India’s wealth inequality and income levels have become among the highest in the world, surpassing those of South Africa (SA), the United States (US) and Brazil
“Should everybody be poor? Everyone should be poor, then there will be no difference,” said Prime Minister Narendra Modi in a television interview while talking about income inequality in India. Amidst the ongoing general elections, he added that it will reduce gradually and that a process is underway.
In 2014, when Narendra Modi came to power, he was pitched as an economic reformer who would end corruption and help India’s middle class rise in society. However, as PM Modi seeks a rare third term, the gap between rich and poor has widened.
In a dramatic development, a new study by the World Inequality Lab (WIL) has revealed that India’s wealth inequality and income levels have become among the highest in the world, surpassing those of South Africa (SA), the United States (US) and Brazil. The report titled ‘The Rise of the Billionaire Raj’ showed that income inequality is worse than it was under British colonial rule
The country with a massive population of about 1.4 billion, a recent three-day pre-wedding ceremony of Indian billionaire Mukesh Ambani’s son Akash Ambani showed the stark reality between the rich and poor. Hollywood and Bollywood celebrities such as Rihanna, Deepika Padukone, Shah Rukh Khan along with Ivanka Trump, Bill Gates and were in attendance, while the Ambani women flashed diamonds and jewellery once part of the Mughal empire’s collection. The Ambani women showcased diamonds and jewellery that were once part of the Mughal empire’s collection.
On the other side, the unemployment rate of Indian youths is higher than for adults, according to the International Labour Organisation (ILO). The youth unemployment rate has been rising over the past several decades– from 5.6 per cent in 2000 to 6.2 per cent in 2012 and then increasing threefold, to nearly 18 per cent in 2018 and reaching around 15.1 per cent in 2020.
Unemployment among educated youths is particularly high and has exceeded global averages by 2018. Indian youths are attaining high levels of education, but not enough employment opportunities are created for them, as reflected by the declining participation in the labour force and workforce. The challenge of educated youth unemployment is increasing and becoming huge in India, with immense implications for societal balance and peace, according to the report.
BJP’s 2014 election manifesto listed job creation as a “high priority” task and earmarked manufacturing, infrastructure and housing as sectors with potential to achieve the target. However, a periodic Labour Force survey done by the government showed it further rose to 20.8 per cent in April-June 2020 during the Covid-19 pandemic before dropping to 3.2 per cent in 2022-23– nearly half of the 2017-18 levels.
Throughout much of the 1930s, during British rule, the richest 1 per cent in India held just over 20 per cent of the national income. This share declined during World War II, dropping to just above 10 per cent for most of the 1940s, and stood at about 12.5 per cent in 1947 when India gained independence.
The share of national income held by the top 1 per cent remained around this level until the late 1960s. Under PM Indira Gandhi, India implemented a series of broadly socialist measures—such as scrapping payments to princely kingdoms for their accession and nationalizing banks—which led to the top 1 per cent’s share of national income collapsing to about 6 per cent by 1982.
Economic liberalisation in 1991 marked a turning point. By the turn of the century, the top 1 per cent held more than 15 per cent of India’s income. When Modi came to power in 2014, this figure had surpassed 20 per cent. By 2022-2023, it reached an unprecedented 22.6 per cent.
India’s income and wealth inequality is among the highest in the world, Swetha Kochar, Founder and Partner, PKC Management Consulting said, “This inequality stems from multiple factors, including rapid economic growth concentrated in certain sectors while leaving behind the informal sector, which employs a large portion of the workforce with generally lower wages and minimal job security. Additionally, economic growth has been concentrated in urban regions, leading to significant disparities in income and wealth accumulation in semi-urban and rural areas.”
Under Modi, the country’s economy has grown exponentially as it stands out among major economies, poised to maintain its status as the fastest-growing in 2024. The IMF’s latest World Economic Outlook has revised its growth projections upward to 6.8 per cent for 2024, citing robust domestic demand and a burgeoning working-age population as key drivers. However, per capita income still remains a major hurdle for growth.
At current per capita gross domestic product (GDP) levels, India is a “lower-middle income” (USD 1,136-4,465 range) country. Kochar mentioned that disparities in educational opportunities and skill development further perpetuate income inequality, as individuals with higher education and skills can access higher-paying jobs and opportunities for wealth accumulation.
Tax The Rich
Interestingly, debates on income and wealth inequality in India have gained significant momentum in recent weeks, partly following the release of the study “Income and Wealth Inequality in India, 1922-2023: The Rise of the Billionaire Raj” which revealed that economic disparities in India have reached historical highs. Now, WIL has published a follow-up note making the case for a comprehensive wealth tax package on the ultra-rich to tackle the massive concentration at the very top of the wealth distribution and create valuable fiscal space for crucial social sector investments.
The authors pitched for an annual wealth tax and an inheritance tax for those with net wealth exceeding Rs 10 crore equivalent to the top 0.04 per cent of the adult population (370,000 adults), who currently hold over a quarter of the total wealth.
They added that there is a need to raise phenomenally large tax revenues while leaving 99.96 per cent of the adults unaffected by the tax. In a baseline scenario, a 2 per cent annual tax on net wealth exceeding 10 crore and a 33 per cent inheritance tax on estates exceeding 10 crores in valuation would generate a massive 2.73 per cent of GDP in revenues.
Co-author Anmol Somanchi highlighted, “Let’s be clear: Indian billionaires are largely an upper caste club. A progressive wealth tax package of the kind we propose is most likely to benefit lower castes and the middle classes to the detriment of only a tiny number of ultra-wealthy upper-caste families. In that respect, besides addressing extreme wealth inequality, such taxes could also play a small role in weakening the rigid link between social and economic inequalities in India.”
Somanchi added that the 2024 Lok Sabha election marks a critical juncture with heightened political and public focus on economic justice. Despite sustained attempts from certain sections at derailing this much-needed conversation, a vibrant public debate has emerged. It would, however, be a shame if after coming this far, this momentum is not translated into policy. Progressive wealth taxation, effective redistribution, and broad-based social sector investments are urgently needed to build an equitable and prosperous India, Somanchi said.
“When exploring the ways of reducing the gap between the rich and poor, implementing a tax specifically targeting the super-rich is the most sought-after option among the public. However, this is not as straightforward as it sounds. Implementing such a measure in India could have both positive and negative implications for the economy. One of the primary benefits would be increased revenue generation for the government, which could then be utilised to provide essential services to the informal sector of society, thus reducing inequality and fostering inclusive growth. Additionally, implementing such a tax could facilitate the development of policies and schemes aimed at benefiting the middle and weaker sections of society,” Kochar added.
Kochar, however, added that considering India’s status as a developing country, implementing a tax targeting the affluent could potentially hinder the nation’s growth. It may result in capital flight, with individuals opting to invest in countries with lower tax rates, thereby shrinking the overall tax base. This could discourage domestic investment and entrepreneurship opportunities, as individuals may be less inclined to invest in local businesses.
In an era of growing income inequality, the concept of wealth tax has been recommended by many. The primary aim of wealth tax is to redistribute wealth from affluent individuals to the economically weaker sections of society. Additionally, it provides the government with additional revenue to finance social programs aimed at the welfare of the economically weaker sections.
According to Kochar, “These taxes should be designed to be progressive, with higher rates for larger estates. Additionally, providing targeted subsidies, tax incentives, and financial support to SMEs can help promote economic growth and job creation, which can lead to more equitable income distribution.”
In the area of taxation, the rich and large companies often engage in tax evasion, using tax havens and exploiting loopholes, whereas the poor and middle class, especially those with salaried income, have no option but to pay tax on their full earning because of the inability to avail better financial management and tax planning advice.
“Hence, the government must focus on plugging out these loopholes which allow some of the largest companies globally to operate in tax havens paying negligible amounts of tax. A large portion of the wealth creation for the super-rich also comes from investments in the capital markets which have traditionally enjoyed lower rates of taxes which can be relooked at,” Kochar mentioned.
Meanwhile, experts suggested that the government should focus on policies that boost the disposable income of economically weaker and middle-class communities, such as reducing income tax for low-income salaried employees by providing wider tax exemptions to purchase more and more necessary products for survival and to enhance the existing standard of living.
Courtesy : BW Businessworld
