Redistribution of wealth- Explained Pointwise

The debate surrounding the redistribution of wealth has gained prominence during the ongoing election campaign, with the ruling government and the Opposition engaged in heated exchange. Furthermore, the Supreme Court (SC) has also constituted a nine-judge Bench to interpret the Directive Principles of State Policy (DPSP) with respect to ownership and control of material resources.

What are the Constitutional Provisions which provide for the Redistribution of Wealth? How has the redistribution of Wealth been applied historically? 

Constitutional Provisions for redistribution of Wealth

Policies and Measures taken for Redistribution of Wealth after Independence

a. Curtailment of the Right to Property through various amendments-

Right to Property was originally envisaged as a fundamental Right under Art 19(1)(f) of the constitution. It further provided that under Article 31 the state shall pay compensation in case of acquisition of private property.

Since the Government wanted flexibility in acquiring land for land reforms and public welfare, it curtailed the scope of right to property through various amendments.

In the Kesavananda Bharati case (1973), the Supreme Court upheld the validity of Article 31C but made it subject to judicial review.

In the Minerva Mills case (1980), the Supreme Court ruled that the Constitution exists on a harmonious balance between fundamental rights and DPSP.

b. 44th Amendment Act which abolished Right to Property as a Fundamental Right

The 44th amendment act 1978, omitted right to property as a fundamental right and made it a constitutional right under Article 300A. This was done to avoid excessive litigation directly in the Supreme Court by the propertied class.

c. ‘Socialistic Model of Economy’- Policies like Nationalisation of banking and insurance, extremely high rates of direct taxes (Even up to 97%), Estate duty on inheritance, tax on wealth and The Monopolies and Restrictive Trade Practices Act, 1969 (MRTP Act) that restricted private trade were adopted. These were aimed at reduction of inequality and redistribution of wealth among the poorer sections.

However, these measures stifled growth and also resulted in the concealment of income/wealth. Taxes like estate duty and wealth tax generated revenue that was much less than the cost incurred in administering them.

What has been the Government economic policy in the post-liberalisation era for wealth redistribution?

Indian economy adopted the modern liberal welfare economist model, with the Govt opening up the economy to private players, raising resources through taxes and redistributing them using a welfarist approach.

a. The Indian economy has moved from the closed economy model towards liberalisation, globalisation and privatisation in the 1990s.

b. The new industrial policy was adopted in 1991 to empower market forces, improve efficiency and rectify deficiencies in the country’s industrial structure.

c. The MRTP Act was repealed and replaced with the Competition Act, 2002 and income tax rates were reduced considerably.

d. Estate duty was abolished in 1985 and wealth tax in 2016.

The market driven economy has resulted in additional resources for the government that has helped in bringing people out of abject poverty. For ex- India has registered a significant decline in multidimensional poverty in India from 29.17% in 2013-14 to 11.28% in 2022-23.

However, these policies have not been able to address the growing problem of inequality in India. There has been concentration of Wealth in the hands of few

What is the need for redistribution of Wealth in India?

1. Rising wealth and income inequality in India- In the post-liberalisation period of the Indian economy, the wealth and income inequality has been rising in India. According to a report by the World Inequality Lab, the top 10% of the country’s population have a share of 65% and 57% of the wealth and income respectively as of 2022-23. The bottom 50% have a meagre share of 6.5% and 15% of the wealth and income, respectively.

2. Lack of Inclusive Growth- The Gini wealth coefficient in India has gone up from 81.3% in 2013 to 85.4% in 2017 (100% represents maximal inequality). The growth in India has not been inclusive.

3. Creation of meritocratic society- It will help in creation of a meritocratic society by chipping away the advantages the children of the wealthiest families enjoy by accident of birth. The redistribution of initial endowments can help in the establishment of optimal social state.

4. Reduction of Intra generational inequalities- The inheritance tax reduces Intra- Generational Inequality and promotes Inter-Generational Equity by preventing the concentration of income and wealth in the hands of a few.

What are the Challenges to redistribution of Wealth in India?

1. Political Resistance- Redistributive policies face resistance from powerful interest groups and vested interests, including wealthy individuals and corporations. For Ex- Opposition by the dominant landholding classes to the Land reform policy in India.

2. Large Informal Economy- Redistribution of wealth fail to reach informal economy, which are characterized by low wages, lack of job security, and limited access to social protection. This makes it challenging to effectively address the income inequality.

3. Deep-rooted Social Inequalities- There are deep-rooted caste, gender, religious, and ethnic inequalities in India. These social inequalities perpetuate economic disparities and hinder the effectiveness of redistributive policies, as marginalized groups face barriers in accessing resources and opportunities.

4. Capacity Constraints- India’s institutional capacity to implement redistributive policies effectively is limited by bureaucratic inefficiencies, inadequate infrastructure, and resource constraints. For ex- Corruption and leakages in the welfare schemes.

What Should be the Way Forward?

1. Introduction of Inheritance tax with higher threshold- A inheritance tax with higher threshold needs to be introduced for redistribution of wealth in India. For ex- A moderate inheritance tax of 10-15% (like other Asian countries such as the Philippines, Taiwan and Thailand) on India’s 101 billionaires who are more than 65 years old and collectively own ₹10.54 trillion can create a financial base of wealth redistribution.

2. Strengthening of institutional capacity and governance- The governance mechanisms must be strengthened, to ensure the efficient delivery of welfare services and benefits. For ex- Plugging the leakages in the welfare schemes.

3. Socio-Political consensus- Socio-Political consensus must be created on progressive taxation and welfare programs to address income inequality and promote equitable wealth distribution.

4. Attenuation of Govt Policies- The Govt policies must be reframed in line with the current economic model so that Innovation and growth is not curtailed, but the benefits of growth should reach all sections, especially the marginalized sections. For ex- Resource based Development Policies.