India’s new public and social policy challenge: inequality
The level of income inequality in India in 2016 matched that in sub-saharan Africa and Brazil
Income inequality in India has worsened over the past three-and-a-half decades and the top 10% of earners now corner more than half of the country’s national income in 2016.
Their share was 30% of the national income in 1980, according to The World Inequality Report 2018 published on Thursday by World Wealth & Income Database, which tracks information on income distribution.
Among major economic blocks, with the exception of West Asia, India’s record on inequality is the worst. Not only does this pose a challenge to public policy—particularly in figuring out a redistribution of wealth—but it could potentially trigger social unrest.
The level of income inequality in India in 2016 matched that in sub-saharan Africa and Brazil, where top earners accounted for a very high share of income.
However, rise in income inequality has been more gradual in India since 1980 compared to Russia, where it has been abrupt and compared to China, where it was moderate, said the report.
This indicates the role played by policies and institutions in evening out inequality, said the report, which advocated “tax progressivity” or taxing the rich more as an effective tool to address inequality. Income taxes are levied based on a person’s ability to pay and the rate increases as income level progresses.
India has been trying to tackle income inequality with a combination of direct transfer of entitlements to the intended beneficiaries, drive against tax evasion and schemes meant to improve access to energy and finance by the poor.
The findings of the report come at a time when the central government has started working on drafting a new direct taxes code and the state of Jammu and Kashmir is set to make a bold experiment with universal basic income scheme from the next financial year.
The report authored by researchers Facundo Alvaredo, Lucas Chancel, Thomas Piketty, Emmanuel Saez and Gabriel Zucman pointed out that rising income inequality can lead to political, social and economic consequences.
The report also advocated higher public spending in education to reduce income inequality and setting up an international registry of financial asset ownership for curbing tax evasion.
The report found Europe as the best performing region, where the top earners’ group accounted for 37% of national income in 2016, followed by 41% in China, 46% in Russia and 47% in Us-canada. The report called West Asia the frontier of income inequality as this group accounted for 61% of national income.
One of the reasons for national governments’ diminished ability to effectively tackle income inequality is the transfer of public wealth into private hands, says the report. Also, net public wealth (that is, public assets minus public debts) has declined in nearly all countries since the 1980s.
“This arguably limits government ability to regulate the economy, redistribute income, and mitigate rising inequality. The only exceptions to the general decline in public property are oil-rich countries with large sovereign wealth funds, such as Norway,” the report said.
Experts said robust public policy intervention was required to address income inequality. “While these numbers may be debatable, policies for broadening the tax base and increasing public spending on health and education are very much needed for a country like ours where there is a social infrastructure deficit,” said N.R. Bhanumurthy, professor at the National Institute of Public Finance and Policy, a New Delhi-based think tank.