Is trickle-down economics working for India?

Over the last 10 years, the Indian economy has followed the principles of trickle-down economics, according to which tax breaks and benefits for corporations and the wealthy will trickle down and eventually benefit everyone. Corporate income tax cuts, a favourable tax regime for the wealthy, and deregulation are the initial steps of a trickle-down policy. As more money remains in the corporate sector, business investments may be triggered with new factories and an increase in employment. Wealthy individuals may spend more, creating more demand for goods in the economy. The increase in the labour market leads to more spending and investing, creating growth in industries such as housing, automobiles, consumer goods, and retail.

India Inc. and stock markets perceive the Modi government as being pro-business and pro-billionaires. It was the Modi 2.0 government that drastically reduced the corporate tax rate from 30% to 22% in 2019–20. The Modi 2.0 government had also announced a lower rate of 15% for newly incorporated domestic companies.

The representatives of the G20 countries discussed the proposal of a global tax on billionaires at a summit held in Sao Paulo during February 2024. “Progressive taxation is a key pillar of democratic societies,” Gabriel Zucman, director of the EU-backed research group, told the leaders at the summit. The world’s current patchwork of tax regimes fails “to properly tax the individuals with the highest ability to pay taxes,” he added. The EU Tax Observatory has proposed, among several early ideas, to set a minimum global 2% tax on billionaires’ net wealth—that is, the value of their assets once their debts are subtracted. Though India is a member of the G-20, it has yet to take any steps to tax the billionaires, which implies that the tax regime is a relaxed one for the wealthy.

The trickle-down economics assumes that the tax cuts for the corporate sector will trigger more investments by the private sector in new factories, leading to more employment. However, private sector investment in machinery and equipment declined for two consecutive years, FY20 and FY21, before expending in FY22 and FY23. The private sector has prioritised reducing debt by using the proceeds from the corporate tax cuts. It is the government’s capital expenditure in the infrastructure sector that is keeping the Indian economy rolling forward. Between FY19 and FY23, the share of private non-financial corporations in overall gross fixed capital formation has increased only marginally from 34.1% to 34.9%.

On account of the private sector’s lacklustre capital investments and the government’s capital-intensive economic policies, there is a serious employment problem for the Indian youth, with youth unemployment rates doubling between 2012 and 2023, according to the Periodic Labour Force Survey (PLFS) data.

India’s per capita income has increased from $1,560 in 2014 to $2,731 in 2024—an increase of about 75% in 10 years’ time. If we exclude the high per capita incomes of the top 1% of the population, the per capita incomes of the remaining 99% people might have grown only at a marginal rate. By 2022-23, the top 1% income share in India was 22.6%, as per a paper released by World Inequality Lab.

Indian household savings fell to a six-year low in FY23. Fiscal 2023 witnessed a significant dip in household savings. According to government data, the net financial savings of Indian households dropped to Rs 14.16 lakh crore in 2022–23—about 5.3% of the Gross Domestic Product (GDP) compared to 7.2% in the previous year.

A research note from Crisil states that a sharp rise in borrowings by individuals from banks and other financial institutions brought down net savings. As per the Crisil report, total retail credit rose to 19.4% of the GDP in fiscal 2023, from 12.1% in fiscal 2017.

Meanwhile, India has witnessed a staggering rise in its billionaire count, with 25 new additions during the year 2024, according to the ‘Forbes World’s Billionaires List 2024’. The combined net worth of these Indian billionaires stands at a whopping $954 billion, marking a staggering 41% increase compared to the previous year’s $675 billion.

Although trickle-down theorists argue that more money in the hands of the wealthy and corporations promotes spending, investments, employment, and benefits everyone, it does not seem to be the case in India.

(The writer is a retired corporate professional)