Inequality in India

SYLLABUS

GS 3 >> Social Justice >> Inclusive Growth

REFERENCE NEWS

The recent working paper by World Inequality Lab titled ‘Income and Wealth Inequality in India, 1922-2023: The Rise of the Billionaire Raj‘ has put the spotlight on the status of inequality in India. The report combines data from national income accounts, wealth aggregates, tax tabulations, rich lists, and surveys on income, consumption, and wealth to arrive at the results.

MAIN TAKEAWAYS OF THE REPORT

• Naming the paper, the “Billionaire Raj”, the authors claimed that the country was now more unequal than even the British Raj.
• Extreme levels of inequality in India- In 2022-23, India’s top 1% own 22.6% of India’s national income and 40.1% of the country’s wealth. 
• Extreme wealth concentration at the very top- Between 1961 and 2023, the top 1% wealth share has increased threefold, from 13% to 39%.
• International comparison of income and wealth inequality- India’s top 1% income share & wealth share is among the very highest in the world, behind only perhaps Peru, Yemen & a couple of other countries. India has one of the highest wealth & income inequality in the world.
• Growth in average incomes- India’s average income grew at 2.6% per year in real terms between 1960 and 2022.
• Emergence of very high net worth individuals- The period between 1990 to 2022 witnessed a rise in national wealth and the emergence of very high net worth individuals (those with net wealth exceeding $1 billion at market exchange rate). The number of high-networth individuals has increased from 1 to 52 to 162 in 1991, 2011 and 2022 respectively.
• Rise in the percentage of income taxpayers- The share of the adult population filing an income tax return has increased from 1% till the 1990s to 5% in 2011 to 9% between 2017-2020.
• Poor Economic data- The quality of economic data in India is notably poor, and it has seen a decline recently, leading to a likely underestimation of the level of inequality.
• Policy solution to reduce inequality- Implementing a super tax on Indian billionaires and multimillionaires, restructuring the tax schedule to include both income and wealth, and finance major investments in education, health and other public infrastructure, could be effective measures to reduce inequality in India.

REASONS FOR GROWING INEQUALITY:

• Skewed regional growth: In India, growth continues to be focused on urban centers. The trickle-down theory in regional growth, which was proposed after independence, has largely failed to attain the desired objectives.
• Skewed economic growth: A considerable share of economic growth was cornered by the service sector that employed nearly a third of the population. On the contrary, agriculture grew at less than 3 % in the last few decades. Focus on capital intensive economic growth rather than labour intensive growth is also a contributing factor to the rising inequality.  
• Flawed tax collection system: Recent Oxfam report said governments are massively under-taxing the wealthiest individuals and corporations and failing to collect revenues that could help lift the responsibility of care from women and tackle poverty and inequality.
• Predominance of informal economy: In India, nearly 90% of the economy is informal in nature. The lack of regulatory control over this sector means that issues like labour exploitation, low income levels and lack of social security is rampant. The informal nature of economy is a major reason for the persistence of poverty in India.

• Underfunded public services: Despite having numerous schemes and measures, facilities for the common man remains underfunded. This is severe in the healthcare and education sector, where the public spending stands at a dismal 1.4% and 3% of GDP respectively. The high cost of healthcare is a major contributing factor to the vicious cycle of poverty.
• Gender discriminations: Women continue to take the backstage even in today’s economy. Besides this, the governments are also underfunding vital public services and infrastructure that could help reduce women and girls’ workload, the Oxfam report said. Ex: India’s Female Labour Force Participation Rate= 37%(World bank’s legal gender Gap report)

IMPLICATIONS OF RISING INEQUALITY

• Enhanced Vulnerability to Disasters: Individuals with scarce financial resources are disproportionately impacted by disasters like pandemics or natural calamities, lacking savings or assets for recovery. This highlights the need for resilient support systems for the vulnerable.
• Barriers to Social Mobility: Economic disparities hinder access to education and opportunities, trapping children of impoverished families in cycles of poverty. This limits their ability to improve their socioeconomic status, perpetuating inequality across generations.
• Loss of Dignity: The economic divide forces the poor into relentless work with insufficient access to basic needs, undermining their dignity. This is contrary to the fundamental rights enshrined in the Constitution, emphasizing the disparity between different societal segments.

• Increased Crime Rates: Inequality erodes social trust and may lead to higher crime rates as a form of survival or protest among those marginalized. Addressing wealth disparities is crucial for fostering social cohesion and reducing crime.

GOVT.SCHEMES

WAY FORWARD

1. Implementing Wealth and Super Taxes: To mitigate income disparities, the Indian government could introduce taxes targeting the nation's wealthiest individuals, such as wealth taxes on billionaires and super taxes on multimillionaires. This strategy aims to redistribute wealth more equitably across society, using the additional revenue to fund social welfare programs and infrastructure development that benefit the broader population.
2. Increasing the Minimum Wage: Elevating the minimum wage, particularly in the informal and gig economy sectors, is crucial. Many workers in these sectors face precarious employment conditions with minimal social security protections. By ensuring a higher minimum wage, the government can protect these workers from exploitation and improve their living standards, contributing to a reduction in income inequality.
3. Boosting Investment in Education and Healthcare: For sustainable and inclusive growth, it's imperative that India allocates a significant portion of its GDP to education and healthcare — ideally, 6% to education and 2.5% to healthcare. Such investments are essential for building human capital, promoting health and well-being, and enabling equitable opportunities for all citizens, regardless of their socioeconomic status.
4. Minimizing Exclusion Errors in Welfare Schemes: Enhancing the accuracy and efficiency of social welfare schemes is necessary to ensure that aid reaches those who need it most. Leveraging digital technologies and the JAM (Jan Dhan-Aadhaar-Mobile) trinity can streamline service delivery, reduce both inclusion and exclusion errors, and prevent leakage of resources. This approach ensures that support is directed accurately and effectively to improve the lives of the underprivileged.

PRACTICE QUESTION

Q:  Due to rising economic inequality and its effects on human well-being and prosperity, the concept of "inclusive growth" has become central to economic development. Explain. (10M, 150W)