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

Yet, as is typical for capitalist-leaning economies, various forms of inequalities — income-based, gender-based and region-based inequalities, and inequalities affecting the 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 per cent of the Indian population holds almost 72 per cent of the country’s wealth. India still has the world’s highest number of poor, about 228.9 million, and yet is estimated to produce 70 new millionaires per 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.

Moreover, gender-based discrimination also persists, particularly in labour markets. Research by Nikore Associates shows that women have been systematically exiting the workforce over the last five decades, despite rising household incomes and narrowing gender gaps in education, resulting in the “missing working woman” phenomenon in India. This has exacerbated gender-based wealth inequalities, with WTW’s Gender Wealth Inequality Index showing that Indian women’s expected lifetime earnings are only 64 per cent 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.

Countries that have successfully managed to assuage income inequalities have typically had long-term political commitment, accompanied by targeted government interventions to address structural biases in economic superstructures. Four types of income redistribution measures show promise.

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

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

Second, decentralising investments across geographical areas to address regional inequalities within a country. Nearly 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 amongst the OECD countries, a testament to the success of its long-term strategy of ensuring strong connectivity and spreading out human capital investments across the country.

Third, promoting women’s entrepreneurship, particularly in rural areas. While nearly every country has recognised that women’s entrepreneurship is a critical mechanism to create wealth accumulation opportunities in light of persisting gender gaps, Bangladesh stands out among the Global South for its innovative schemes, 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 at all branches of the Central Bank of Bangladesh to support and train women entrepreneurs in accessing finance and improving product marketing. Such schemes are critical in an ecosystem where only seven per cent of micro, small and medium enterprises are women.

Fourth, limiting monopoly and strengthening regulatory frameworks. Countries such as the United Kingdom have created strong regulatory institutions in infrastructure sectors such as Ofcom (Office of Communications), Ofgem (Office of Gas and Electricity Markets), Orr (Office of Rail and Road), 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 key performance standards. Strong regulators put some curbs on the power of monopolies to generate abnormal profits, thereby limiting wealth inequalities.

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

Intentional action by policymakers for adopting progressive taxation systems, decentralising investments, promoting women’s entrepreneurship, and creating 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, which gathered at Davos to attend the World Economic Forum’s Annual Meetings 2023, must question if the investments being attracted can help in decentralising 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