Problems of inequality: huge revenue expenditure for universal basic income; Tax

The report, commissioned by the Prime Minister’s Economic Advisory Council (EAC-PM), expressed no surprise at the extreme levels of multidimensional deprivation in the country. Income inequality in India is not only widespread and acute, but also has a peculiarity within the nation community for its almost philosophical acceptance by society. The official line is to underestimate the problem. As the eminent economist Thomas Piketty put it, “India needs to adapt to its problem of inequality.” Since this panic originated as “a great deal of inequality from the historical legacy”, only great solidarity could correct it meaningfully. However, since large-scale dynamics at the income and caste levels have never occurred, the boundaries between social divisions and castes have remained rigid for decades. External agencies such as the World Bank and UNDP-OPHI often need to remind everyone of India’s irresistible bottom slot in terms of global poverty or income inequality. In the absence of income data or the incidence of poverty or the number of “poor” or even poor people who are diligently collected and regularly revised, it is easy to debate data from outside sources. But even if outside agencies exaggerate India’s problems (they rarely conduct field surveys here), there is no denying that it is a serious and complex problem.

The World Inequality Report last December stated that the top 10% of the Indian population was 57% of the country’s gross national income in 2021, compared to 22% of the top 1%. The latest report from the Competition Institute quotes the country’s own periodic labor force survey as saying that the top 1% was 6-7% and the top 10% was one-third of national income in 2019-20. In both cases, the situation is dire and crying out for remedial intervention. As the EAC-PM report states, “The share held by the top 1% is only increasing, further marginalizing the poor.” EAC-PM correctly discounts the effectiveness of the trickle-down theory. Otherwise, a monthly salary of 25,000 could not even be in the top 10 percent of wages earned in the country in 2019-20, which sadly surprises one about the misery of the lowest percentage. So what is the logical way to bring back the growing inequality? State intervention is needed to correct economic imbalances, but the question is how and at what cost.

The EAC-PM has suggested an urban adversary for the Rural Employment Guarantee Scheme, which has been reasonably successful in controlling rural misery. As long as the urban project has a strong link with the creation of sustainable urban infrastructure, its economic productivity cannot be questioned. The proposal to raise the minimum wage has also been well received, although it will be difficult to implement because it would require state support (wage levels now vary widely between states and only a few states provide adequate income support). But reconsidering the concept of universal basic income (UBI) can be fraught with serious revenue costs, especially since explicit budget subsidies on food and fertilizers are increasingly proving to be sticky and vulnerable to external shocks.

An earlier design by UBI, which assumed a semi-universal rate of 75%, was estimated to cost a significant 5% of GDP, where current subsidies were included. A good alternative would be to use the top 1% of the income pyramid to further fund the government as tax revenue and to increase public spending on health and education. There are plenty of examples around the world of such spending being a great catalyst for pushing equity. If the corporate tax rate is to be modest in order to align with a competitive economy, then very high personal income and wealth can be a useful tool for tax growth, such as for redistribution justice.

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