Subramanian Swamy, the man who minces no words with his opinions and views has been in the news of late for his tirade against Raghuram Rajan and the Chief Economic Advisor Mr. Arvind Submaniam. For now, our interest is not on his tirades against them but on his opinion on income tax and why he wants it to be removed. Subramanian Swamy wrote on The Hindu on an “imminent crash” of the Indian economy and also suggested a way out for the Indian economy. He has suggested the abolition of income tax to boost the economic growth of India. Where is he spot on? Where are the grey areas? Let’s have a look.
Before we go into this, let us quickly look into some important indicators of the economy that as Mr. Swamy suggests is heading towards a tailspin despite a reported 7% growth.
1. Exports and imports of the majority of the commodities have declined steadily.
2. Household savings as a percentage of GDP has come down from 35% in 2005 to 28% in 2015.
3. Investments lined up for infrastructure is lower than the 2005 level.
4. Manufacturing is growing dismally at 2-5 %.
5. NPA’s have risen dramatically and credit growth has slowed.
Adding to this, very slow or nil employment generation all point to one direction, the economy is indeed in a tailspin, will Swamynomics work?
If as suggested by Mr. Swamy, income tax could be abolished, it would have the following cascading effects:
1. The salaried employees who are the main tax payers of India will be able to boost their expenditures and as a consequence, it will boost other businesses besides the salaried employees can retain enough for investments.
2. China leads India in a lot of economic parameters, but lags in one thing, a crucial thing, consumption as a percentage of GDP, India is way ahead of China. China is an export driven economy, India is a consumption driven economy and it is for that reason, the abolition of income tax makes perfect sense to boost consumption.
3. This would also unearth the black money stashed by the ultra rich to avoid tax and gets injected into the economy. The ultra rich and the poor both are out of the tax bracket. The brunt is borne by the middle class who are the engine of India’s economy.
So if income tax is abolished, how will the government earn the money?
Income tax contributes about 2 lakh crores for the government, abolishing that is no straight forward task unless there is a concrete plan to earn from other means. Swamy suggests it could be earned by the auctioning of resources. Auctioning of resources is already happening, auctioning and taxation is a double burden on the consuming Indian who is the prime mover of the economy. The government taxes the citizen and auctions the resources, the money spent by telecom companies in auctions are recuperated from the consumer in the form of high voice or data prices. Both of these reduces the consumption power of the ordinary citizen.
Two ways Indian economy can improve
1. The global economy should improve sooner than later and thereby kick-starting the sluggish exports and imports
2. Boost consumption of Indians by reduction or abolition of income tax. India’s strength has always been its consumption power, the demographic dividend will aid consumption, we need to harness this strength of ours.
1. Could auctioning of resources be sustainable over the long run?
2. Could it affect short, medium or long-term government investments and expenditures?
and few more.