Economic Inequality in India

General Studies Paper-3 

Context: Inequality is worsening in India with the share of top 1% in total income at new high as per the paper released by World Inequality Lab.

Major Findings

• Concentration of Wealth:Wealth is highly concentrated even within the top 1 percent.
  • In 2022-23, the top 1 percent wealth share was 39.5 percent, 29 percentage points went just to the top 0.1 percent, 22 percentage points to just the top 0.01 percent and 16 percentage points to just the top 0.001 percent.
• Rise over the Years:In 1961, bottom 50 percent and top 1 per cent shares were identical; by 2022-23, the top 1 percent share was more than 5 times larger.
• Lack of Data:The quality of economic data in India is notably poor and has seen a decline recently. It is therefore likely that these new estimates represent a lower bound to actual inequality levels.

Reasons for Economic Inequality in India

• Historical Factors:India’s history, including colonization and feudalism, has led to the accumulation of wealth in the hands of certain groups.
  • These historical inequalities have persisted over time, influencing wealth distribution patterns.
• Economic Policies:Economic policies, including liberalization and privatization measures implemented since the 1990s, have spurred economic growth in certain sectors, benefitting those with access to capital and resources.
  • However, these policies have also widened income and wealth inequalities, with the gains of economic growth disproportionately accruing to the wealthy.
• Urban-Rural Divide: There exists a significant gap in development between urban and rural areas.
  • Urban centers tend to attract more investment and offer better job opportunities, leading to the concentration of wealth in these regions.
• Access to Education and Opportunities:Disparities in access to education persist, particularly among marginalized communities, exacerbating wealth inequality.
• Informal Economy:A significant portion of India’s workforce is employed in the informal sector, where workers often lack job security, social protections, and access to formal financial services.
  • The informal economy perpetuates economic vulnerability and contributes to income disparities.
• Globalization and Market Forces: The benefits of globalization have not been evenly distributed, leading to the concentration of wealth among a select group of individuals and corporations that are well-positioned to capitalize on global market trends.

Suggestions As per the Report

• The paper finds suggestive evidence that the Indian income tax system might be regressive when viewed from the lens of net wealth.
  • A restructuring of the tax code to account for both income and wealth, and broad-based public investments in health, education and nutrition are needed to enable the average Indian, and not just the elites, to meaningfully benefit from the ongoing wave of globalisation.
• A “super tax” of 2 percent on the net wealth of the 167 wealthiest families in 2022-23 would yield5 percent of national income in revenues and create valuable fiscal space to facilitate such investments.
• Addressing wealth disparity in India requires comprehensive policy measures aimed at promoting inclusive economic growth, improving access to education and opportunities, addressing social discrimination, combating corruption, and implementing progressive taxation and wealth redistribution policies.