Wealth Redistribution

SYLLABUS:

GS 2 > Polity > Constitution

REFERENCE NEWS:

• During the on-going election campaign, there have been intense debates between the ruling government and the Opposition regarding the redistribution of wealth. Additionally, the Supreme Court has formed a nine-judge Bench to interpret the Directive Principles of State Policy (DPSP) concerning the ownership and control of material resources.

CONSTITUTIONAL PROVISIONS RELATED TO WEALTH REDISTRIBUTION

• Preamble:
  • The Preamble aims to secure social and economic justice, liberty, and equality to all citizens.
• Part III - Fundamental Rights:
  • Guarantees liberty and equality.
• Part IV - Directive Principles of State Policy (DPSP):
  • Contains principles for the central and State governments to achieve social and economic justice.
  • Not enforceable in court but fundamental in governance.
  • Article 39(b) and (c) focus on economic justice:
    • Ownership and control of material resources should serve the common good (Article 39(b)).
    • Economic system should not result in wealth concentration to the common detriment (Article 39(c)).

INITIATIVES FOR WEALTH REDISTRIBUTION: The Socialistic Model of Economy: Indian governments in the first four decades after independence followed a “socialistic model” of economy. Under this model, policies were implemented to reduce inequality and redistribute wealth. Nationalisation of banking and insurance, along with high rates of direct taxes (up to 97%), aimed to achieve these goals. Additionally, measures such as estate duty on inheritance, wealth tax, and the Monopolies and Restrictive Trade Practices Act, 1969 (MRTP Act), which restricted private trade, were adopted. Land Reforms:   One of the earliest initiatives was land reforms, aimed at redistributing land from large landowners to landless farmers. These reforms sought to eliminate intermediaries like zamindars and provide land to the tiller. Acts like the Land Ceiling Act and Tenancy Acts were passed by states to implement these reforms. Constitutional amendments: The Constitution initially guaranteed the right to property as a fundamental right under Article 19(1)(f), with compensation for acquisition under Article 31. However, to facilitate land reforms and public projects, amendments were made to limit this right.  In 1978, in order to avoid excessive litigation directly in the Supreme Court by the propertied class, the 44th amendment act omitted right to property as a fundamental right and made it a constitutional right under Article 300A. Judicial interpretation: In various cases, the Supreme Court has interpreted the relationship between fundamental rights and the Directive Principles of State Policy (DPSP) in cases involving amendments restricting the right to property. In Kesavananda Bharati (1973), it upheld Article 31C, giving DPSP precedence but subject to judicial review. In Minerva Mills (1980), the Court emphasized a balanced approach between fundamental rights and DPSP, stressing harmony. Post-Liberalisation Wealth Redistribution Policy: The economy moved from a closed model to liberalisation, globalisation, and privatisation in the 1990s.This policy aimed to empower market forces, enhance efficiency, and address industrial structure issues.Repealed MRTP Act, replaced with Competition Act, 2002, and reduced income tax rates significantly. Abolishment of Estate and Wealth Taxes: Estate duty in 1985 and wealth tax in 2016 were abolished. The market-oriented approach generated additional resources, helping lift people out of poverty. For instance, India saw a notable decline in multidimensional poverty from 29.17% in 2013-14 to 11.28% in 2022-23. Poverty Alleviation Programs: The government has introduced several poverty alleviation programs aimed at improving the economic condition of the poor. Programs like the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) provide employment opportunities and income support to rural households. Subsidies and Welfare Schemes: Various subsidies and welfare schemes have been introduced to provide basic amenities and support to the economically weaker sections of society. These include food subsidies, housing schemes, and healthcare programs. Education and Skill Development: Investments in education and skill development are crucial for reducing income inequality. The government has launched several initiatives to improve access to quality education and enhance skills among the youth, such as the Skill India Mission. Financial Inclusion: Promoting financial inclusion is another important step towards wealth distribution. Initiatives like the Pradhan Mantri Jan Dhan Yojana (PMJDY) aim to provide access to banking services to all households, especially the poor. Despite these efforts, India's policies have not effectively tackled the increasing issue of inequality. Wealth has become concentrated in the hands of a few.

NEED FOR REDISTRIBUTION OF WEALTH IN INDIA

• Income Inequality:
  •  India's income distribution is highly skewed, with a small fraction of the population controlling a significant portion of the wealth. 
  • For instance, a report by the World Inequality Lab shows that as of 2022-23, the top 10% of India's population holds 65% of the wealth and 57% of the income. In contrast, the bottom 50% only holds 6.5% of the wealth and 15% of the income.
• Poverty Alleviation: 
  • Data from the eShram portal indicates that 90% of the 300 million unorganized sector workers earn less than Rs 10,000 per month. Redistribution could significantly benefit these individuals and lift many out of poverty.
• Social Justice:
  • A more equitable distribution of wealth could lead to greater social justice by ensuring that everyone has access to basic necessities such as education, healthcare, and employment. This is particularly crucial considering that many of the rich have acquired their wealth through cronyism and bending rules.
• Economic Growth: 
  • Inequality can hinder economic growth by limiting the purchasing power of the poor. Redistributing income could stimulate demand and lead to more sustainable economic growth, benefiting the entire society.
• Economic Stability: 
  • The lack of redistribution can lead to economic instability, as seen in the 2008 global financial crisis. Countries with high levels of income inequality, such as the United States, experienced more severe economic downturns compared to countries with more equitable income distribution, like Sweden
• Political Stability: 
  • High levels of inequality can lead to social unrest and political instability. Redistributing income could help address these issues and promote a more stable society, aligning with global trends towards greater equity in wealth distribution.
• Taxation Principles: 
  • The principle of "ability to pay" suggests that those with higher incomes should pay a higher proportion of their income in taxes. This could be achieved through progressive taxation, including a wealth tax and a gift tax.
• Human Capital Development: 
  • Redistribution can foster human capital development by allocating resources to education and skill-building, boosting productivity and economic growth. Kerala's emphasis on human development, seen in improved education and healthcare, has elevated literacy and life expectancy, showcasing redistribution's positive impact.
• Global Trends:
  • There is a growing global consensus on the need for the wealthy to pay their fair share of taxes. This includes leaders like US President Joe Biden, who has emphasized the importance of the super wealthy paying their fair share.

CHALLENGES AND CONCERNS ASSOCIATED WITH WEALTH REDISTRIBUTION:

• Individual Freedom and Economic Freedom:
  • Redistribution policies can infringe on individual property rights and limit economic freedom.
  • Philosophers like John Locke and Robert Nozick argued that property rights are derived from individual labor, and any forced redistribution violates these rights. Economists such as Friedrich Hayek and Milton Friedman linked economic freedom to individual freedom, advocating for minimal state intervention to preserve liberties and encourage economic efficiency.
• History of Inheritance Tax in India:
  • Inheritance tax has historically been unpopular and ineffective in India, failing to achieve its intended goals. India had an inheritance tax from the 1950s to 1985, but it was abolished due to procedural issues and negligible revenue gains.
  • The tax was criticized for its adverse impact on the middle class and poor, showing that poorly designed wealth redistribution policies can harm those they intend to help.
• Interpretation of Constitutional Articles:
  • The interpretation of constitutional articles related to wealth redistribution, especially regarding "material resources of the community," has led to legal ambiguity.
  • Articles 39(b) & (c) of the Indian Constitution aim to distribute material resources for the common good and prevent their concentration in a way detrimental to the public. However, the term's (material resources of the community) scope is debated, with some suggesting it includes all public and private resources. This uncertainty underscores the need for a clear interpretation to guide state policy without infringing on private property rights.
• Opposition from Interest Groups::
  • Powerful interest groups and vested interests, including wealthy individuals and corporations, often resist redistributive policies. For instance, the dominant landholding classes in India have opposed land reform policies.
• Stifle Productivity:
  • Redistribution policies can discourage wealth accumulation and innovation.
  • When individuals feel their efforts and the wealth they pass on could be taken away, they may be less motivated to accumulate resources, leading to economic stagnation.
• Deep-rooted Social Inequalities: 
  • India's entrenched caste, gender, religious, and ethnic inequalities perpetuate economic disparities, hindering the effectiveness of redistributive policies. Marginalized groups face barriers in accessing resources and opportunities.
• Informal Economy: 
  • The large informal economy, characterized by low wages, job insecurity, and limited social protection, poses a significant challenge to wealth redistribution efforts.

WAY FORWARD:

• Progressive Taxation: Implementing a progressive tax system, including a wealth tax and inheritance tax, can help redistribute wealth more equitably. For instance, an inheritance tax with a higher threshold should be introduced.
• Enhanced Social Welfare Programs: Strengthening existing social welfare programs and introducing new ones targeted at the most vulnerable sections of society can help reduce inequality.
• Education and Skill Development: Investing in education and skill development programs can uplift individuals from poverty and empower them to contribute to the economy.
• Addressing Informal Economy: Bringing informal economy workers into the formal sector through initiatives like skill development and providing social protection can reduce economic disparities.
• Land Reforms: Continuing and strengthening land reforms to ensure that land is distributed more equitably among landless farmers can help reduce rural poverty.
• Enhanced Judicial Interpretation: The Supreme Court's interpretation of constitutional provisions related to wealth redistribution should be clear and consistent to guide state policy effectively.
• Stakeholder Engagement: Engaging with stakeholders, including wealthy individuals and corporations, to garner support for redistributive policies and address their concerns can facilitate smoother implementation.
• Public Awareness and Participation: Raising public awareness about the importance of wealth redistribution and encouraging public participation in policy discussions can create a more inclusive and equitable society.

PRACTICE QUESTION:

Q. “While wealth redistribution is often presented as a solution to inequality, it is fraught with challenges and concerns." Discuss the need and challenges associated with wealth redistribution in India.(10 marks, 150 words)