Dr. Susmit Kumar, Ph.D.

Published at South Asia Monitor on March 3, 2017.

Modi government needs to stop listening to the US educated economists’ mantra of trickle down economy, i.e. to use tax-cuts to fuel consumer driven economy. The same mantra has led the US on the brink of impending bankruptcy. It should not increase the income tax exemption limit from 2.5 lac rupees, instead it should use the collected tax wisely to come out of perennial trade deficit and also to directly target the economy of the bottom 80 percent of population who have been largely left out of the economic boom.

The US is on the verge on economic bankruptcy by following the tax cut driven trickle down economy. US dollar is over-valued and hence trickle down economy is working temporarily in the US. For more than three decades, taking advantage of the dollar being the global currency the US is being able to print as many dollars as it wants to fund it twin deficits (trade deficit and budget deficit) which India cannot do, i.e. India cannot fund its deficits by printing its currency Rupee.

In PPP (Purchasing Power Parity) terms, US dollar should be only 13 to 14 Indian rupees, one-fifth of market value. If you take Delhi Metro to go from Connaught Place/Rajiv Chowk to Dwarka (30 km) it will cost you 25 rupees, i.e. about one-third of a dollar whereas for same distance in Bay Area, California, the Metro will cost you 8 dollars. Hence dollar is over-valued. Once China brings down dollar, as explained in my article Chinese yuan replacing US dollar as global currency: A not so distant prospect, and dollar goes down to its PPP value, there will be a complete collapse of the US economy, resembling the Russian economy during 1990s. Right now even after massive loss of manufacturing jobs, the living standard of even an hourly wage American is at the same level as middle-middle income class Indians. At even $10 an hour, working in a restaurant, they make $1600 a month, out of which they spend $200-$300 on food, $700 on the room rent (with a/c) and $300 to $400 on a very good car; he can buy a brand new 48" LED TV for less than $400 which is just one-fourth of his monthly income; he can buy a round-trip air ticket to India in less than $700 in off-season and in $1200 in peak season which are less than 50% and 75%, respectively, of monthly income. If two persons (wife & husband) work, then they can have a life better than a middle-middle class Indian family. But if the dollar goes down to its PPP value, there will be complete chaos in the US. Then a brand new Toyota Camry in US would cost $125,000 instead of $25,000, its present price, and it will be out of bound even for the middle class in US. Right now the moment a person in US gets a gets a $50,000 a year job, he buys a brand new car like Camry.

During 2011-13, India saw how its increasing trade deficit can destroy its economy. India can barely manage its trade deficit by its FDI (Foreign Direct Investment which is about $50 billion a year) and NRI remittances (about $70 billion a year) and for this very reason its credit rating is just one notch above the junk status. When the crude oil price hovered around $100 a barrel during 2011-13, it could not pay its $180 billion to $200 billion a year trade deficit, leading to the collapse of its currency rupee from 44 to a dollar to 62 to 1 dollar. Although it was unexpected for so-called economic experts (None of the experts saw India's debt bubble coming. Sound familiar?, The Guardian, 26 August, 2013 ), I had warned about collapse of Indian economy in my books, published much before the 2011-13 crisis. India’s trade deficit is increasing by leaps and bounds with China, on the same pattern as the US trade deficit with China. If India wants to be a super-power, it needs to follow China rather than the US, i.e. India needs to be producer country, with trade surplus as well as it should be able to provide minimum necessities, mainly food and housing, to all its citizens, otherwise it will be always in danger of economic collapse. If the crude oil price again goes above $100, Indian economy would have same fate as Greece. After the onset of Ukraine crisis, the US used its dollar as a weapon to destroy the Russian economy, but Russia was able to withstand it mainly because it was running both trade surplus and budget surplus.

The raise in the income tax exemption limit will give extra income to maybe 1% of urban population to buy things like car rather than a 2-wheeler (extra few thousand rupees a month) resulting in a marginal increase in industrial growth but the same few thousand rupees a month can drastically raise the income level of a family in low income group. The brunt of demonetization and coming action against the benami properties will be felt by unorganized labor as housing industry would be down for next several years because it was the black money in cash form which was fueling the housing industry. The government needs to keep the same 2.5 lac income tax exemption limit and give the extra money to help the semi-skilled and un-skilled labor.

India has been spending its precious dollars on importing simple items like scissors, air coolers and idols which can be manufactured easily in the country. Not only India is spending its hard-earned dollars to buy them it is also losing the related manufacturing jobs. A 150 rupee tag price of a domestically manufactured item may be cheaper than a 100 rupee tag imported item because out of 150 rupees, the government would be getting tax, it will generate job in a family which would lead to associated jobs in industries like auto, housing, school/college and food, i.e. as the worker will rent or buy a home and auto, his children will attend school or college, etc. Hence if we take into consideration entire economy, a 150 rupee tag of a Made-in-India item would be cheaper than 100 rupee tag imported item. Therefore, the government should target the imported products which are killing the domestic jobs and provide tax-breaks as well as subsidies towards labor cost to manufacture these products, similar to what it does in MGNREGA in rural sector. Rather than allowing profit minded large conglomerate to create factories for this purpose, it should allow only small cooperatives, working on no-profit-no-loss principle, to manufacture these products locally. The World Trade Organization (WTO) should not intervene for the country providing subsidies to these industries because majority of high-tech industries in the Western countries have origins in government subsidies. For an example, the US based Tesla, which makes electric cars, sells solar panels and launches rockets into space, is mainly funded by the government subsidies (Elon Musk's growing empire is fueled by $4.9 billion in government subsidies, Los Angeles Times, May 30, 2015). It is an open secret that China has become the world's number one exporter of consumer goods only by providing government subsides to its domestic manufacturing firms. A country should never import a mass consumed item because not only it loses related manufacturing jobs, it will also be at the mercy of factors outside its control.

By demonetization and coming action against Benami properties, PM Modi has already solidified his urban vote for the next 2019 parliamentary elections, i.e. they will vote for the ruling NDA because he is the first person, in history of India, to take any concrete step against corruption. Apart from for over-all growth in Indian economy, he needs to provide basic necessities to the un-organized labor who are feeling the brunt of his policies against black money otherwise his party may have same fate as the NDA1's in 2004 parliamentary election which they fought on “India Shining” slogan and lost.