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Economic inequality PSC NOTE

 Economic inequality in India

  • French economist Thomas Piketty, recently came out with some startling findings on economic inequality trends in India over the last century

  • They estimate that inequality in India today is far worse than during the inter-war British colonial rule.

  • In 2022, the top 1% of the Indian population owned 40.1% of total wealth and earned 22.6% of total income, while the bottom 50% owned 6.4% of total wealth and earned 15% of total income. 

Economic conditions in earlier India

  • Income and wealth inequality in India began to rise sharply only from the 1980s when India gradually began to adopt markets

  • For example, the share of the bottom 50% in total national income dropped from 23.6% in 1982 to 15% in 2022, while the income share of the top 10% rose from 30.1% to 57.7% during the period. 

  • Data from the World Inequality Lab suggest that the total real income of the bottom 50% increased over four-fold between 1991 and 2022 even though their share of total national income dropped during the same period

  • In other words, the size of India’s total economic pie has grown so much in the last 30 years that the bottom 50% now enjoys higher real income despite receiving a much lower share of national income.

  • Second, economic growth in India was stagnant in the socialist decades, and began to rise only after 1990. 

  • India’s economy grew at a miserable 1.6% per year between 1960 and 1990, but at a much stronger 3.6% per year between 1990 and 2022

  • The trend in income shares of different groups since the 1980s shows that the bottom 50% does not enjoy as much economic freedom as the top 1% or even the top 10%. 

Inequality

  • The income share of any group in a market economy, it should be noted, depends on the ability of the group to compete against others in the market for a share of the total national income. 

  • Economists estimates that the top 1% income earners in India earn ₹53 lakh on average annually while the bottom 50% earners earn just ₹71,000.

  • In a free market economy, such stark differences in income levels would present lucrative arbitrage opportunities and help close the gap between the richest and the poorest

  • It should also be noted that the bottom 50% enjoy very little protection of their property rights, which makes it hard for them to even make a living, let alone to climb up the income ladder. 

  • So, what is required is greater economic freedom for India’s poor, not higher taxes on high-income earners

Wealth Inequality

  • To be sure, wealth inequality is inevitable in a market economy as the market rewards people who are better at investing or allocating capital; investors who make profits see their wealth share grow over time while investors who suffer losses see their wealth share shrink. 

  • An entrepreneur with an innovative product that benefits billions of people, for instance, would enjoy massive profits and see his or her wealth share rise. 

  • Thus, the market ensures that capital is in the hands of the best investors, and resources are used in the best way possible to create a bigger economic pie. 

  • And it is a bigger economic pie, one should note, that allows the bottom 50% to enjoy higher real income despite their falling income and wealth shares.

  • The extreme wealth disparity we see in India today, however, is largely not because of the free market rewarding the top 1% for their entrepreneurial capabilities. 

  • Instead, much of it is due to the top 1% enjoying special privileges from the government, which protects them from competition in the marketplace that could erode their wealth share significantly. 

  • So, the way forward then is to get rid of such special privileges and allow more competition in the economy

  • This would naturally reduce the wealth share of the top 1% and also benefit the wider economy since competition ensures that the best investors rise to the top of the wealth hierarchy and enlarge the size of the economic pie in the process. 

  • Free competition would also ensure no one would stay at the top forever by enjoying special privileges.

Wealth tax

  • A wealth tax (also called a capital tax or equity tax) is a tax on an entity's holdings of assets or an entity's net worth

  • This includes the total value of personal assets, including cash, bank deposits, real estate, assets in insurance and pension plans, ownership of unincorporated businesses, financial securities, and personal trusts (a one-off levy on wealth is a capital levy).

  • Typically, wealth taxation often involves the exclusion of an individual's liabilities, such as mortgages and other debts, from their total assets

Impact of wealth tax

  • Contrary to common belief, investors can actually shield themselves from higher taxes (including wealth tax) by lowering the amount of capital they invest in any venture based on their expected post-tax income. 

  • So, people who would really be affected by higher taxes on the wealthy would then be workers and landowners who will be paid lesser in order to maintain investor returns. 

  • The tax would thus indirectly affect the income of ordinary workers, most of whom belong to the bottom 50% or the middle 40% of the population, and hence also affect their output.

  • A wealth tax on labour and land owners would have a similar negative effect

  • In effect, a wealth tax on the rich would eventually turn out to be a tax on lower income groups.

  • Most of the wealth that the top 1% possess is in the form of the capital assets such as advanced factories and real estate, and not consumer goods and services. 

  • It is thus incorrect to believe that the poor suffer low living standards because the rich have cornered most consumer goods. 

  • In fact, capital assets owned by the wealthy, by massively increasing the productivity of workers, help boost the output of consumer goods and services and improve the living standards of the masses.

  • Overall, the wealth tax will have a negative effect on economic growth and living standards

  • The right way to fight inequality and help the poor is thus not to tax the rich but to offer more economic freedom to the poor so that they can compete better in the marketplace for a bigger share of the economic pie.


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Learnerz IAS | Concept oriented UPSC Classes in Malayalam: Economic inequality PSC NOTE
Economic inequality PSC NOTE
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