party says policies will be shaped on the basis of such data. But it stops short of saying that wealth will be redistributed from the rich to the poor. But the hint is sufficient even if the wording of what is said is left deliberately vague.

Sam Pitroda, an old associate of the Gandhi family who is based in the US, recently talked about the importance of inheri­tance tax. As with other leaders of the party, he did not go all the way to say that such a tax would be reintroduced. But as before, the hint was unambiguous that at some point the party could resort to such taxes. Pitroda had also said direct taxes on the middle class would be increased and that this section of society should be “large-hearted” and bear such taxes.

This led to a furore within days with Prime Minister Narendra Modi mounting a direct attack on Congress by quoting Pitroda at a rally in Chhattisgarh on April 24. While he did not name Pitroda directly, his words made it crystal clear who he was referring to. Within no time, Congress communications in-charge Jairam Ramesh clarified in a post on X that Pitroda was free to say what he wanted to but his statements were not the party’s official position. Interestingly, Ramesh did not deny that the party would not engage in further redistributive measures.

This won’t be the first time the party has thought of reintro­ducing inheritance tax and taxing “con­spicuous consumption”. In April 2011, in a full meeting of the Planning Com­mission chaired by then Prime Minister Manmohan Singh, a senior party leader pointed out that since managing non-plan expenditure was becoming “difficult”, the tax-to-GDP ratio should be raised. This, the leader had said, could be done by imposing an inheritance tax and by taxing “conspicu­ous consumption”.

Historically, estate duty was imposed in 1953, but was withdrawn in 1985 as it did not yield expected gains. In any case, estate duty had a political purpose as it signalled to the voters that the government was playing Robin Hood by taxing the rich and distrib­uting their wealth to the poor. It is another matter that the estate duty system had a number of loopholes that ensured it went nowhere or encouraged fraud. This has been the experience with estate duty in almost all countries in the world.

Between various statements made by Congress leaders in the past two months and the party’s manifesto, it is clear Congress wants to take India back to a socialist era— with added embellishments—that prevailed from Independence until 1991 before a bal­ance of payments problem forced the PV Narasimha Rao government to seek help from the International Monetary Fund (IMF). Former Prime Minister Manmohan Singh is remembered for his “reformist” credentials but he presided over a government more interested in redistribution in the pur­suit of social welfare than furthering economic reforms. This was partly due to the influence of the National Advisory Council (NAC), a “super cabinet” headed by Sonia Gandhi and staffed with leftwing and NGO economists and activists. The party’s 2024 manifesto shows that Congress has moved even more left, with the centrist components of its political DNA no longer visible.

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Siddharth Singh

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