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

Three decades after its encounter with economic liberalisation, India remains a country of contradictions — where massive growth and prosperity coexist alongside poverty and deprivation.

India’s growth continues to be impressive, beating the expectations of economists and policy makers around the world. Between 2011-12 and 2019-20, India grew at an average of 5.4 percent per year, clearly placing itself among the fastest growing emerging economies in the world. Even post-Covid, India has emerged as a global hotspot, with most international organizations projecting growth rates of 6.8 -7.2 percent in 2022-23.

However, as is typical of capitalist-leaning economies, various forms of inequalities — income-based, gender-based and region-based inequalities, and inequalities affecting historically disadvantaged social groups — are a by-product of this rapid growth.

Oxfam’s recent report, “Survival of the richest”, shows that the top 10 percent of the Indian population own almost 72 percent of the country’s wealth. India still has the highest number of poor in the world, around 228.9 million, and yet it is estimated to produce 70 new millionaires every day.

The tax burden also falls unevenly. Currently, indirect taxes, such as the Goods and Services Tax, form a large portion of tax revenue with the poorest half of the population bearing nearly two-thirds of the GST burden.

In addition, gender-based discrimination also persists, particularly in labor markets. Research by Nikore Associates shows that women have been systematically dropping out of the workforce over the past five decades, despite rising family incomes and narrowing gender gaps in -education, which resulted in the phenomenon of “missing working woman” in India. This has exacerbated gender-based wealth inequalities, with the WTW’s Gender Wealth Inequality Index showing that Indian women’s expected lifetime earnings are just 64 percent of their male counterparts.

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Having said that, India is not alone in its experience of income inequality. Countries around the world are facing growing inequalities, which have worsened after Covid-19. Data from the 2022 World Inequality Report shows that income inequality in the United States is among the highest among developed countries: In 2021, the top 10 percent captured 45 percent of -total income, while the lowest 50 percent had only 13 percent. This is worse in emerging economies like Brazil where the bottom 50 percent of the population earn 29 times less than the top 10 percent.

Countries that have succeeded in alleviating income inequalities have typically had long-term political commitment, accompanied by government interventions aimed at addressing structural biases in economic superstructures. Four types of income redistribution measures show promise.

First, progressive taxation such as wealth taxes. Countries such as Norway have had wealth taxes for more than a century, and others such as Denmark are now introducing a so-called “top tax”, which adds an extra five percent tax on income over $358,000.

Oxfam estimates suggest that globally an additional five percent tax on the world’s multimillionaires and billionaires could raise up to $1.7 trillion a year, enough to lift 2 billion out of poverty and fund a plan for – fight against hunger — a plan that was recently supported by over 200 millionaires in an open letter to delegates at the meetings of the World Economic Forum in Davos. Closer to home, the introduction of a three percent wealth tax on India’s billionaires could fund the National Health Mission for 5 years.

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Second, the decentralization of investments in geographic areas to address regional inequalities within a country. Almost all advanced economies face large differences in economic performance between regions, with growth and employment typically concentrated in large cities. Japan stands out as having achieved the lowest levels of regional inequality among OECD countries, a testament to the success of its long-term strategy of ensuring strong connectivity and spreading human capital investments across the -country.

Third, the promotion of women’s entrepreneurship, particularly in rural areas. While almost every country has recognized that women’s entrepreneurship is a critical mechanism for creating wealth accumulation opportunities in the face of persistent gender differences, Bangladesh stands out among the Global South for innovative schemes his, such as the establishment of an Equity and Entrepreneurship Support Fund (EEF). ) to help women in the SME sector avail low-cost loans, as well as the formation of Women’s Entrepreneurship Development Units in all branches of the Central Bank of Bangladesh to support and train women entrepreneurs to access finance and improve product marketing. Such schemes are critical in an ecosystem where only seven percent of micro, small and medium enterprises are women.

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Fourth, the limitation of monopoly and the strengthening of regulatory frameworks. Countries such as the United Kingdom have created strong regulatory institutions in the infrastructure sectors such as Ofcom (Office of Communications), Ofgem (Office of Gas and Electricity Markets), Orr (Office of Railways and Roads), and Ofwat (Office of Water), in addition to the Competition and Markets Authority (CMA) to ensure that natural monopolies meet critical service delivery requirements and core standards of -performance. Strong regulators put some restraints on the power of monopolies to generate abnormal profits, thereby limiting wealth inequalities.

The goal of creating an economy of $ 5 trillion in India by 2025 can only be realized if the growth opportunities are spread, rather than being concentrated among a few cities, enterprises, or social groups.

Deliberate action by policy makers to adopt progressive taxation systems, decentralize investments, promote women’s entrepreneurship, and create strong regulations can be a start in the long-term agenda towards addressing India’s growing inequalities.

Most importantly, India’s central and state governments, who have gathered in Davos to attend the 2023 World Economic Forum Annual Meetings, must ask whether the investments being attracted can help decentralize the development and addressing inequalities.

The writer is an economist and gender policy specialist, and the founder of the youth-led research group, Nikore Associates. Research assistance for this article was provided by Mannat Sharma and Sukriti Anand

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