Role of Indian Politics in Income Equality

The World Inequality Report 2022 categorizes India as a ‘poor and very unequal country, with an affluent elite.’ The report further shows that 57% of wealth is held by the top 10% of the population, while the bottom 50% hold just 13%. What are the reasons behind such inequality? What role do policies and politics play in it?

Last year, the CEO of NITI Aayog, Amitabh Kant, got into a controversy for saying that India had ‘too much democracy’ which is hampering its growth. While this statement created a stir on social media, the other part of his speech went unnoticed. Kant, in an interview with Swarajya, said, “In India, we are too much of a democracy so we keep supporting everybody”. He went on to elaborate,

“For the first time in India a government has thought big in terms of size and scale and said we want to produce global champions. Nobody had the political will and the courage to say that we want to support five companies who want to be global champions. Everyone used to say I want to support everyone in India, I want to get votes from everyone.”

Aakar Patel writes in Price of The Modi Years,

“What he (Kant) was saying in essence was that the government of India would back a very small set of elite firms. This was being done in two ways. One called ‘formalisation’ and the second through blocking foreign competition in crucial sectors (‘import substitution’).”

Thus the policies of the incumbent government have always been in this direction. The formalization theory is that small and medium-sized firms are inefficient and tax thieves and therefore the demonetization made their existence difficult as they were not able to operate for weeks. As for big firms, they were not affected as they relied on electronic transactions.

Atmanirbhar Bharat was also such a step. Narendra Modi’s former advisor Arvind Panagariya termed it as another form of import substitution. It basically means substituting the imported goods by products made domestically. This is done through a variety of measures that block foreign competition. Import Duties have been rising for last three years. In 2018 budget speech, late Mr. Arun Jaitley, the then finance minister, said,

“In this budget, I am making a calibrated departure from the underlying policy in the last two decades, wherein the trend largely was to reduce the customs duty.”

The implications of rising import duties have been that products have become costlier for the consumers. My favourite example is that of the iPhone. When iPhone 12 Pro was launched in India, it cost ₹120,000. Its cost in Dubai was ₹84,000, while the return ticket to Dubai from Delhi cost around ₹20,000. Hence, it made more sense to go to Dubai to buy the iPhone instead of buying it in India.

In addition to this, the corporate tax was reduced to the extent that the share of corporate tax revenue fell to its lowest in a decade. At the same time tax on petrol and diesel was raised. The Union government recently declared that it was able to generate ₹ 8 lakh crore from this in the last 3 years. It is important to note that a tax on petrol is a tax on the poor as it has an inflationary impact on all other products, and even the poor on the street buy food or salt.

Due to such policies, India added 55 new billionaires in the pandemic, at a time when around 230 million people were pushed into poverty. I believe inequality is not a problem in India, but poverty is. We have seen as nations become richer inequality tends to rise, like in the case of economic liberalization in 1991 after which millions were pushed out of poverty and we also saw a rise in inequality. This stems from the fact that the rich have a wider reach. As Vivek Kaul quotes Ray Dalio in his column for Livemint,

“Wealth gaps are self-reinforcing because rich people use their greater resources to expand their power. They also influence the political system to their advantage… to develop between the rich ‘haves’ and the poor ‘have-nots’.”

As a part of a country where still massive poverty exists, should we think about inequality? Amit Varma wrote in a column for Times of India,

“When millions of Indians don’t have enough money to eat properly or sleep with a roof over their heads, it is our moral imperative to help them rise out of poverty. The policies that will make this possible – allowing free markets, incentivising investment and job creation, removing state oppression – are likely to lead to greater inequality. So what? It is more urgent to make sure that every Indian has enough to fulfil his basic needs”

But it is definitely a serious matter of concern when inequality is rising along with poverty. The Consumer Expenditure Report 2017-18 showed that for the first time in the last 50 years, consumption levels have declined and this would mean a growth in poverty by 10%. However, the full report never came out as the government vaguely dismissed it by saying that it had ‘quality issues’ and it would redo the survey in 2022. Even after experts backing the government including the chief economic advisor asked the government to make it public so that flaws, if any, could be examined with transparency, the government decided not to do so.

Also, the share of the wealth of the top 1% in India is far more than developed nations like The US or UK or even China which have used the same capitalistic approach. Contrary to whatever I have mentioned till now, The World Inequality Report 2022 does not show any huge growth in inequality in recent years. But, the reason for this lies in the same.  The report says,

“Over the past three years, the quality of inequality data released by the government has seriously deteriorated, making it particularly difficult to assess recent inequality changes.”

Therefore, what the government did with the consumption index and many other indicators, it did with inequality data as well. And the first step to solve the problem would be to acknowledge it.

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