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Income Inequality in India: To What Extent Does Taxation Contribute?

Context

Despite three decades of economic liberalisation, India is still a country of contrasts, with significant growth and success coexisting with persistent poverty and deprivation.

Relevance:

GS Paper-3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

Mains Question

Adopting progressive taxation systems, decentralising investments, encouraging women’s entrepreneurship, and establishing strong regulations can be a start in addressing India’s growing inequalities. Discuss (250 words) 


Key Takeaways

  • India’s growth continues to outperform economists and policymakers around the world.
  • Between 2011-12 and 2019-20, India grew at a 5.4 percent annual rate, placing it among the world’s fastest-growing emerging economies.
  • Even post-Covid, India has emerged as a global bright spot, with most international organisations projecting growth rates of 6.8 to 7.2% in 2022-23.
  • This rapid growth, like that of capitalist-leaning economies, has resulted in a variety of inequalities, including income-based, gender-based, region-based, and inequalities affecting historically disadvantaged social groups.
  • These inequalities are a result of the country’s rapid economic growth, and they highlight the need for more inclusive and equitable policies to address them.

Key findings

  • According to Oxfam’s recent report, “Survival of the Richest,” the top 10% of the Indian population controls nearly 72% of the country’s wealth.
  • Despite having the world’s highest number of poor people, approximately 228.9 million, India is estimated to produce 70 new millionaires per day.
  • The tax burden is also distributed unevenly. Indirect taxes, such as the Goods and Services Tax, currently account for a sizable portion of tax revenue, with the poorest half of the population bearing nearly two-thirds of the GST burden.
  • Gender-Based Discrimination: According to research, women have been systematically leaving the workforce over the last five decades, despite rising household incomes and narrowing educational gender gaps, resulting in the “missing working woman” phenomenon in India.
  • According to WTW’s Gender Wealth Inequality Index, Indian women’s expected lifetime earnings are only 64% that of their male counterparts.
  • India Is Not Alone in Its Experience: Throughout the world, countries have been grappling with growing inequalities, which have worsened in the aftermath of Covid-19.
    • According to the World Inequality Report 2022, income inequality in the United States is among the highest among developed countries:
    • By 2021, the top 10% of Americans will own 45 percent of total income, while the bottom 50% will own only 13 percent.
    • The situation is exacerbated in emerging economies such as Brazil, where the bottom 50% of the population earns 29 times less than the top 10%.

Promising Income Redistribution Measures

  • Countries that have succeeded in reducing income disparities have typically had long-term political commitment, accompanied by targeted government interventions to address structural biases in economic superstructures.
    • Four types of income redistribution policies appear to be promising.
  • Wealth Taxes: Countries such as Norway have had wealth taxes for over a century, and others such as Denmark are now introducing a “top-top tax,” which adds an extra 5% tax on incomes above $358,000.
  • According to Oxfam estimates, a 5% additional tax on the world’s multimillionaires and billionaires could lift up to 2 billion people out of poverty and fund a hunger-fighting plan.
  • A 3% wealth tax on India’s billionaires would be enough to fund the National Health Mission for five years.
  • Decentralizing investments across geographical areas to address inequalities within a country.
  • Almost all advanced economies experience significant regional disparities in economic performance, with growth and employment typically concentrated in large cities.
  • Japan stands out among OECD countries for having the lowest levels of regional inequality, a testament to the success of its long-term strategy of ensuring strong connectivity and spreading out human capital investments across the country.
  • Encouragement of female entrepreneurship, particularly in rural areas. In light of persistent gender disparities, women’s entrepreneurship is a critical mechanism for creating wealth accumulation opportunities.
  • Bangladesh stands out among the Global South for its innovative programmes, such as the creation of an Equity and Entrepreneurship Support Fund (EEF) to assist women in the SME sector in obtaining low-cost loans.
  • In addition, Women’s Entrepreneurship Development Units will be established at all Central Bank of Bangladesh branches to assist and train women entrepreneurs in accessing finance and improving product marketing.
  • Such programmes are critical in an ecosystem where women account for only 7% of micro, small, and medium-sized businesses.
  • Monopoly limits and regulatory frameworks are strengthened.
  • Countries such as the United Kingdom have established strong regulatory institutions in infrastructure sectors such as the Office of Communications, the Office of Gas and Electricity Markets, and so on.
  • It ensures that natural monopolies meet critical service delivery and performance requirements.
  • Strong regulators limit monopolies’ ability to generate abnormal profits, thereby limiting wealth inequalities.

Conclusion

  • Policymakers’ adoption of progressive taxation systems, decentralisation of investments, support for women’s entrepreneurship, and the implementation of strong regulations can be a first step toward addressing India’s growing inequalities in the long run.
  • The goal of creating a $5 trillion economy in India by 2025 can only be realised if growth opportunities are spread out.
  • Most importantly, India’s central and state governments, who gathered in Davos for the World Economic Forum’s Annual Meetings 2023, must question whether the investments being attracted can help in decentralising development and addressing inequalities.

 

February 2023
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