India needs to use its fiscal armoury to fight inequality

Source– The post is based on the article “India needs to use its fiscal armoury to fight inequality” published in the mint on 24th January 2023.

Syllabus: GS2- Issues relating to poverty. GS3- Inclusive growth

Relevance– Inequality and related issues

News– The article explains the recent report of Oxfam about increasing inequality in India. It also provide some facts about inequality and suggest solution to reduce inequality in India

What are arguments favouring Oxfam report conclusion about increasing inequality in India?

Tax burden on the poor is not only through indirect taxes but also through inflationary impact of higher excise duty on petrol and diesel.

Average inflation has been above 6% for three years. For items like milk, flour and eggs, it is higher. It is running ahead of the rise in wages.

Oxfam says that worldwide 1.7 billion workers have seen wages eroded by sharp rise in inflation. It has made them relatively more poor.

The World Bank 2022 Poverty and Shared prosperity says that by the end of 2022, more than 70 million people slipped below the poverty line. A bulk of them are in India.

There has been no official poverty count for the last 11 years due to lack of consumer expenditure data. A NITI Aayog report using multi-dimensional index shows an average of double digit poverty.

Mercedes clocked a record growth of 41% during 2022. Demand for luxury goods has been booming in recent years.

What are some facts about inequality?

Inequality is an inevitable consequence of faster economic growth. Risk taking entrepreneurs create wealth and make disproportionate gains. Those left behind may benefit from trickle down.

But, if trickle down does not happen, it leads to stagnating income for the majority.

Extreme inequality leads to social tensions. It is detrimental to growth.

What is the way forward to reduce inequalities?

Monetary policy is not very useful. Loose monetary policy during Covid made inequality worse. Soaring stock markets due to infusion of central bank liquidity benefits those who invested in stocks. It is less than 3% of the population.

Fiscal policy is necessary to address the inequalities. It can be done by redistributive taxation or by more spending on public goods.

There must be focus on survival of MSMEs where most of the job creation happens. Outstanding payments due to MSMEs are nearly 10 million dollars. TReDS is a platform to sell the outstanding bills of small businesses. But, it is not working.

Fiscal action is needed for skill generation for school dropouts due to pandemic.

Higher expenditure is needed on health, education and infrastructure. It needs higher taxation on the rich.

There is a need to reduce the burden of indirect taxes and increase the share of direct taxes.