As the world continues to be ravaged by the covid pandemic, more than a year on, it is becoming increasingly evident that the greatest burden has fallen on the global poor.
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Even the poor in rich countries, which have relatively secure social safety nets and well developed public health systems, have seen a sharp drop in incomes and suffered the hardest impact of the virus itself, since they are not in occupations in which work-from-home is feasible.
While an investment banker, a senior civil servant or university professor can safely work remotely, this is obviously not an option for a food-delivery worker, a store clerk, or a front line medical worker.
If the impact on the poor in rich countries has been severe, in lower and lower middle income countries, it has been nothing short of devastating. A recent study by Pew Research Center compares the impact in China and India.
While China’s gross domestic product (GDP) rebounded in 2020, after an initial drop on account of the pandemic, India’s GDP collapsed last fiscal year, but is projected to revive in 2021-22. This difference helps account for the big difference in impact on the poor in the two countries.
Pew’s methodology is a counterfactual one—that is, it computes the change in the number of poor and those in other income strata as compared to a scenario of normal GDP growth in the absence of the pandemic and subsequent lockdowns.
In other words, this is a conceptually clean methodology for determining the pandemic’s impact on poverty. The survey’s definition of those in poverty is the standard international definition of a daily income (actual or imputed) of $2 or less.
For China, the study shows a very modest increase in the number of people in absolute poverty—only a million or so—whereas 30 million more people were pushed into the low-income (but not absolutely poor) category. Meanwhile, 10 million people fell out of the Chinese middle class, 18 million from the upper middle class, and 3 million from the high-income category.
By contrast, for India, a staggering 75 million people were pushed back into poverty by the covid crisis—this is almost 60% of the global total increase in poverty caused by the pandemic. India’s lower middle income category lost 35 million people, and the country’s middle class shrank by 32 million, many of these, evidently, accounting for those who slipped back into poverty.
Additionally, there was a loss of 7 million people from the upper middle class, and a drop of 1 million from the count of high-income earners.
The covid crisis in India has undone years of progress in combating poverty and also reversed several years of gains in drawing those in lower and lower middle income groups into the country’s middle class.
If these statistics are not grim enough, there is now added concern globally of a looming sovereign debt crisis, especially in middle- income emerging countries. In a 29 March interview with the Financial Times, United Nations secretary-general António Guterres pointed to the fact that large, middle-income countries such as Brazil and South Africa have borrowed heavily in domestic bond markets.
There is little danger of an external debt crisis, but there is a danger all the same, as maturities are coming down in many large middle-income countries such as Brazil and South Africa.
Shortened maturities may reduce the interest service cost of debt, given how low short rates are, but they mean that borrowings must be rolled over more frequently, which can heighten the possibility of a crisis in a context of greater macroeconomic instability.
While India is not in such crisis territory, unrestrained fiscal profligacy and an increasing debt-to-GDP ratio can add to macroeconomic pressures in the not-so-distant future, especially if rising retail inflation forces the Reserve Bank of India to raise its policy rate to damp it down, thus raising borrowing costs.
Taking a longer view, the global crisis and its aftermath have impeded the process of economic convergence between richer and poorer economies, a beneficial impact of globalization that had been in train, at least in fits and starts, since the 1990s.
India, in particular, suffered a serious GDP contraction last year, and even the prospect of higher growth this year, which could give India back its crown as the world’s fastest growing major economy, has reduced the chances of achieving the government’s putative goal of making India a $5 trillion economy anytime soon.
Even a month or so ago, there was somewhat greater optimism, thanks to vaccine rollouts around the world, over a reduction in the covid infection rate in many countries and the easing of pandemic restrictions. However, cases are again on the rise in many places, and new variants and mutations of the virus appear to be more resistant than earlier thought to our existing vaccines.
India, in particular, is seeing an alarming increase in cases and increased stress on its healthcare system. If this necessitates renewed curbs and lockdowns, as have been imposed partially in some states, it will almost certainly lead to a significant downward revision in India’s growth forecast for the current fiscal year.
Lower growth, in turn, foretells a rather grim year ahead for India’s poor.
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Petrol in India is cheaper than in countries like Hong Kong, Germany and the UK but costlier than in China, Brazil, Japan, the US, Russia, Pakistan and Sri Lanka, a Bank of Baroda Economics Research report showed.
Rising fuel prices in India have led to considerable debate on which government, state or central, should be lowering their taxes to keep prices under control.
The rise in fuel prices is mainly due to the global price of crude oil (raw material for making petrol and diesel) going up. Further, a stronger dollar has added to the cost of crude oil.
Amongst comparable countries (per capita wise), prices in India are higher than those in Vietnam, Kenya, Ukraine, Bangladesh, Nepal, Pakistan, Sri Lanka, and Venezuela. Countries that are major oil producers have much lower prices.
In the report, the Philippines has a comparable petrol price but has a per capita income higher than India by over 50 per cent.
Countries which have a lower per capita income like Kenya, Bangladesh, Nepal, Pakistan, and Venezuela have much lower prices of petrol and hence are impacted less than India.
“Therefore there is still a strong case for the government to consider lowering the taxes on fuel to protect the interest of the people,” the report argued.
India is the world’s third-biggest oil consuming and importing nation. It imports 85 per cent of its oil needs and so prices retail fuel at import parity rates.
With the global surge in energy prices, the cost of producing petrol, diesel and other petroleum products also went up for oil companies in India.
They raised petrol and diesel prices by Rs 10 a litre in just over a fortnight beginning March 22 but hit a pause button soon after as the move faced criticism and the opposition parties asked the government to cut taxes instead.
India imports most of its oil from a group of countries called the ‘OPEC +’ (i.e, Iran, Iraq, Saudi Arabia, Venezuela, Kuwait, United Arab Emirates, Russia, etc), which produces 40% of the world’s crude oil.
As they have the power to dictate fuel supply and prices, their decision of limiting the global supply reduces supply in India, thus raising prices
The government charges about 167% tax (excise) on petrol and 129% on diesel as compared to US (20%), UK (62%), Italy and Germany (65%).
The abominable excise duty is 2/3rd of the cost, and the base price, dealer commission and freight form the rest.
Here is an approximate break-up (in Rs):
a)Base Price | 39 |
b)Freight | 0.34 |
c) Price Charged to Dealers = (a+b) | 39.34 |
d) Excise Duty | 40.17 |
e) Dealer Commission | 4.68 |
f) VAT | 25.35 |
g) Retail Selling Price | 109.54 |
Looked closely, much of the cost of petrol and diesel is due to higher tax rate by govt, specifically excise duty.
So the question is why government is not reducing the prices ?
India, being a developing country, it does require gigantic amount of funding for its infrastructure projects as well as welfare schemes.
However, we as a society is yet to be tax-compliant. Many people evade the direct tax and that’s the reason why govt’s hands are tied. Govt. needs the money to fund various programs and at the same time it is not generating enough revenue from direct taxes.
That’s the reason why, govt is bumping up its revenue through higher indirect taxes such as GST or excise duty as in the case of petrol and diesel.
Direct taxes are progressive as it taxes according to an individuals’ income however indirect tax such as excise duty or GST are regressive in the sense that the poorest of the poor and richest of the rich have to pay the same amount.
Does not matter, if you are an auto-driver or owner of a Mercedes, end of the day both pay the same price for petrol/diesel-that’s why it is regressive in nature.
But unlike direct tax where tax evasion is rampant, indirect tax can not be evaded due to their very nature and as long as huge no of Indians keep evading direct taxes, indirect tax such as excise duty will be difficult for the govt to reduce, because it may reduce the revenue and hamper may programs of the govt.