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Budget 2016 should address the rising inequality in India

The rich of India have gained manifold and sometimes at the expense of the common man. All the statistics show that the rich control most of the assets - physical or financial - of the country.

Manish Bhandari | February 24, 2016 | Updated 12:43 IST

Manish Bhandari
India should centre its debate on rising inequality and we should be intolerant about this. Things are glorious for the rich and wealthy in India. According to data by a private bank, India's richest 1 per cent owned 36.8 per cent of the country's wealth in year 2000, while the share of the top 10 per cent was 65.9 per cent.

This has changed dramatically by year 2015. Today, the share of the top 1 per cent has crossed 50 per cent. The study also suggests that India's wealth increased by $2.284 trillion between 2000 and 2015. Of this incremental wealth, the richest 1 per cent has hogged 61 per cent, while the top 10 per cent bagged 81 per cent.

The rich of India have gained manifold and sometimes at the expense of the common man. All the statistics show that the rich control most of the assets - physical or financial - of the country. The consequence of this widening divide can be witnessed from the unequal distribution of wealth. Crony capitalism is resulting in rising dissatisfaction among masses.

The watershed election of year 2014 also has shades of anger of the masses on this rising inequality and crony capitalism. Just look at the consequences: the private security guard industry, which was nonexistence a decade ago, employs more than 7 million workers, which is approximately four times the total police force of the country.

Why? To protect the assets of the haves from the have-nots. There are four reasons for this huge increase in inequality over the past one and a half decades. One, inflationary pressure, which has inflated the physical and few financial asset prices manifold. Two, deflationary pressure in labour income due to demographic dividend at the bottom of pyramid. Three, abysmal job creation in the economy. And four, the runaway black economy, which has created benami asset owners and rent seekers.

Younger generation has only labour income to acquire basic needs

Today, 50 per cent of India is less than 35 years of age and they are aspiring for jobs and homes. The ballooning property markets have created a huge divide between people who own and cannot own homes. Investors have crowded the property market and the state has suitably incentivised the actors to keep the property prices high due to their dependence on revenue generated by the sale of land.

This has resulted in rising mortgage payments as a percentage of household income over the past 15 years across India, and all this is happening at a time of record low interest rates in the global markets. Without inherited wealth, it is very difficult for younger generations to access property, simply because they only have their labour income. If one has labour income and wants to own a home in a city like Delhi, Mumbai, Jaipur, Bangalore or any other tier-II city, it is much more difficult today than 10 to 15 years ago.

The same is true for acquisition of particularly inflation beating financial assets like equities. An average Indian is competing with foreigners with low cost of capital or the ultra wealthy for acquisition of fractional ownership of financial assets.

The measure of inequality is not well understood by the government. It is reflected on the balance sheet, and not in profit and loss accounts of the households.

Incidentally, most of the government measures of tax collection are directed towards taxing profits rather balance sheet of households. In the last Budget, the government surrendered wealth tax in favour of some surcharge on higher slabs of income. Today the modern-day data and tools used by the I-T department are equipped to track and tax the balance sheet of India. The digitisation of land records has ensured that we will have full assessment of ownership of land by individuals. A simple idea can change the fortune and shorten the time frame of progress to a developed nation.

Government should tax balance sheet; It has huge benefits for society

We need to introduce progressive tax on wealth over a certain level; property rights should in effect be temporary. This means that each year we have to return to society a very small percentage of our net worth for a good cause. This can be achieved by implementing a small tax on net worth of a household - 15 bps on their assets. I have carefully used world household not individual to make the definition wide enough. The tax structure should be homogeneous in all the asset classes.

Taxing balance sheet will result in huge sum of money in government coffers (approximately Rs 85,000 crore) and will reduce the government borrowing by 20-25 per cent per annum. This will lead to structural reduction in interest rate by 100-150 bps with spiral impact on servicing of outstanding public debt of Rs 69,00,000 crore.

The reduction in interest rate will ensure that India will usher in creation of world class infrastructure, and ensure a boon for equity markets and availability of credit to many social projects, which can become viable at lower cost of capital. This measure also fulfils the crying need and promise of current government of identifying black money participants and taxing them. We will be able to deflate the inflated balance sheets submitted to the banking system and avert the crises seen today. Along with this, the government should introduce a nominal 5 per cent long-term tax on equities, increase securities transaction tax (STT), abolish sec IT Act 54 F, which gives leeway to ultra HNIs to disguise income by buying second or third homes, introduce vacant land tax of 1 per cent to dissuade hoarding of land, and curb black money menace.

Globally, countries have undertaken various measures to reduce inequality in the society:

1. France: There is a solidarity tax on wealth on any net assets above 800,000 euros, if your total net worth is 1,300,000 euros or more. Marginal rates range from 0.5 per cent to 1.5 per cent.

2.  Spain: The tax rate is progressive, from 0.2 to 3.75 per cent of net assets above the threshold of 700,000 euros after 300,000 euros primary residence allowance.

3.  Switzerland: A progressive wealth tax that varies by residence location. Most cantons have no wealth tax for individual net worth less than CHF 100,000 and progressively raise the tax rate on net assets with a top rate ranging from 0.13 per cent to 0.94 per cent depending on canton and municipality of residence. Wealth tax is levied against worldwide assets of Swiss residents, but it is not levied against assets in Switzerland held by non-residents.

Some other European countries have discontinued this kind of tax in recent years after achieving desired milestones: Austria, Denmark (1995), Germany (1997), Finland (2006), Luxembourg (2006) and Sweden (2007).

India of our dreams cannot be built on weak financial foundations and huge economic disparity. The post-Independence generation is yet to make its meaningful contribution towards the building of modern India. Implementing a radical yet simple idea like this will ensure we have also done our bit.

The author is Managing Partner and CEO of Vallum Capital Advisors

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