• UGI USER
  • May 06, 2024
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MAKE THE POOR RICHER WITHOUT MAKING THE RICH POORER

Syllabus:

GS-III: Indian Economy

Why in the news?

Inequality debate intensifies in India over Congress manifesto, sparking controversy about wealth redistribution and tax reforms.

source:reddit

Introduction:

  • Debate Triggered by Congress Manifesto
    • Congress manifesto release prompts economic redistribution discourse.
    • PM Modiaccuses Congress of advocating wealth redistribution.
    • Global context underscores the urgency of addressing economic inequality.
Understanding the Redistribution of Wealth:

●   Transfer of wealth from one individual to another via taxation, charity, or public services.

●   Involves higher taxation on higher earners.

●   The Indian government provides assistance to the poor through welfare measures, subsidies, and cash transfers.

●   State governments levy property tax to fund public services.

●   Estate duty, wealth tax, and gift tax were abolished due to high administration costs.

●   Aimed to bridge the societal inequality gap.

Constitutional Provisions for Wealth Redistribution in India:

●   Preamble to the Constitution:

●   Aims for social and economic justice, liberty, and equality for all citizens.

●  Fundamental Rights:

●   Part III guarantees individual liberties and equality before the law.

●   Directive Principles of State Policy (DPSP):

●   Part IV outlines principles for economic justice.

●   Article 39(b) and (c) : emphasise equitable distribution of material resources for common good and prevention of wealth concentration.

About Right to Property in India:

  • Pre-Independence:
  • Guaranteed under Article 19(1)(f) of the Constitution.
  • Compensation mandated for property acquisition under Article 31.
  • Post-Independence:
  • Amendments limited property rights for land reforms and public projects.
  • Exceptions under Constitution:
  • Article 31A: Laws for acquisition not voided for violating fundamental rights.
  • Article 31B: Laws in ninth schedule immune from judicial review.
  • Article 31C: Primacy to DPSP; laws not voided for violating fundamental rights.
  • Constitutional & Legal Right:
  • The 44th Amendment Act (1978) removed property as a fundamental right.
  • Made a constitutional right under Article 300A.
  • Property acquisition for public purpose with adequate compensation mandated.

What is Inheritance tax ?

  • Definition: Inheritance tax is a levy on the value of inheritance received by a beneficiary upon the death of an individual.
  • Variants: Also known as death taxes or estate duty, they are imposed on the deceased’s estate.

What is Wealth Tax?

  • Direct Tax: Wealth tax is levied directly on individual assets like cash, shares, and property.
  • Indian Legislation: India’s Wealth Tax Act 1957 imposed a 1% tax on earnings exceeding Rs 30 lakh/year.

About Inequality debate intensifies in India over Congress manifesto:

The Philosophical Debate:

  • Strategies for Bridging Economic Disparity
    • Options include making the rich poorer, the poor richer, or both.
    • Choice influenced by growth dynamics and national development stage.
    • Developed nations opt forPareto optimal approach due to slow growth.

Taxation and Economic Inequality:

  • Disproportionate Tax Burden
    • India’s tax system favours corporations over the poor and middle class.
    • Congress manifesto proposes tax reforms to rectify this imbalance.
    • Importance of social security nets until the poor can benefit from economic growth.

Pragmatic Solutions:

  • Maximising Economic Growth
    • Key to reducing inequality by expanding economic opportunities.
    • Importance of balancing labor market incentives and welfare safety nets.
    • Attracting investments crucial for sustainable economic growth.

Critique of Wealth Tax:

  • Zero-Sum Mentality
  • Wealth taxis perceived as a zero-sum approach to inequality reduction.
  • Potential hindrance to economic growth and investment.
  • Need for systemic fixes rather than punitive taxation.

Debate Over Inheritance Tax:

  • Ethical Considerations vs. Economic Goals
  • Moral dilemmas surrounding inheritance tax.
  • Priority should be reducing inequality, not resolving ethical quandaries.
  • Risks associated with punitive tax measures on inheritance.

Challenges of Economic Growth:

  • Jobless Growth Phenomenon
  • GDP growthnot translating into meaningful employment.
  • Contemporary economic models prioritise capital over labour.
  • Need for rebalancing growth priorities toprioritise job creation.

The Call for Pragmatic Approaches:

  • Emphasis on Economic Growth
  • Economic growth necessary for increasing overall prosperity.
  • Confrontational approaches hinder investment and economic development.
  • Importance of balanced policies to stimulateeconomic growth and job creation.

Inequality and Taxation:

  • Imbalance in Taxation
  • Common person bears a higher tax burden compared to corporations.
  • Need for overhaul of taxation system to ensure fairness and equity.
  • Proposed reforms aim to simplify tax structure and reduce burden on common citizens.

Social Security Nets:

  • Ensuring Welfare Programs
    • Importance of social security nets to support vulnerable populations.
    • Funding for welfare programs through a combination of economic growth and efficient tax systems.

About Economic Policy of Indian Government on Wealth Redistribution:

  • Socialist Model Phase:
    • Followed in the first four decades post-independence.
    • Aimed to reduce inequality and redistribute wealth among poorer sections.
  • Changes Implemented:
    • Nationalisation of banking and insurance.
    • High direct tax rates(up to 97%).
    • Estate duty and wealth tax imposition.
    • Regulations limiting growth of private enterprise (e.g., MRTP Act).
  • Concerns Raised:
    • Policies stifled economic growth.
    • Resulted in income/wealth concealment.
    • Taxes like estate duty and wealth tax incurredhigh administration costs, yielding less revenue.

Need for Redistribution of Wealth in India:

  • Combat Rising Inequality:
    • Richest 1% own 40% of India’s wealth.
    • Policy interventions like super tax on billionaires advocated.
    • Economists like Thomas Piketty support wealth redistribution.
  • Achieve Inclusive Growth:
    • Significant fall in inequality observed in the last decade.
    • Gini coefficient dropped from 0.472 to 0.402.
    • Indicates a 15% reduction in inequality.
  • Provide Opportunities to All:
    • Redistribution aims to increase economic stability and opportunity.
    • Funds public services for welfare.
    • Promotes inclusive growth and social mobility.

Challenges to Redistribution of Wealth in India:

  • Impact on Economy & Growth:
    • Excessive taxation stifles innovation and productivity.
    • Redistribution can discourage investment and entrepreneurship.
    • Shift of taxation burden onto small businesses or employee wages.
  • Political Resistance:
    • Powerful interest groups resist redistributive policies.
    • Politics becomes a battleground for conflicts over redistribution.
    • Opposition or evasion strategies are common.
  • Large Informal Economy:
    • High informal economy limits effective redistribution.
    • Characterised by low wages and limited social protection.
    • Estimated at 38.9% of GDP.
  • Operational Challenges:
    • Bureaucratic inefficiencies hinder policy implementation.
    • Inadequate infrastructure and resource constraints.
    • Corruption and leakages in welfare schemes.
  • Existence of Social Inequalities:
    • Deep-rooted caste, gender, religious, and ethnic inequalities.
    • Marginalised groups face barriers in accessing resources.
    • Hinders effectiveness of redistribution.

Way Forward:

  • Responsibility of Government:
    • Protect the interests of poorer classes.
    • Ensure benefits of growth reach marginalized sections.
    • Frame policies after adequate debate.
  • Inclusion of Inheritance Tax:
    • Introduce a 10-15% inheritance tax.
    • Similar to models in the Philippines, Taiwan, and Thailand.
  • Strengthening Institutional Capacity & Governance:
    • Enhance delivery of welfare services.
    • Improve overall societal welfare.
  • Democratise Decision-making:
    • Democratise wealth distribution via production.
    • Implement workplace democracy for fair decision-making.
  • Alternative Approaches:
    • Expand access to education.
    • Promote economic growth.
    • Foster a conducive business environment.
    • Focus on human capital enhancement and innovation.

Conclusion:

Importance of Balanced Approach:Need for pragmatic solutions to reduce the rich-poor gap.Maximising economic growth, minimising unemployment, and providing social safety nets are essential.Focus on sustainable policies that promote economic prosperity for all citizens.

Source: https://www.thehindu.com/opinion/op-ed/make-the-poor-richer-without-making-the-rich-poorer/article68142143.ece#:~:text=A%20pragmatic%20approach%20to%20reducing,safety%20nets%20and%20attracting%20investments.

Mains Practice Question:

Discuss the ideological and pragmatic approaches to reducing economic inequality, as highlighted in the editorial. How can nations like India bridge the gap between the rich and the poor without resorting to punitive measures against the wealthy? Evaluate the effectiveness of strategies proposed in the editorial in fostering a more equitable society.