Prabhat Patnaik

Political formations in India have generally come to accept the idea of economic transfers to the poor. The Congress made it a major plank in the recent Karnataka elections. Even the BJP, which favours transfers to the rich in the name of “development” and debunks transfers to the poor as “freebies”, engages in some “freebies” at election times. And several economists advocate cash transfers for guaranteeing a basic minimum income in society.

All this is good news, but transfers are a distinctly suboptimal way of redressing economic inequality. This is so for at least three reasons. First, they constitute, and are also presented as, a largesse on the part of the government, thereby demeaning the recipients into mendicants. Second, they can be withdrawn at any time at the mercy of the government. And third, they do not necessarily yield real benefits to the recipients in the form the latter would like: if there are no schools or hospitals in the neighbourhood, then simply giving cash to the poor does not ensure education or healthcare for their children. It is therefore preferable to institute a set of universal, justiciable, and constitutionally guaranteed fundamental economic rights, on a par with the fundamental rights that already exist, as the means of building a welfare state.

Let me take just five such rights: a right to food for everyone (on par with what the BPL population gets at present); a right to employment (failing which the unemployed person should be paid a statutorily fixed wage or salary); a right to free, quality public education; a right to free, quality public healthcare (through a National Health Service as in the UK); and a non-contributory living old-age pension (for all those who are not getting pensions through some existing institutional arrangement) and disability benefits.

The institution of these five rights will require, in addition to what is already being spent under these headings in central and state government budgets, an additional public expenditure of about 10 percent of GDP. Raising financial resources for such expenditures should not be a problem. Since any initial extra public expenditure generates some extra tax revenue within the period itself, which also gets spent, to spend an extra 10% of GDP, the governments at the central and state levels will need to raise an extra 7% of GDP as tax revenue.

This amount can be raised through the imposition of just two additional taxes, and that too only on the top 1% of the population: a 2% wealth tax and a 33.3% tax on whatever wealth is passed on as inheritance or gift. (Details are given in an article by P Patnaik and J Ghosh in Aruna Roy, Nikhil Dey, and Rakshita Swamy, eds., We the People.) These are extremely modest rates: during the last US presidential elections, one contender, Elizabeth Warren, had suggested a two-slab wealth tax of 1% and 2% (a proposal publicly endorsed by several billionaires), while another, Bernie Sanders, had suggested a graded wealth tax going up to 7%; and several advanced capitalist countries have inheritance taxes much higher than suggested here, such as 40% in Japan.

Of course, raising adequate financial resources does not ensure that spending of this order will not be inflationary, but two mitigating factors are pertinent here: first, these rights need not be instituted all at once; their introduction can be staggered over a couple of years, during which production capacities can be built up to take care of any excess demand. Second, there is already enough “slack” in the economy, in the form of unsold food grain stocks and unutilized industrial capacity, to absorb the impact of the initial injection of demand without causing any additional price rises.

To be sure, the proposals mooted here will make serious administrative demands. There will have to be an agreed-upon allocation of responsibilities and, correspondingly, of resources between the centre and the states for instituting these rights. But such hurdles will not be insurmountable and obviously cannot be allowed to hold up the institution of such rights. Likewise, the administration of a wealth tax is not easy, which is usually the reason given for abandoning this tax in India and elsewhere, but its administrative difficulties must not be allowed to get in the way of imposing a wealth tax, and one can learn from the way that the recent American proposals mentioned above were designed to be implemented.

No doubt, with the relatively unrestricted trade and capital flows that neo-liberal India currently has, the building of such a welfare state, where the government has major responsibilities, may undermine the “confidence of finance” and trigger a capital flight, making the balance of payments unmanageable. But the economic regime that a society adopts should serve its basic objectives; these objectives should not be adjusted to what is feasible within a particular economic regime. Hence, if the regime of relatively unrestricted trade and capital flows becomes a barrier to instituting economic rights, then that regime should be altered through the imposition of appropriate trade and capital controls.

If a Constitutional amendment for instituting fundamental economic rights appears infeasible for some reason, then a unanimous resolution in both houses of parliament can be tried instead, as happened with the MGNREG Act. But the people must not be made to wait ad infinitum for the benefits of GDP growth to “trickle down” to them.

(The writer is senior economist, Professor Emeritus at Jawaharlal Nehru University, New Delhi. He was the vice-chairperson of the Kerala State Planning Board.)

(This is the fifth of a series of articles on inequality in India in Deccan Herald, curated in collaboration with the Centre for Financial Accountability, New Delhi)

This article was originally published in Deccan Herald and can be read here.

Centre for Financial Accountability is now on Telegram. Click here to join our Telegram channel and stay tuned to the latest updates and insights on the economy and finance.