Modi’s tax plan is crushing the middle class

(Bloomberg Opinion) — Indian Prime Minister Narendra Modi sought a third five-year term, promising to lead his country into “amrit kaal,” an age of abundance in Hindu astrology when the doors of bliss will open to all.

However, the slogan, which Modi’s party used with gusto in its election manifesto last week, was quietly buried. In her first budget speech of Modi 3.0, Finance Minister Nirmala Sitharaman distanced herself from the slogan, even though it had appeared in different forms 30 times in her speeches on government finances in the past two years.

And rightly so. Now that a slim majority in parliament has corroded his shield of invincibility, Modi’s proposal to voters is no longer a dream but an awakening. Let the golden age of prosperity come when it comes; it is time for the middle class – some of the Indian leader’s most loyal supporters – to pay more taxes.

Trading in stocks and options, ramped up nationally since the pandemic, will now be taxed more strictly. This was not entirely unexpected. But even on long-term investments, the government will take a bigger share of the profits, including buybacks. Also, the indexation benefit against inflation, which had allowed people to report lower taxable profits, has been removed on property sales, although the capital-gains levy has been reduced from 20% to 12.5%.

This was a big blow. In most major cities, people planning to sell homes bought a decade or two ago may end up with less than expected after paying taxes. The least that could be done for them is to exempt capital gains with a relatively recent start date, such as before 2019.

This was the route the UK took in 1988 to garner support for the idea that income from work and property should be taxed equally. Alternatively, people could be allowed to invest their profits in bonds that raise money for public infrastructure – India’s railway tracks and signalling systems are desperate for modernisation. Currently, there is a limit on how much profit can be reinvested in tax-saving debt.

The government says its aim is to simplify filing, not generate more revenue, though property owners are not reading the changes that way. For the so-called octopus class, super-elite spenders of Rs 1 million or more, there will be a tax cut on handbags, watches and other luxury items costing more than Rs 1 million ($12,000). This is in addition to the goods and services tax, or GST, of 18% to 28%. However, the really rich can always go to Dubai and Singapore and buy whatever they want. On the other hand, those who are living comfortably are also charged taxes for their children’s education in foreign universities.

The changes made to the tax code this year could hit the middle class hard. The tax levied on individuals is already 30% of gross tax revenue, while the tax paid by companies is 26%.

Mind you, this is still a tiny fraction of a population of 1.4 billion, sandwiched between the 800 million Indians who claim free rations and billionaires spending $600 million on weddings. Eight out of 10 Indian workers do not earn a regular salary. Of those who do, less than 10% earn more than $600 a month. How much more does Modi want to saddle those who believe in a bountiful “amrit kaal” (amrit time), who are increasingly going into debt to make ends meet amid high inflation? Retail loans, including credit cards and other unsecured loans, are now 1.5 times higher than bank loans to industry for working capital or expansion. In the pre-Modi days, these loans were only two-fifths of what banks gave to firms.

Meanwhile, a low tax regime for firms is not encouraging new investment. The massive rebates of 2019, which cost the exchequer $100 billion, have boosted corporate profits, but without meaningful job creation. In 2020, New Delhi announced another $24 billion in production-linked incentives for manufacturers. They have added only 850,000 positions so far. This is when India needs 8 million annually. In this budget, the government offered $24 billion for jobs and apprenticeships, finally acknowledging a jobs crisis that has cut into Modi’s vote share.

In 2014 and 2019, a disproportionately higher share of rich and middle-class voters supported Modi than the poor. When he brought the economy to a standstill overnight in 2016 by banning 86% of the country’s cash, his more affluent cheerleaders had no problem. A few months later, he imposed a poorly designed GST that shut small firms out of the production network. During the 2020 pandemic, Modi sent millions of urban, blue-collar workers back to their villages on four hours’ notice. Three shocks shut down 6 million informal enterprises.

Throughout the election, the middle class voted to keep big companies happy and ignore bottom line demand. But this election the rich-poor gap among Modi voters has narrowed significantly. Faith in Modinomics is waning, even though it has done its part to raise asset prices and turn software code-writers into day traders.

Only a few months ago, at the height of the election campaign, India’s Hindu right-wing prime minister was accusing the opposition of plotting to seize private wealth to redistribute it among the country’s minority Muslims. Now he himself is seizing wealth, and his fans are paying the price – whether they get “amrit kaal” or not.

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Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services in Asia. Previously, he worked for Reuters, the Straits Times and Bloomberg News.

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