Forget about tax rates, look at a different set of numbers

Households must realize that their micro problems have their roots in the macro issues of deficits, inflation, subsidies and the efficacy of government expenditure

The money is there for the government to spend, but how it spends this and how effective that spending is, are questions that this educated, opinionated urban mass affluent slice of population must now ask. Photo: Priyanka Parashar/Mint

Updated: Wed, Feb 27 2013. 08 59 AM IST

Despite the budget-day hysteria, in which there has been an increasing focus on the household and its reaction to the event, the average Indian home has very little to do with the annual expenditure and revenue statement of the government, also known as The Budget.

I also think that attention has been focused on the wrong part of the budget speech, as far as the household is concerned. The part that gets the most attention is the one that deals with the revenue side of the budget, where the focus is on income tax. We worry about tax slabs, exemption limits and tax rates. But there has been no big change for the last 14 years in the marginal rate of income tax that has stayed at 30%. The only changes have been more of a tinkering in the form of a cess here, a surcharge there, of differential tax thresholds for men, women, or the introduction of a “very senior citizen” category in the last budget (this one still baffles me).

It made sense for the household to watch the budget speech for relief when the tax rates were exorbitant and a slash in them meant some real savings. If you were in the marginal tax bracket of 97.5%, as was the rate in 1971 (on no less than 11 tax slabs!), it really mattered when that came down to 77% in 1974-75. And then, again, it made a difference when the next big slash came to make the top rate 50% in 1985-86 when the number of tax slabs went from eight to four. But the tax regime has been stable now for many years and, perhaps, we should focus on some other parts of the budget that have a much deeper impact on the household than tax rates.

The urban mass affluent household has been badly affected by the slowdown in the Indian economy, by inflation that takes away all real return from savings, by the stagnancy in jobs and entrepreneurial opportunity, by the high cost of capital and by the fairly repressive financial regime that treats it as the milch cow for cheap money for the government’s spending splurge.

This household must now realize that its micro problems have their roots in India’s macro issues of deficits, inflation, subsidies and the efficacy of government expenditure. The money is there for the government to spend, but how it spends this and how effective that spending is, are questions that this educated, opinionated urban mass affluent slice of population must now ask.

Our attention must shift from the revenue side that deals with tax rates and their incidence, to the expenditure budget. Where does the government spend its money and how efficiently does it spend this for the goals of the nation that we broadly agree to when we elect a government?

Why, for instance, is over 20% of the total expenditure of the government going towards interest payments and as much as 13% towards subsidies and less than 1.5% for social services, including health and education, are all good questions to ask. It should ask why the government spends more and more to meet current expenses rather than using this for building national assets and infrastructure.

The Indian household is a prudent one. We look very carefully at where our money goes and what we spend it on. No wonder our savings rates have been so high. I’m calling for an intelligent and educated extension of that focus on the goals of our annual budget exercise and to hold the government to account for the money spent.

Finally, where ever it comes from—direct taxes or indirect or from printing more money—it is you and I who pay, either as taxes or in higher prices through inflation and on negative returns on our deposits. The 99% was a powerful movement in the US in that it gave a pithy slogan to the multi-dimensional economic issues faced by the average worker. We need one in India that will encapsulate our need to bring the country’s leaders to account for our money that they spend.

The Indian urban mass affluent has begun to build muscle in the last few years. The public outpouring against corruption and in support of women’s safety issues are symptomatic of a deeper change in the psyche of the middle class. If earlier, the middle class dream was to escape from the stagnant economy, that option is no longer there. We understand that there is nowhere to go. This is all we’ve got. And if we don’t mess it up, this is where global growth is for the next 30-40 years. We’ve discovered our voice for the most pressing of national issues at the moment, but we could extend that voice and generate wider public opinion to put pressure on economic issues. When we do that, let’s not waste it on plaintively asking for lower taxes. We should use it to push for government accountability on the expenditure side of the budget.

Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, and Yale World Fellow 2011. She can be reached at
expenseaccount@livemint.com

TOUHID HUSSAIN

PGDM 2nd SEM

IIMT COLLEGE OF MANAGEMENT