The distribution of national income requires political intervention

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According to the CMIE report, in the financial year 2021-22, the average monthly income of a regular employee was around Rs 22,000, a self-employed Rs 11,200 and a daily salaried worker. of 9,800 rupees. In October 2022, out of a total of 39 crore jobs, about 30.5 crore jobs did not have regular salaried jobs. Other reports cite different numbers, but the pattern is somewhat similar. It is indeed worrying. Hence, India needs political intervention for a judicious distribution of national income.

In a free economy, an equal distribution of national income is impossible. In a controlled economy, like that which prevailed in India before 1980, the national income will not increase at a faster rate. Global experience shows that an increase in tax collection and income redistribution is also counterproductive. It is therefore a complex problem. Yes, by choosing an appropriate policy, the problem can be resolved to an acceptable level. Subsequently, fiscal support to the poor and lower middle classes will further reduce public miseries.

In my opinion, the priority must remain on GDP growth to enlarge the size of the cake to be distributed. At the same time, the number of participants in economic activities, i.e. the labor participation rate (LPR) must increase to obtain a higher share of the national income. Great importance should be given to human capital (knowledge and labour) over physical capital. Therefore, the distribution of income must be oriented in favor of “work and knowledge” in relation to the “capital” deployed in economic activities. For a quick assessment of this concept, let’s revisit the basic formulas for estimating GDP (national income, as coined by Nobel laureate Simon Kuznets in 1935.

Formula 1 defines GDP (Gross Domestic Product) as “the total value of output” minus the “total value of inputs”. Production includes entire “goods and services” produced from a large factory to a small street vendor. During production, inputs (goods and services) are contracted out to other units, whether a large or a micro unit. People participating in this economic chain receive their share of the national income. Thus, the percolation of income takes place between all the participants. For higher percolation, it is necessary to widen the economic chain and restore the LPR which shrunk to about 39% in October-2022 against 52.9% in 2011.

Formula 2 defines GDP as ‘consumption’ plus ‘investment’ minus ‘trade deficit (goods and services)’. Therefore, the trade deficit should be reduced and consumption should be moderate, allowing more investment to extend the economic chain and the LPR as mentioned above.

Formula 3 defines GDP as the sum of rent, interest, profit, and wages. The rent of a production unit depends on the cost of “land and capital”. The “cost of capital” is the cost of interest on the borrowings of a production unit. Profit depends on the deployment of venture capital, borrowed capital, technology, brand positioning and government policies. Salaries depend on the knowledge, work and experience of the employee. Wages also depend on the ability to pay of a production unit which, in turn, depends on its size.

According to the corollary of formula 3, if the cost of capital (interest) is reduced, the distribution of income will certainly be tilted in favor of wages and therefore; wages will increase, as found in most developed countries. This is the main recommendation.

In the case of small enterprises (MSMEs), the technology and brand positioning is much lower than that of large enterprises. The higher cost of urban land is another disincentive. Therefore, the profits are relatively lower and, therefore, the average salary of the employees is also lower. India is a developing nation with a large population. Small (non-agricultural) businesses provide over 40% of employment, second only to agriculture. Therefore, their profits must increase to enable them to pay higher salaries to their employees. They need liberal, cheap credit and the easement of trade and tax regulation. Small and micro unit products are also to be exempt from GST, much like the exemption from excise duties in the previous tax regime.

However, a detailed sector survey should be conducted to identify their problems. This is another key recommendation.

In conclusion, (1) The priority must remain on high GDP growth for which the investment/GDP ratio must be brought above 35% and India must be converted into a trade surplus in goods and services. (2) The LPR should be restored to around 53% to expand the direct beneficiaries of national income. (3) The cost of capital (interest) must be reduced to steer the distribution of income in favor of wages and also to stimulate investment. (4) The MSME sector is expected to enjoy huge political support after conducting a detailed survey since; this is the most crucial of all. (5) Raising farm incomes is equally crucial. However, the same is not covered here.

With these composite stages, the national income will increase and the distribution of income will be inclined towards the bottom of the age pyramid. High interest and low priority given to MSMEs are the main obstacles; these must be resolved through political intervention.



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Disclaimer

The opinions expressed above are those of the author.



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