Should India take from the rich, give the poor? A new election flashpoint

As India enters the second half of its giant election, wealth distribution has emerged as a central campaign faultline — and a battering ram for PM Modi to target the opposition.

Modi Rahul
Indian Prime Minister Narendra Modi and opposition leader Rahul Gandhi have locked horns in recent days as a debate over wealth redistribution takes centrestage in India amid national elections [Reuters]

New Delhi, India — As the world’s largest — and one of its most unequal — democracies votes in a mammoth national election, a new debate has gripped the campaigns of both Prime Minister Narendra Modi’s ruling Bharatiya Janata Party (BJP) and the opposition Congress party.

At the heart of this latest political slugfest is the idea of a potential redistribution of wealth. But while the Congress party has alluded to the need for some resources to be reallocated to traditional marginalised economic and caste-based communities, Modi and the BJP have accused the opposition of plotting to hand over wealth from Hindu households to Muslims.

So what’s the controversy about and what do economists say about the proposals for a relook at India’s wealth distribution?

What is the controversy about?

In April, Rahul Gandhi, a scion of the Nehru-Gandhi political dynasty, said if voted to office, his Congress party would conduct a caste census along with an economic and institutional survey to determine who owns what and earns how much. Following this, a portion of the 16 trillion rupees ($192bn) of benefits given to 22 big businessmen by the Modi government would be transferred to 90 percent of the country’s people, as a starting point for delivering social justice, he said.

Gandhi described the caste census as an “X-ray” into Indian society. “This is not a political issue for me, this is my life mission,” Gandhi said. “You can write down; no force can stop the caste census.’’

The Congress party manifesto doesn’t talk directly about redistribution of wealth.  It says, “We will address the growing inequality of wealth and income through suitable changes in policies.’’  On the caste-based census, it says, “Congress will conduct a nation-wide Socio-Economic and Caste Census to enumerate the castes and sub-castes and their socio-economic conditions. Based on the data, we will strengthen the agenda for affirmative action.”

Yet, responding to Gandhi’s speech, Modi has been repeating in election rallies that the Congress party has hatched a “deep conspiracy’’ to snatch the wealth of people and gold of Hindu women to distribute it among Muslims, whom he described as “infiltrators” and “those who have more children”.

The opposition has accused Modi of resorting to “lies” and “hate speech” to distract people from high unemployment and rising prices, and has complained to the election commission.

Whose wealth and how much?

India is the fastest-growing major economy in the world, but also suffers from deepening inequality. Numerous studies have shown that the benefits of India’s brisk growth have been unevenly distributed.

A new study by researchers at the World Inequality Lab shows that income and wealth inequality in India today is, in many ways, worse than it was even under British colonial rule. India’s richest 1 percent control 22.6 percent of national income and more than 40 percent of the country’s wealth. Meanwhile, the bottom 50 percent control less than 10 percent of national wealth.

Inequality was worsened over the past decade of Modi’s rule. India has 271 dollar billionaires, third behind only China and the US — and world’s highest number of poor at 228.9 million, according to Oxfam India.

The Congress party has accused the Modi government of ‘crony capitalism’ and favouring certain businesses in government contracts. The government has denied the accusations saying it has not favoured companies and has instead invested in welfare programmes to improve the lives of the poor.

Experts say India’s inequality is the result of the prevailing economic and political system. Even as both governments of the BJP and the Congress have launched reforms and pushed for economic growth over the past three decades, they have failed to generate enough employment, check inflation, and move the workforce from low-income farming to well-paying non-farm jobs, resulting in high inequality of wealth and income.

Will wealth redistribution help?

There is no one view among economists. Those against the idea say redistribution will be counterproductive by taking capital from wealth generators thereby handicapping and disincentivising them to contribute to the economy.

But others argue that redistribution is required not only in wealth but also in opportunities like education, healthcare, access to financial resources, water and energy, which will boost poor people’s capacity to generate income and reduce inequality in the long run.

Redistribution of income and wealth is a very good idea in contemporary India, said Deepankar Basu, economics professor at the University of Massachusetts Amherst.

“The high and rising level of economic inequality suggests that the economic system does not work equally for all. The wealth and income being generated by the system is predominantly being cornered by the rich,” said Basu. “Not only does this have economic implications, but it also distorts the democratic process — extreme wealth inequality allows the super-wealthy to disproportionately influence the political process through various channels like campaign contributions and donations to political parties. This erodes the democratic system of governance.’’

Devashish Mitra, professor of economics, Maxwell School of Citizenship and Public Affairs, Syracuse University, New York, agreed that some wealth distribution “might not be a bad idea”.

“But it is a politically contentious issue, and there might be political problems in enacting any kind of means to redistribute wealth,’’ Mitra acknowledged.

One solution, Mitra said, might be to combine wealth redistribution with “some reduction in income taxes”. That would partially compensate for the wealth redistribution. “Then, we will have a combination of wealth taxes and income taxes that could lead to both greater equity and greater efficiency than in the current situation,’’ he said.

What’s the politics around it?

The Congress is arguing that data from a caste-based census will help with the implementation of welfare and social security schemes. The party has promised to raise a Supreme Court-mandated cap on reservations in higher education and government jobs for underprivileged groups called Scheduled Castes (SC), Scheduled Tribes (ST) and Other Backward Classes (OBCs).

If successful, this political pitch could in theory help the Congress break the BJP’s growing stranglehold over the Hindu vote across castes and sub-communities. Modi, in turn, has responded by alleging that the Congress wants to give Muslims benefits that are meant to be allocated on caste — not religious — lines. He has cited a 2006 speech by then Congress Prime Minister Manmohan Singh where he said disadvantaged communities and religious minorities, including Muslims, should have the first claim on national resources.

The Congress has insisted that it has no wealth redistribution plan, and that Singh’s 2006 comments had been misinterpreted.

What about inheritance tax?

In an April 24 television interview, Sam Pitroda, an adviser to the Nehru-Gandhi family and head of the overseas wing of the Congress party, added another twist to the debate by arguing that India should debate whether an inheritance tax might help reduce wealth inequality.

Modi has responded by accusing the Congress of plotting a wealth and inheritance tax that would snatch away people’s wealth accumulated through hard work. The Congress, he said, aims to loot people “zindagi ke saath bhi aur zindagi ke baad bhi” (in life, and after death), echoing the popular tagline of the state-owned Life Insurance Corporation.

The Congress party distanced itself from Pitroda comments by saying his view does not reflect the position of the party. Jairam Ramesh, a spokesman of the Congress party, referred to past comments by BJP ministers in favour of an inheritance tax. Modi has clarified that the BJP has no intention to bring such a tax.

What is an inheritance tax?

An inheritance tax, also known as estate tax or death duty in some countries, is a levy imposed on the total value of money and property of a deceased person before it is passed on to their heirs. Generally, this tax is determined by assessing the value of the assets remaining after certain exemptions or deductions. Essentially, the government collects a share of the wealth transferred from the deceased to their beneficiaries.

Globally, inheritance taxes are widespread in nations including the UK, Japan, France, and Finland. The United States does not impose an inheritance tax at the federal level, though it has an estate tax. However, six states independently retain inheritance tax regimes.

There is no estate duty or inheritance tax payable in India. Estate duty on property that is passed on to the legal heirs on the death of a person was removed in 1985 by the then Congress government of Rajiv Gandhi — Rahul’s father — citing the need to simplify the tax system and promote investment and saving. However, other taxes such as capital gains tax, wealth tax, and gift tax are applied to inheritances depending on the circumstances.

Before the removal, estate duty was payable on a slab basis ranging approximately from 7.5 percent to 40 percent of the principal value of the estate. This estate tax was introduced in 1953 in a bid to reduce economic inequality.

In recent years, worldwide, there has been a trend towards scrapping estate or inheritance tax. Five European countries have abolished their estate or inheritance taxes since 2000. On the other hand, US President Joe Biden has been supporting higher taxes on inherited wealth.

Is an inheritance tax a good idea?

Finance Minister Nirmala Sitharaman has said inheritance tax could nullify India’s decade of progress. Raghuram Rajan, former governor of the Reserve Bank of India has said that while inclusive growth will aid in the expansion of the economy, taxing the rich more is not the way to do that.

Other economists back an inheritance tax. “An inheritance tax will make the whole economic system fairer by redistributing some of the accumulated wealth away from the children of wealthy people,’’ said Basu. “These tax revenues can then be used to finance public education, provide public healthcare and affordable housing, and support mitigation efforts related to the negative effects of climate change, which disproportionately impacts the poor.’’

Syracuse University’s Mitra said that while an inheritance tax might make some economic sense, he sees “enormous scope for corruption, stemming from the subjectivity in the valuation of inheritances and the unlimited scope in misreporting the actual value of inheritances”.

What is the way forward?

Progressive taxation and greater social spending could be other solutions to boost economic equality. A greater emphasis on wealth taxes such as capital income taxation, net wealth taxation, and transfer taxation would generate tax revenue that could allow greater investment in health, education and infrastructure.

“There are many policies that can be adopted to address rising economic inequality in India,’’ said Basu. “These include increasing the tax rate for the top 1 percent of income earners, increasing the corporate tax rate on relatively large firms, improving educational opportunities and making them accessible for the poor.’’

Source: Al Jazeera