India needs to use its fiscal armoury to fight inequality

Photo: Mint
Photo: Mint


Higher social and productive spending along with tapping tax opportunities can help reduce yawning gaps

The Oxfam 2023 report Survival of the Richest has set the cat among the pigeons. There is outrage from predictable quarters that it maligns India because it exaggerates its poverty and inequality. The report is also sought to be discredited for its wrong methodology in estimating people’s tax burden. For instance, one finding in the report is that the bottom half of India’s income earners pay nearly two-thirds of the goods and services tax (GST). This is an indirect tax and inherently regressive because it pinches the poor more than the rich. That is because the GST paid depends on the price of the product and not on the income of the payer. Naturally, as a proportion of income, it hurts the poor more. But since the rich have higher consumption and buy more expensive goods, their share of the total GST collected should be disproportionately more. Hence, the finding that the bottom half is paying more than the top half is awkward. How did Oxfam come to this strange conclusion? To its credit, it has been transparent about its methodology and data-availability limitations. India has not collected detailed survey-based data on consumer expenditure since 2011-12. Hence, the report applies the present GST rate to a rather outdated consumer basket (for every decile) and that might have tainted its conclusion. Critics claim that Oxfam is wrong, and that our recent buoyancy in GST collections might not be due to the poor being squeezed, but due to robust demand for luxury goods by the rich.

But therein lies the validation of Oxfam’s larger point about worsening inequality. Our K-shaped recovery is now in its third year, and there is no sign of a let-up. The tax burden on the poor is not only through indirect taxes like GST, but also due to the inflationary impact of high excise taxes on petrol and diesel. Average inflation has been above 6% for three years, but for items such as milk, eggs, wheat and flour, it is higher. It is running ahead of the rise in wages. Oxfam says worldwide 1.7 billion workers have seen wage growth eroded by a sharper rise in inflation, making them relatively poorer. The World Bank’s 2022 report on Poverty and Shared Prosperity says that by the end of 2020, there were 70 million more people who slipped below the poverty line, and a bulk of them are in India. Thus, not just inequality, but even poverty has worsened. There has been no official poverty count in India for the past 11 years owing to the lack of consumer expenditure data, but Niti Aayog’s poverty report using multi-dimensional index still shows an average of double-digit poverty. On inequality, there is plenty of supporting data that corroborates Oxfam’s dismal conclusion. India’s billionaire count went up from 102 to a whopping 166 in the past two years. Mercedes Benz clocked a record growth of 41% during 2022. Demand for luxury goods and services has been booming. India’s stock market rose 4.6% even as the Nasdaq plunged 34% and the S&P 500 was down 20%. Oxfam says that the 100 richest Indians’ wealth is $660 billion, and the top 1% now own 40% of the total wealth.

Inequality is an inevitable consequence of fast economic growth. The winners, who are innovators, risk-taking entrepreneurs and the talented, race ahead and create wealth and make disproportionate gains. They also corner most of the gains of high national income growth. Those left behind might benefit from a trickle down. But what if the majority simply stagnates in income and employment? At some point, extreme inequality leads to tensions, social instability and investor nervousness, which is detrimental to growth. Hence an antidote is needed.

Unfortunately, monetary policy is not very helpful. As a previous column of mine, dated 20 October 2020 (, said, the loose monetary policy followed since 2008 and also during covid made inequality worse. Soaring stock market indices, partly enabled by the infusion of central bank liquidity, benefit only those who are invested in stocks, which in India’s case is less than 3% of the population. Hence, it is fiscal policy that one turns to for addressing inequality. This can be done either by redistributive taxation or by spending on public goods whose benefits predominantly go to the poor.

Next week’s Union budget is the last one before the national elections of 2024. It may be the last chance for the government to go full throttle on populism or voter-pleasing expansionary spending. The cabinet recently approved the extension of the 30-month long free foodgrain scheme for another year. There is talk of topping up the free basic income to all farmer households by another 2,000. The rural employment guarantee scheme might get a higher allocation. All of these do mitigate inequality and poverty, but more is needed. We must focus on ensuring the birth and survival of hundreds of thousands of tiny, small and medium enterprises every year, which is where most of the job creation will happen. Outstanding payments due to MSMEs are nearly 10 trillion, and this is a huge millstone thwarting their growth and survival. The TReDS platform is an exchange to sell outstanding unpaid bills of small businesses, but is not working. Skill mismatches lead to the co-existence of a jobs shortage with manpower scarcity for skilled jobs. The pandemic has led to a setback of two years of schooling for perhaps 200 million children. This is where fiscal action is needed. Higher spending on health, education and infrastructure must also not ignore tax revenue opportunities from the pockets of the rich. We also need to reduce the burden of indirect taxes and increase the share of direct taxes in the total kitty.

Ajit Ranade is a Pune-based economist

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