Context

A recent study ‘Income and Wealth Inequality in India, 1922-2023: The Rise of the Billionaire Raj’ by the World Inequality Lab (WIL), presents facts about ‘inequality’.

Key-highlights of the Report

• Income inequality:6% of India’s national income in 2022-23 went to the top 1%, the highest proportion in the last 100 years.
• Wealth inequality: The share of the top 1% in wealth was as high as 40.1% in 2022-23, also its highest level since 1961.
  • The share of wealth among the top 10% increased from 45% in 1961 to 65% in 2022-23.
  • Conversely, the share of the bottom 50% and middle 40% in wealth has declined.
• Wealth concentration: India’s wealth inequality is not as extreme as Brazil and South Africa, but its wealth concentration has already increased threefold between 1961 and 2023.
• Additionally, with India’s income inequality being the world’s highest, higher than South Africa, Brazil and the United States of America, it will only add to wealth inequality in times to come.

1: Dimension- Growing inequality and Concerns

• Negative impact on growth: Income inequality negatively affects growth and its sustainability. Growth is critical to the reduction of poverty; the greater the inequality, the lower the impact of growth on poverty reduction
• Inverse relationship: There is an inverse relationship between the income share of the rich and economic growth. (IMF Study).
  • If the share of the top 20% of the population increases by 1 percentage point, GDP growth is actually 0.08 percentage points lower in the following five years, suggesting that the benefits do not trickle down.
  • Instead, a similar increase in the income share of the bottom 20% is associated with 0.38 percentage point higher growth.
• Affected policy-making: The super-rich affect decisions by being in and out of the corridors of power.
• Cut on public goods: The enhanced power of the elite could result in a more limited provision of public goods that boost productivity and growth, and which disproportionately benefit the poor.
• Inequality dampens investment, and hence growth, by fuelling economic and political instability.

2: Dimension- Policies to reduce inequality

• Pro-poor growth: There is need of growth strategies that generate non-farm jobs (and promote structural change). It would lead to pro-poor growth, which would also be inequality-reducing.
• Absorption of labour: The government needs to work for the absorption of surplus labour from agriculture, but also the rising share of the formal workforce, with access to social insurance.
• Social security: Employment is key for poverty reduction. But employment should come with old age pension, death/disability insurance and maternity benefits if sudden shocks are not to push informal workers into poverty. 
• Progressive taxes: Progressive taxes on income, inheritance and property have been most effective in reducing inequality in industrialised countries. India’s Union government barely captures under 8% of the workforce in income tax; it does not have an inheritance tax and has abolished its wealth tax.
• Property taxation (the responsibility of which lies with local governments) remains grossly inadequate and captures a minuscule portion of potential revenue.