Rising-tide is not lifting all in India

The general election has missed multiple opportunities to debate the economic upheavel India is facing, particularly about 90% of the population (the bottom 50% and the middle-40%) rapidly losing their income and wealth shares after India adopted market-driven economic policies in the reforms era of post-mid-1980s – which reached historic high levels in the past decade. The benefits of high GDP growth since then is going to the top 10%. Hence, also the opportunity to deliberate on possible course corrections.

Nothing exemplifies the dire financial conditions of Indians better than the “guarantee” of “free” 5-kg grains per capita per month to a majority of population (a legal right for 67% households) for the next five years and the main Opposition party’s counter promise to raise it to 10-kg. One big opportunity was when the World Inequality Lab’s March 2024 report said the income and wealth inequalities had reached “the highest historical levels” in the current decade of 2014-23.

But there were others:

(i) ILO-IHD’s March 2024 report flagged “paradoxical improvements” in official (PLFS) employment numbers amidst economic crisis and youth constituting 82.9% of the total unemployed.

(ii) The main Opposition party’s electoral promise of redistributing income and wealth to bring equity and suggestion for imposing inheritance tax (‘estate tax’ was abolished in 1985).

(iii) Prolonged hearing in the Supreme Court on acquisition of private property for public purposes and its verdict of May 16, 2024 stating that no such acquisition is valid if proper procedure is not followed.

(iv) Former RBI Governor D Subbarao repeatedly reminding (in February and May 2024) that the metaphor, “a rising tide lifts all the boats”, is making all richer but not lifting up all equally.

Next, the unstated logic behind the GDP-push model of growth in the post-reforms/liberalized era – which was very much the stated case in the previous Nehruvian social era which saw inequality reducing. Chief Economic Advisor Anantha V Nageswaran dismissed all concerns in December 2023 by saying: “…the Indian experience has been that of convergence between growth and inequality rather than of conflict. "Chairman of the 16^th Finance Commission Arvind Panagariya did so in April 2024 in an article titled, “Don’t lose sleep over inequality".

Subbarao’s metaphor (rising-tide) didn’t evoke any response, even though it best captures the ideal of growth and has acquired status of economic theory – an inalienable part of free-market/neoliberal economics which both India and the world adopted in 1980s. India went for pro-market reforms in mid-1980s and market-liberalisation in 1991; the UK (Thatcher) and the US (Reagan) had already taken that route in late 1970s and early 1980s; the World Bank and IMF imposed it on rest of the world in 1980s when many countries, including India, sought their bailouts.

There is at least one instance, of 2019, when the Indian establishment used a different but similar metaphor – "size of the cake" – to explain why it set the goal of making India a $5 trillion economy. The logic being, bigger the size of the cake, bigger the slices for all.

But do these metaphors hold true in real life?

Pitfalls of metaphor becoming theory

The appeal of “rising-tide” metaphor (or "size-of-the-cake" for that matter) lies in the beautiful way it conceptualizes GDP-push growth as “shared prosperity” – a phrase that would create buzz decades later in 2013, first as part of the World Bank’s twin goals in 2013 (the other being ending "extreme poverty") and then found its way into the UN’s Sustainable Development Goals (SDG) of 2015 as “Goal 10: Reduce inequalities” (“No poverty” became Goal1).

The origin of the metaphor is traced to US President John F Kennedy, who used it for the first time in 1962 to defend the controversial Greers Ferry Dam in Colorado. But his speechwriter Ted Sorensen revealed later in his 2008 book "Counselor: A Life at the Edge of History" that it was a “thoughtful slogan” of the New England Council, a regional chamber of commerce, which Kennedy "borrowed often".

In the interim, the metaphor became part of the neoliberal economics.

In the US, it has been used regularly to justify corporate tax cuts (benefiting the high earners) by US Presidents Ronald Reagan, George W Bush (Sr) and Donald Trump. Gene Sperling, National Economic Adviser and Director of the National Economic Council for both President Obama (2011-2014) and President Clinton (1997-2001), wrote in 2007 that the Reagan-Bush era (1980-1993) “were more like a period of rising yachts and sinking row boats". In 2018, the US Congress examined President Trump’s 2017 corporate tax cut to find the tax savings were used for a record-breaking stock buyback of $1 trillion in 2018 – instead of boosting investment or creating jobs as was promised.

India did the same in September 2019 (without using the metaphor) with predictable results.

The corporate tax cuts of 2019 led to a direct loss of ₹2.28 lakh crore in corporate tax in FY20 and FY21 (Parliament answers) and continues. Result?

· Corporate tax collections fell below personal income tax thrice (FY21, FY23, FY24) and is headed for the fourth – FY25 (BE).

· The RBI’s annual report of 2019-20 said, the tax cut was “utilised in debt servicing, build-up of cash balances and other current assets rather than restarting the capex cycle".

· RBI, FinMin and private bankers routinely express hope that the revival of private capex is imminent (on the “cusp” or “uptick” seen) – but that hasn’t happened. At 10.9% of the GDP in FY23 (RE), up to which data is available, private GFCF (actual private capex) has fallen below 11% since FY18 – and is below the average of 12.4% during the previous 13 fiscals of FY05-FY17 (2011-12 GDP series).

The IMF had studied how the metaphor worked in India (when GDP growth was higher). Its 2008 report, “India: Is the Rising Tide Lifting All Boats?", looked at household consumption expenditure data since 1980s and concluded: (i) from 1983 to 1993-94, growth in HCE/MPCE at the bottom of income distribution "outpaced" that at the top, especially in rural India but in urban areas growth was "remarkably distribution-neutral" but (b) after 1991, as the growth accelerated "the shape of the growth incidence curve reversed, with far faster growth at the top than the bottom".

The subsequent inequality studies since 2017 by Thomas Piketty, Lucas Chancel and their colleagues at the World Inequality Lab further confirm the same trend: a secular fall in income and wealth shares of the bottom 50% and the middle 40% (90% of population) while those of the top 10% saw a secular rise. Look at the sheer magnitude of this reversal:

· Income shares of the 90% population (bottom and middle) peaked at 69.6% in 1982 – which progressively fell to 42.3% in 2022 (the top 1% getting 22.6%).

· Wealth shares of the 90% population (bottom and middle) peaked at 56% in 1971 – which progressively fell to 35.3% in 2023 (the top 1% getting 39.5%).

This is also the global trend (intra-country, not inter-country).

Gene Sperling, in his article mentioned earlier, “Rising-Tide Economics” of 2007, wrote about the US experience. He wrote, while the progressives (Democrats) saw the metaphor “not a causal assumption that growth will automatically raise everyone” but as “the aspiration and test for economic policy”, for the conservatives (Republicans) it was "an automatic assumption that growth – and specifically tax relief to upper-income Americans – will trickle down and lift everyone else up".

He explained how the metaphor actually worked during the “New Productivity Decade” of 1995- 2006.

The first half of this decade, he wrote, was “perfect example of the rising tide lifting all boats” when “every economic quintile saw income growth”. But that changed in the second half as “the typical working family saw its income fall” and “record corporate profit growth…due to the historically low share of national income going to labor”. (India saw such historic corporate profits amidst loss of jobs and wages during the pandemic.)

Sperling concluded that neither growth regardless of equity nor equity regardless of growth is desirable. Instead, policies should aim at “raising all boats in the most pro-growth way possible”.

What happens when the tide turns?

Nobel laureate Joseph Stiglitz provided a glimpse of what happened in the US when the tide turns after the Great Recession of 2007-09 hit.

In 2012, Stiglitz wrote: “The year 2011 will be remembered as the time when many ever-optimistic Americans began to give up hope. President John F Kennedy once said that a rising tide lifts all boats. But now, in the receding tide, Americans are beginning to see not only that those with taller masts had been lifted far higher, but also that many of the smaller boats had been dashed to pieces in their wake…"

"By 2011, the savings of those who had lost their jobs in 2008 or 2009 had been spent. Unemployment checks had run out. Headlines announcing new hiring – still not enough to keep pace with the number of those who would normally have entered the labor force – meant little to the 50-year-olds with little hope of ever holding a job again."

Way forward for India

Sure, rapid GDP growth since mid-1980s reduced poverty and hunger until 2015 (OECD-OPHI), but then it was hit by triple blows – demonetisation, GST and Covid-19 – reversing that process (“India’s silent economic crisis”). In the meanwhile, inequalities kept growing.

How to correct the skewed growth (income and wealth accumulating at the top 10%) is well known. Both the IMF’s 2008 study and Piketty et al have established clear links between inequality and policy changes (“rooted in market and government failures”) – which is true for the world too.

Another IMF study published in 2015, “Causes and Consequences of Income Inequality” examined economic data of over 150 countries for 1990-2012 to conclude: (a) rise in the income of the bottom 20% (the poor) drives GDP growth and (b) rise in the income of the top 20% (the rich) reduces GDP growth – a reversal of the “trickle down” neoliberal theory.

Some of the obvious solutions are:

(i) Raise investments in education, health and skilling to improve quality of human capital – to boost productivity and growth and enable the left out 90% to raise their income. Remember, India’s HDI score reversed during 2019-2022.

(ii) Redirect government capex to support agriculture, MSMEs and services which provide far more jobs than manufacturing since 1950-51 to actively create jobs – particularly keep away from sophisticated, technology-and-capital intensive sectors (like semiconductors, for example) which produce very little jobs.

Raising fiscal resources for the above is not a problem.

(iii) Redirect PSB money from writing off loan defaults of big corporate entities (₹14.5 lakh crore of NPAs written off during FY15-FY23) to improve human capital and support job creation.

(iv) Redirect tax towards those with ability to pay more (like, raising corporate tax), rather than depend on indirect tax like GST – a burden on the poor.

(v) Check tax evasion by HNIs. Here is a classic case. Fortune India had analyzed tax data of FY18 to find only 4.26 lakh individuals had declared income above ₹50 lakh – while India had 7.25 lakh dollar millionaires in 2018 and 9.12 lakh in 2019.

(vi) Check tax evasion of corporates. Use of shell companies and tax havens (including for FDI inflows/outflows) is rampant. The EU Tax Observatory’s Global Tax Evasion Report of 2024 says, $1 trillion of profits were shifted to tax havens in 2022 – “equivalent of 35% of all the profits booked by multinational companies outside of their headquarter country”. India figures prominently in its list. It says “extra tax” that India can generate (on “tax deficit” proportionally to sales) in 2023 alone would be $2.4 billion (at 15% tax) and $7.3 billion (at 25% tax).

(vii) Wealth tax of 2% (on net wealth above ₹10 crore) and inheritance tax of 33% (on estates above ₹10 crore) can mobilise ₹2.45 lakh crore annually – which would impact only the “ultra-rich” constituting just 0.04% of population (World Inequality Lab’s estimate of May 24, 2024).