WEF Davos: Income inequalities in India — How much does taxation help?

by Jacob Solomon Jan 23, 2023 News
WEF Davos: Income inequalities in India — How much does taxation help?

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India is a country of contradictions after three decades of economic liberalisation.

India has beaten the expectations of economists around the world. India is positioning itself as one of the fastest-growing emerging economies in the world by growing by an average of 5.4 per cent a year between 2012 and 2019. India has emerged as a global bright spot, with most international organizations projecting growth rates of 6.8 to 7.2 per cent in the next two decades.

The tax on the wealthy may not be the right solution.

Income-based, gender-based and region-based inequalities, as well as inequalities affecting the historically disadvantaged social groups, are a result of this rapid growth.

The top 10 per cent of the Indian population have more wealth than the rest of the population. India has the world's highest number of poor at more than 200 million and is thought to produce 70 new millionaires a day.

There is a tax burden that varies. The Goods and Services Tax forms a large portion of tax revenue with the poor accounting for two-thirds of the tax burden.

There are serious constitutional concerns about the fact-checking proposed by the IT rules.

There is still gender-based discrimination in labour markets. Despite rising household incomes and narrowing gender gaps in education, women have been leaving the workforce in large numbers over the last five decades. The gender wealth inequality index shows that Indian women's lifetime earnings are only 64 percent of their male counterparts.

Having said this, India is not alone in its experience of income inequality. Countries across the world have been grappling with growing inequalities, which have worsened in the aftermath of Covid-19. Data from the World Inequality Report 2022 shows that income inequality in the US is among the highest across developed countries: In 2021, the top 10 per cent captured 45 per cent of total income, while the bottom 50 per cent owned just 13 per cent. This is worse in emerging economies like Brazil where the bottom 50 per cent of the population earns 29 times less than the top 10 per cent.

The countries that have successfully mitigated income inequalities typically have long-term political commitment and government interventions to address structural biases in the economy. There are four types of income redistribution.

Progressives include wealth taxes. For over a century, Norway and other countries have had wealth taxes, which add an extra five per cent tax on top of the standard tax.

An additional tax of five per cent on the world's multimillionaires and billionaires could raise up to 1.7 trillion dollars a year, enough to lift 2 billion out of poverty and fund a plan to fight hunger, according to estimates by the charity. The National Health Mission can be funded by a wealth tax on India's billionaires for five years.

Regional inequalities within a country can be addressed by decentralising investments. Growth and employment are usually concentrated in large cities in advanced economies. The success of Japan's long-term strategy of ensuring strong connections and spreading out human capital investments across the country has resulted in the country achieving the lowest levels of regional inequality in the Organisation for Economic Co-operation and Development.

Promoting women's entrepreneurship is a third priority. Bangladesh stands out among the Global South for its innovative schemes, such as the establishment of an Equity and Entrepreneurship Support Fund to help women in the business world. Seven percent of micro, small and medium enterprises are women.

Enhancing regulatory frameworks is the fourth thing. The Competition and Markets Authority is one of the regulatory institutions created by the United Kingdom. Some curbs on the power of monopolies were put in place by strong regulators.

If growth opportunities are spread out, the goal of creating a $5 trillion economy can be achieved.

Intentional action by policymakers for adopting progressive taxation systems, decentralising investments, and promoting women's entrepreneurship can be a start in addressing India's growing inequalities.

India's central and state governments need to question if the investments being attracted can help in decentralising development.

The writer is an economist and gender policy specialist. The research assistance for this article was given by two people.