India should center its debate on rising inequality and we should be intolerance about this. Things are glorious for the rich and wealthy in India. According to data by a private bank shows that India’s richest 1% owned just 36.8% of the country’s wealth in Yr 2000; while the share of the top 10% was 65.9%. This has changed dramatically by Yr 2015 and share of the top 1% has now crossed 50%. The study also suggests that India’s wealth increased by $2.284 trillion between Yr 2000 and Yr 2015. Of this incremental wealth, the richest 1% has hogged 61%, while the top 10% bagged 81%.The rich of India have gained manifold and some time at expenses of common. All the statistics shows that rich control most of the assets physical or financials of the country. The consequence of this widening divide can be witnessed that 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 masses on this rising inequality and crony capitalism. Just look at consequences, the private security guard industry, which was nonexistence a decade back employees more than 7.0 mn workers which are approx. 4x more than the total police force of the country. Why? To protect the asset of have from have not. There are four reasons for this huge increase in inequality over the last one and half decade: One, The inflationary pressure, which has inflated the physical and few financial asset prices by manifold. Two, deflationary pressure in the labor income due to demographic dividend at the bottom of pyramid, Three, abysmal job creation in the economy and lastly, the runway black economy which has created benami asset owners and rent seekers.
Younger generation has only labour income to acquire basic needs
Today 50% of India is less than 35 years of age and they are aspiring to job and home to build. The ballooning property markets have created a huge divide people who own and cannot own. Investors have crowded property market and state has suitably incentivized the actors to keep the property prices high due to their dependence on revenue generated by the sale of land. This has resulted in the rising mortgage payments as a percentage of household income over the past 15 years across the India and all this is happening in 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 labor income. If one has labor income and wants to own a home in a city like Delhi, Mumbai, Jaipur, Bangalore or even other tier II; today, that is much more difficult 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 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 not in Profit and loss account of the households. Incidentally, most of the government measures of tax collection are directed towards taxing profits rather balance sheet of households. In last budget government surrendered wealth tax in favor of some surcharge on higher slabs of income. Today the modern day data and tools by IT department are equipped to track and tax the balance sheet of India. The digitization 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 time frame of progress to a developed nation.
Government should Tax Balance sheet; It has hugely benefit for the 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 percent of our net worth to good cause of society. 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 definition wider enough. The tax structure should be homogeneous in all the asset classes.
Taxing Balance sheet measure will result in huge sum of money in government coffer (Approx Rs 85,000 cr) will reduce the government borrowing by 20-25% p.a. 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 crs. The reduction in interest rate will ensure that India will usher in creation of world class infrastructure ensures boon for equity markets and availability of credit to many social projects which can become viable at lower cost of capital. This measure also fulfills 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 banking system and avert the crises, seen today. Along with this government should introduce a nominal 5% long term tax on equities, increase Securities Transaction Tax (STT), abolish sec IT Act 54 F which give lee way to ultra HNIs to disguise income by buy second or third homes, introduce vacant land tax of 1% to dissuade hoarding of land and curb black money menace.
Globally, countries have undertaken various measures to reduce inequality in the society.
- France: There is a solidarity tax on wealth on any net assets above €800,000, if your total net worth is €1,300,000 or more. Marginal rates range from 0.5% to 1.5%. Spain: The tax rate is progressive, from 0.2 to 3.75% of net assets above the threshold of €700,000 after €300,000 primary residence allowance.
- 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% to 0.94% 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 the recent years : Austria, Denmark (1995), Germany (1997), Finland (2006), Luxembourg (2006) and Sweden (2007) after achieving desired mile stones.
These are the words from dying mother of Bill gates “From those to whom much is given, much is expected,” which pushed him to philanthropy. India of our dreams cannot be built on weak financial foundation and huge economic disparity. 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 sure we have also our bit.
(Manish Bhandari, CIIA CEO of Vallum Capital Advisors, is based in Mumbai and advises on Investments to HNIs and Institutions)