Is India a capitalist or socialist country?

India is neither a capitalist nor a socialist economy. India was never a socialist economy. The principle of a socialist economy is based on the equidistribution of money or wealth. Socialism is an erroneous proposition so far law of economics is concerned. Equidistribution of money and wealth is a flawed proposition as per economics even though for the vast majority it may sound nice. Why so? The first drawback is that under this economic model, there is no reward for excellence or hard work. You can not pay equal remuneration to a doctor and to a clerk and expect the same productivity. And if you are not paying them equally, the equidistribution of wealth is not possible. So productivity suffers the most. Revenue collection happens at the lowest. A Socialist economy can survive only under very regressive governance. People have to be forced to be productive under fear. But fear is not the best motivating factor to increase productivity.

The revenue collection will be at its peak when there is a reasonable level of inequality of income. Let me give a simple example. Suppose there are five friends, the first four friends earn Rs.2.5 lakhs annually and the 5th friend earns Rs.10 lakhs. Here only the 5th friend pays income tax, the rest four are not required to pay IT. In total, they earn Rs.20 lakhs. Now let's go for equidistribution of wealth, everybody earning Rs.4 lakhs, and nobody pays income tax. So the government earns no income tax. Let’s consider the GST scenario - with equitable earnings more spending will be on basis necessities, where GST is either Nil or on the lower slab. This means GST collection would be lower for the total earnings of Rs.20 lacs with equitable income distribution. But in the first case where one of the friends was earning Rs.10 lakhs, so it is expected he would spend some amount on luxury goods where GST would be at 18% or 28%. So on the GST front also the government would be earning more.

However extreme capitalism is also not good, where only a handful few would have all the money. This will reduce overall consumption. For economic prosperity, we need a large section of people above the poverty level with significant purchasing power which will drive consumption and increase demand for goods & services that come under the category of comfort and luxury. Goods & services that come under the category of comfort and luxury generally draw higher GST. The economic progress of any nation is possible only when they have a large size of middle-class and upper-middle-class population.

What the Modi government is doing is systematically attacking this middle-class population and destroying their purchasing power by squeezing them out of maximum tax. The size of the middle-class people in India is growing. India contributed 60 per cent to the worldwide drop in the middle-class population. This will surely impact India's already slowing economy. India's top 1% owned more than 40.5% of its total wealth in 2021, according to a new report by Oxfam. Approximately 64% of the total goods and services tax (GST) in India came from the bottom 50% of the population, while only 4% came from the top 10%, the report said.

Top 10% vs Middle 40% National Income Shares in India 1951 -2015

Image source -Indian income inequality, 1922-2015: From British Raj to Billionaire Raj by Lucas Chancel Thomas Piketty. WID.world WORKING PAPER SERIES N° 2017/11

You can see from the above graph, that the share of 40% of middle-class Indians has been steadily going down since 1990 when the last of the Gandhi family was at the helm of affairs. The share of the middle class was at its highest under the Indira regime. The top 10% of people’s share in the national income was around 57% in 2015 and now holds 77 percent of the total national wealth. And 73% of the wealth generated in 2017 went to the richest 1 percent. I do not have the data pertaining to 2022, but I am sure the figure must have gone beyond 90% by 2022. While the bottom 670 million Indians who comprise the poorest half of the population saw only a 1 percent increase in their wealth. Whereas in an advanced capitalist nation like the USA, the top 10 percent held 69.8 percent of total U.S. net worth as of Q1 of 2021. The picture is far better in the UK, with the wealthiest 10% of individuals owning close to half (48.58%) of all the wealth in the UK.

Just imagine the government is extracting 64% of the total GST collection in India from the poorest of the poor bottom 50% of the population when they hold just 3 percent of the wealth. While the top 10% possessing 77% of total national income contributes only 4% GST. They are not giving their due share of a minimum of 10% of GST collection whereas they may now be holding possibly more than 90% of the national income. There has been a steady increase in the share of indirect taxes under the Modi government. From 44. 4% in 2014–15 the share of indirect tax has increased to 53.1% in 2020–21. So people can understand how the poor people and the middle-class people have been overburdened and looted by the Modi government while giving relief to the rich people.

The kind of pseudo-capitalism India is following, particularly under the Modi government is very erroneous and destructive. The basic fundamental for capitalism to survive in any economy is to have strong demand in the economy. The strong demand will be created by the large consumer base with strong purchasing power. But when you systematically destroy the purchasing power of 90% of people capitalism can not grow, nor the economy can grow. I have already expressed doubt that the top 10% population could be holding over 90% of wealth by 2022, leaving only 10% of the balance 90% population. In such a situation how do you expect capitalism to survive particularly when our per capita income is one of the lowest in the world? It is not surprising that the economy is suffering from slackening demand. thousands of industries are going bankrupt and banks are suffering from huge NPA. You see these are all connected. Unfortunately not a single economist pointing out the gross error in our economic policy.

Someone good in economics would understand why the Nehruvian policy of Mixed economy was better. Nowadays I seriously doubt the economic think tank are being able to see the larger picture. Modi Ji giving free ration to 80 crores people wouldn’t help. He has already made the people beggars. The middle class is tottering and going below the poverty line under tax terrorism. Increasing government spending by taxing people more is a catastrophic policy. But the Modi government relies more on that to create an impression and win elections.