IMA Analysis

Thursday February 27, 2020

Creation of Wealth February 2020

Speaker:  Adit Jain,Editorial Director, IMA India

To Frown Upon Success

An obvious aspect of India’s socialist legacy is that the rich are considered pilferers and success is more frowned upon than admired. In most East Asian economies that is clearly not the case. Success is aspirational and respected, and successful individuals are role-models for others to follow. The basis for such thinking in India, is conceivably a consequence of erstwhile economic policies, deep rooted in socialism, which sought to build an egalitarian state by levelling the affluence gap. Instead of encouraging the creation of wealth, successive governments, in the decades following independence, made life near impossible for business. Licences, permits and several other restrictions curtailed investment and exorbitant taxes sought to equalise what little managed to escape the restrictions put in place by government. These policies may have been cast in the belief that if everybody were kept poor, then it would not be so bad to be poor. The wealthy were treated with disdain and capitalism was a filthy word.

China together with other tiger economies of East Asia took a different stance. Wealth creation was encouraged and consequently policies were drafted to enable this to take place. Taxes were low and investment encouraged, providing opportunities for growth and prosperity. Consequently, these economies, many of which were in past decades considered mosquito-ridden tropical outposts, grew exponentially. Their per capita income is many fold that of India’s. Urban centres are swanky like those in western countries and rural communities no longer live a life in the clutches of wretched poverty. China, for instance had the same level of GDP output as India in the early eighties. Now its economy at USD 15 trillion is the second largest in the world as compared to India’s USD 2.7 trillion.

It was be fair to say that since the 1990s India looks a lot different than it previously did. Over 500 million Indians, who were born thereafter, perhaps do not even know that that the government would dictate what you could manufacture, where you could do it and how much of it you could produce. Everything was controlled. There were no credit cards that you could use overseas and meagre allocations of foreign exchange for business travel, ensured you tucked away, amongst your shirts, any tiny leftovers of US dollars for the next time around.

Despite decent progress, there remains a hint of a legacy of the past. Wealth is still treated with mistrust and the wealthy are regarded with suspicion. High tax impositions go beyond what may be considered progressive. The wealthy are no longer limited to businessmen who may have inherited their status by virtue of an accident of birth, but now include professionals who have worked hard to get there. Their earnings face higher demands from the treasury, the things they buy such as fancy cars and luxury goods, face a sort of sin tax. In many ways they are encumbered in their own country through a political psyche reflecting in state policies. This is not the case in other countries where success is treated more inclusively. The fact is expensive goods create higher margins for producers, thus more money for new investment and consequently new jobs – therefore greater consumption – all leading to a virtuous cycle of growth and prosperity.

Nitty-gritty aside, budgets and statements of policy intent by governments should reflect a changed philosophy towards wealth. Investment will follow and consequently so would economic growth and new jobs. Simple as this sounds, doubts continue to linger on its wider acceptance.