Taking on inequality

Fighting inequality must be taken up on a priority basis

Fighting inequality must be taken up on a priority basis | Photo Credit: surajps

Direct taxation can reduce rich-poor divide 

The Russian invasion of Ukraine sent prices of petroleum products, edible oil and fertilisers soaring. Inflation peaked to 15 per cent, forcing RBI to hike policy rates and the rupee has been declining. Duties on petroleum products were reduced.

Globalisation which was pitched during the Washington consensus’s heydays in 1980s and 1990s, has been in retreat over the last few years.

India’s response

The policy of Atmanirbhartha was India’s response to de-globalisation. The Efficient Market Hypothesis never worked in the real world because of asymmetric information in the economy. Interest rate hikes are generally resorted to in inflationary times, which reduces liquidity in the system. Inflation itself is an invisible tax on the poor.

The rupee’s decline on the other hand will promote exports and reduce imports. The government was forced to reduce excise duties on petroleum products. This will no doubt help the poor. But the rupee’s decline will not necessarily boost exports if imports of inputs that go into the manufacture of export products rise. So the exchange, interest and tax rates are intertwined but they also sometimes pull in different directions.

Taxation is recognised as a powerful tool both to control inflation and promote equity. Reduction of indirect taxes helps the poor. If the rich are getting richer as is happening in India today, tax is a remedy to be seriously considered.

This year's World Economic Forum at Davos debated a UN report on rising inequality. More than 4.6 crore Indians have fallen into extreme poverty in 2020, while the number of Indian billionaires grew from 102 to 143 during the pandemic period.

Their wealth rose from ₹23.1 lakh crore in March 2020 to ₹53.2 lakh crore in November 2021. About 84 per cent of households in India suffered a decline in income. The richest 98 have the same wealth ($657 billion) as the 555 million people — bottom 40 per cent.

If each of the 10 richest Indian billionaires were to spend $1 million daily, it will take them 84 years to exhaust their current wealth. They have seen their combined fortunes more than double during the pandemic. This is bound to be so as long as the rate of return on capital (r) is greater than the rate of growth, (g), graphically explained by Thomas Piketty. The only way to reverse the formula is to levy higher taxes on return on capital.

India's direct tax rates continue to be low. Even Pakistan raised its maximum corporate tax rate to 39 per cent last week.

Sri Lanka’s current economic woes are linked to tax cuts. The anger against the rich is growing in Latin America.

What next? 

Piketty in his latest work observes, that if India manages to surmount its burdensome legacy of inequality, it can replace China as the world’s primary economic power in the course of the second half of the 21st century.

The battle against inequality is on. Indians can either join the battle or get left behind, the consequences of which will be tragic. We need a new political economy, a starting point for debate about the future of progressive politics.

Ramanujam is a former Chief Commissioner of Income-Tax; Sangeetha is a Chennai-based advocate; and Varenyasri Rangarajan is a student of economics in Mumbai

Published on July 26, 2022
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