By Bhogtoram Mawroh
“A look at data provided by the Ministry of Commerce and Industry shows that India’s trade balance during November 2022 had a deficit of around 11.11 billion dollars, i.e., imports were more than exports. This means that it is not external but internal demand which has been the main factor driving growth in the country.”
One of the most talked about points from the 2023-2024 Budget is the announcement by the Union Finance Minister, Nirmala Sitharaman that the threshold for being eligible for paying income tax has been raised from 5 lakh to 7 lakh. Touted as a significant move to help the middle class, the tax relief is expected to have an important impact on demand generation in the economy as well. It is assumed that raising the tax limit will result in more disposable income with the households which will increase their personal consumption which in turn will lead to more private investment into the economy. Indeed, many commentators are of the unanimous view that it is the lagging private investment which is the biggest problem plaguing the Indian economy. So the increase in household disposable income is a good move. But is the intended benefit going to be really significant for the overall economy?
A look at data provided by the Ministry of Commerce and Industry shows that India’s trade balance during November 2022 had a deficit of around 11.11 billion dollars, i.e., imports were more than exports. This means that it is not external but internal demand which has been the main factor driving growth in the country. As such private consumption, i.e., personal consumption or consumer expenditure becomes very important. Here the extra disposable income becomes very crucial. If the proportion of the Indian population enjoying the benefit of this rebate is high it will undoubtedly improve private consumption.
However, the ‘State of Inequality in India Report’ released by Dr Bibek Debroy, Chairman, Economic Advisory Council to the Prime Minister (EAC-PM) revealed that based on the extrapolation of the income data from the PLFS (Periodic Labour Force Survey) 2019-2020 those earning a monthly salary of Rs. 25,000 are already amongst the top 10% earners in the country. This means that 90% of the workers in India have an annual salary of less than 3 lakh. This means that the benefit of the tax relief has only reached a very small proportion of the population. So while it will help the households whose disposable income will go up but the benefit to the overall economy might not be very substantial. Still this move brings focus to a very important aspect of economic policy, i.e., putting money (in this case through tax relief) in the hands of the common people is important for driving growth in the economy. This lesson is very important for Meghalaya.
Recently the All India Trinamool Congress (TMC) released their manifesto for the upcoming Assembly elections in Meghalaya. What has been most talked about from their document is the cash transfer schemes which they have promised to implement if voted to power. There is a promise of direct benefit transfer of Rs. 1200 to the families of all school going children in Government run schools to cover the cost of books and allied material. Under the Meghalaya Youth Empowerment (MYE) scheme every unemployed youth between the ages of 21-40 will get a monthly allowance of Rs. 1000 per month (Rs. 12,000 annually). A direct transfer of Rs. 1000 per month (Rs. 12,000 annually) will be done to a woman of every household as guaranteed universal income support under the Meghalaya Financial Inclusion for Women Empowerment (MFI WE) scheme. A sum of Rs. 10,000 per annum as financial assistance will be given to all farmers of the State under a new FARM (Farmer’s Assistance for Rural Meghalaya) scheme. Finally, all social welfare pensions are also to be increased by Rs. 1000 per month. Barring the last, all these initiatives have been pejoratively described as freebies, i.e., something that have been given free of charge and are therefore bad. However this line of reasoning ignores the fact that the money is not actually free and that there are economic benefits to be had as well.
One of the most important sources of revenue for the Government is taxes, direct and indirect. While direct tax is paid by those whose income is above a certain limit, in this case above 7 lakh, indirect taxes are paid by all, e.g., GST which ranges from 5% to 28%. This means that direct tax in the country is paid by less than 10% of the population while indirect tax is paid by all. The latter accrues to the government when people spend money in the market to buy things for consumption. It is important to remember that even if you are unemployed or a beggar, both presumably unproductive categories, you are still paying taxes. It is only death that can get you rid of taxes. This means that every single citizen of Meghalaya has been contributing to the State’s coffers since they were born and will do so until they die. So the income support promised by TMC is nothing but what everyone has already contributed to the Government through taxes but given back to only some of the people.
According to the NPP (National People’s Party) the schemes would cost around Rs. 2000 crore to the Government which will put a strain on the State’s exchequer. I, however, see it as an injection of Rs. 2000 crore into the local economy to increase demand by putting money in the hands of the people. Just like the tax breaks, by increasing the disposable income of individual households this will push private investment improving business in the economy. And when business improves this will increase the tax revenues for the State as well. The added advantage of this approach is that since the money will go directly to the intended beneficiaries it will also mean Rs. 2000 crore less available for corruption.
However, this is just one part of the solution. This demand-side intervention needs to be supplemented by supply-side interventions as well. Income support ensures that the value created in the economy is transferred back to those who produced it in the first place. But there is also a need to increase the total value in the economy, i.e., increase the GDP of the State, to ensure that more resources are available to improve the living standards of the population. Also if the supply-side is ignored then just income transfer will definitely lead to the State falling into indebtedness.
TMC has promised to bring about double digit growth in the next five years to double the size of the state’s GDP. With the State’s CAGR (Compound Annual Growth Rate) being less than 2%, this will be a very difficult task. Also, the question is how will that be achieved? The Manifesto gives the impression that TMC intends to achieve those goals by adding more MSMEs (Micro Small and Medium Enterprises) and resuming coal mining. While I am not an advocate of coal mining, the sector did provide a great deal of revenue to the State. Also through personal discussion with street vendors there is consensus that the ban did affect the demand in the local economy. But even then mining constitutes less than 10% of the value created in the Primary Sector which itself contributes just around 20% to the GDP. Resuming mining will help but is not going to be the solution. MSMEs, on the other hand, can be very important. Nationally, they contribute more than 29% of the GDP, 40% of the employment and 50% of the export. So the potential of MSMEs for driving economic growth in the State is immense. But Demonetization, GST and the COVID-19 pandemic have badly affected the sector. Overcoming these challenges will determine whether the sector can help TMC deliver on its promise of doubling the GDP and making Meghalaya poverty-free.
NPP has termed the income support promised by TMC as ‘debt traps’ and a burden on the state’s exchequer. There is some truth to that but the narrative created by the TMC is equally important, i.e., the money with the Government actually belongs to the people and it must go back to them. And it makes good economic sense as well. Otherwise, it will be used only for paying salaries and pensions to the politicians and for their personal wealth accumulation. Whoever wins the next election the citizens of Meghalaya should not forget this important fact.
(The views expressed in the article are those of the author and do not reflect in any way his affiliation to any organization or institution)