India is One of the World’s Most Unequal Countries, But There’s a Solution

Academics Propose Wealth Tax and Redistribution as Remedies

Newsreel Asia Insight #238
May 31, 2024

A recent study, titled “Income and Wealth Inequality in India, 1922-2023: The Rise of the Billionaire Raj,” has brought to light the alarming levels of inequality in the country. The authors of the report – economists from New York University, Paris School of Economics and Harvard Kennedy School – have now written a follow-up note in a journal, to propose remedies: a wealth tax and redistribution policies to mitigate inequality and promote equitable growth.

India’s economic inequality has been steadily increasing since the 1980s, with a significant surge in the past two decades. The study indicated that the top 1% of income earners controlled over 40% of the country’s total wealth, up from 12.5% in 1980. Similarly, the top 1% income earners capture 22.6% of total pre-tax income, a substantial increase from 7.3% in 1980. This level of wealth concentration places India among the most unequal countries globally.

The top 0.001% of the population, fewer than 10,000 individuals, hold nearly three times the wealth of the bottom 50%, about 460 million people. Such a vast disparity indicates that the current economic structure benefits a minuscule segment of the population, leaving the majority with minimal resources.

A progressive wealth tax could be a powerful tool to address these disparities, suggest the authors, including French economist Thomas Piketty, Nitin Kumar Bharti from New York University, Lucas Chancel from Harvard Kennedy School and Sciences Po, and Anmol Somanchi from the Paris School of Economics, in the follow-up note published in the India Forum journal.

Historical data suggests that the wealthy typically earn higher returns on their capital than the overall economic growth rate, leading to increased wealth concentration, the authors point out. Without intervention, this dynamic perpetuates inequality. Implementing a wealth tax can curb this trend and generate substantial revenues for essential social investments.

The proposed wealth tax would target individuals with net wealth exceeding 100 million. This threshold means that only the top 0.04% of adults would be affected, leaving 99.96% of the population unaffected. A modest 2% annual wealth tax on these individuals could generate nearly 2.5% of India’s GDP in revenue, providing significant fiscal space for critical social sector investments.

Complementing the wealth tax, an inheritance tax is also proposed. This tax would address the perpetuation of wealth through dynastic transfers, which worsen social and economic inequalities. By imposing a tax on inherited wealth, the policy aims to level the playing field and reduce the advantages conferred by birth.

The revenue generated from these taxes could substantially increase public expenditure on health and education, sectors where India lags behind global standards. For instance, the baseline variant of the proposed tax package could nearly double the current public education expenditure, the authors say. The moderate variant could almost double the combined health and education budget, and the ambitious variant could significantly boost funding for these essential services.

Between 2008 and 2019, government spending on health remained stagnant at around 1.4% of GDP, with a slight increase following the COVID-19 pandemic, the authors point out. Education expenditure has also stagnated at 2.9% for the past 15 years, far below the 6% target outlined in the New Education Policy 2020. By reallocating wealth from the ultra-wealthy to these critical areas, the proposed tax measures can help ensure that the benefits of economic growth are more widely shared.

Economic inequality in India is intricately linked with caste disparities, the authors underline. “Upper” castes, despite comprising just over 25% of the population, control nearly 55% of national wealth. In contrast, Scheduled Castes and Tribes own a fraction of their population share of wealth. A wealth tax would disproportionately impact the ultra-wealthy, predominantly upper-caste families, and benefit lower castes and middle classes.

Allowing the top 1% to amass 40% of national wealth while child malnutrition remains a critical issue is unjust. Progressive wealth taxation and redistributive policies offer a viable path to address these disparities and foster a more equitable society.