We must admire the ingenuity of the NDA government that has found a way to connect taxes, welfare and winning votes. It was as ingenious as the Electoral Bond scheme where crony capitalism, corruption and electoral funding were connected in a way that no law is seemingly violated.
Coming back to the first triad: taxes, welfare and votes. Shortly after being re-elected in 2019, the Modi government practically gave up on reforms, structural changes in the economy and private investment as the main drivers of GDP growth, creation of jobs and reduction of poverty. That was a painstaking task that required sound economic management. Instead, the government discovered an alternative route to win popular support: welfarism. The advent of Covid-19 provided an economic justification for the new policy. (That the welfare measures fell short of the minimum needs of the very poor, the migrant workers, those who had lost their jobs, the MSMEs that were forced to shut down, and the sick and the old people is a separate point and has been marked as a failure of the government.)
Unjust Tax Policy
The Modi government quickly latched on to the political and electoral rewards of expanded welfarism. The crucial question was, ‘Who should pay for them’?
It was a stroke of genius to hit upon the idea that the poor — who were supposed to benefit from the new welfare measures — should and can fund the new measures themselves! In an equities and just society, the government would have asked the rich and the corporates to pay more so that the government could fund the new welfare measures. The Modi government did the opposite: it cut the corporate tax rate to 22-25 per cent and introduced a generously low rate of 15 per cent for new investments. It also maintained the highest personal income tax rate at 30 per cent, plus an Education & Health surcharge of 4 per cent on the tax. Wealth tax had been abolished and an inheritance tax was not even contemplated.
The main sources of revenue of the government were GST and the taxes on fuel. In the latter, the government found a gold mine. The government also realised that it did not even have to make an effort to mine the gold: the tax payers themselves would mine the gold and hand it over to the government every minute of every day!
Compare the excise duty rates on petrol and diesel when the Modi government assumed office and the rates today, and the prices of essential fuels: (see table 1)
And the extortionate prices have been charged on consumers when the price of crude was nowhere near the USD 108 per barrel that prevailed in May 2014. In the last three years (2019-2021) the average price was about USD 60 per barrel.
The tax contribution of the petroleum sector to the central revenues is mind-boggling: (see table 2)
Poor Pay Daily
The bulk of these amounts were paid by farmers who own diesel pump sets and tractors, owners of two-wheelers and cars, auto and taxi drivers, commuters and home-makers. During 2020-21, when millions of consumers paid the Central government Rs 4,55,069 crore as fuel taxes (and another Rs 2,17,650 crore to the state governments), the wealth of just 142 billionaires increased from Rs 23,14,000 crore to Rs 53,16,000 crore — an increase of Rs 30,00,000 crore!
After taxing the poor and the middle-class and collecting humongous amounts, the Central government used that money to provide ‘additional welfare’ to them! And how much was given as additional Direct Benefit Transfer since 2020? We can count free food grain (Rs 2,68,349 crore in two years), one-time cash allowances to women (Rs 30,000 crore), Rs 6,000 a year to farmers (annual bill Rs 50,000 crore) and some sundry expenditure as pure cash transfers. The annual outgo on these transfers was no more than Rs 2,25,000 crore — which is less than the annual fuel taxes collected by the Centre alone.
That’s why I say, welfare for the poor means that the poor pay for their own welfare! Meanwhile, the number of billionaires and their untaxed wealth grows by leaps and bounds.