Economy in stagflation; Budget must tax the wealthiest: Jayati Ghosh

Economy faces 'massive problem' of poor demand and corporations acknowledge that, says the economist.

Government spending on food, employment, health and education would be crucial numbers in the Union Budget on Tuesday, said development economist Jayati Ghosh. Indian economy is in stagflation with rising prices and falling employment, Ghosh, professor of economics at the University of Massachusetts, told Indivjal Dhasmana in an interview.

You have been making a case for increasing allocations to MNREGA and increase in workdays from the present 100. You have also been arguing for a similar scheme for the urban poor. Where will the government find the fiscal space to fund these?

I find it very interesting that whenever we talk about the things that affect the livelihood of the ordinary people, we are asked where the money is. On the other hand, when tax relief is given to corporations which hit the revenues by almost two per cent of GDP, nobody asks where the money is coming from. Employment programmes have very large multiplier effects. The Indian economy is facing a massive problem of inadequate demand. Even large corporations are saying we have to do something to increase the domestic demand. At the moment, we have micro, small, medium enterprises dying thousands by a day. They employ 85 per cent of our workers.

One of the biggest way of ensuring that they survive is by ensuring that there is demand for their products. And that comes from the money in the hands of people down at the ground.

You have also called for raising the allocations to the health sector three times. The same question arises: how will it be financed?

At the moment, the Centre spends 0.3 per cent of GDP on health. It is so embarrassing that I dare not say this abroad, people will laugh at us. The Centre and the states spend one per cent of GDP on health. Globally, this is an abysmal number. The global average is 5-6 per cent of GDP by the public sector health. We should be spending 5-6 times more. In Asia, other countries are spending that much. If you ask me where will money come from?  One of the obvious ways to do this is to impose a wealth tax. This is something which is being talked about globally. Wealth inequality in India is not only one of the highest in the world, but has increased most rapidly in the latest pandemic period. Put a tax on extreme wealth, not regular wealth and pick only the wealth you can identify--financial assets, stock market holdings. Just tax four per cent of that. It’s a tiny amount, nobody will notice it.

S Subramanian, former professor of Madras Institute of Development Studies, did a calculation before the pandemic that if you tax just 965 top wealthy families at four per cent, you will generate slightly more than one per cent of GDP. Their wealth has trebled since then. Even if we tax them at two per cent, you will still generate more than one per cent of GDP.

But wealth tax was abolished by former finance minister Arun Jaitley because the transaction cost was much more than collections. Don’t you fear similar problems for this wealth tax too?

That wealth tax was poorly designed and badly implemented. It extended to all levels of wealth. It went from middle class upwards. It meant immense calculations and naturally there was a very high transaction cost. I am not proposing that. I am saying we go for the extremely wealthy and we look at the wealth which is easily identified. So we look at financial wealth, we look at property. That does not involve high transaction cost, that only needs political will.

A few days ahead of the previous Budget, you had said that the two numbers that should be looked at are the government expenditure during the current financial year and that during the previous financial year. What is your assessment about the expenditure in the current financial year since nine months have passed since then?

Utterly, utterly depressing. The government spent less in FY’21, a pandemic year, than before. We are possibly the only country in the world that has done that in the pandemic year.  We cut down on so many essential areas--education, ICDS--which are fundamental for our future. In the first half of the current financial year, there is barely an increase even over the decline in the previous year.

Would you consider the two numbers the most important that you talked about last year in the forthcoming Budget too?

I would add one number. I would look at how much is being spent on the sectors that will generate mass demand.

Which are these sectors?

Food, rural employment, ideally urban employment, health and education. Because that is where we will get a clue whether mass demand will improve or not.

Former chief economic advisor Kaushik Basu recently said that the Indian economy risks stagflation. Do you concur with his views?

It’s not a question of risk, it is happening. It is an economy which is declining in real terms and prices are going up.

Has it reached the stage of stagflation?

Well, we can’t say declining growth rates because we had a major slump (in the previous year). But a slow and stagnant economy with rising prices and falling employment. The essence of stagflation is falling employment and rising prices and  that we are experiencing. There is no debate about it.