Prime Minister Modi spoke quite mischievously about the principal Opposition party snatching the mangalsutra (a metaphor for people’s wealth) of women and redistributing the same to "infiltrators" (clearly intending Muslims). The Election Commission of India (ECI) is reluctantly examining whether he violated the Model Code of Conduct or not.
The comment, however, has a good side effect. It has generated considerable debate on an issue of important public concern — wealth creation and its redistribution, though the Prime Minister raised it in the context of elections emphasising its populist undertones.
What exactly are the real issues involved in wealth generation, its taxation and redistribution? Will the manner of raising it impair its rational examination in the context of national growth, prosperity, and more equitable distribution of incomes and wealth?
Wealth Indicates National Economic Prosperity
The production of goods and services, and their consumption (more commonly known as the GDP) is the primary source of value addition, income, and wealth in any economy and society.
All income or GDP generated in a year is not spent on consumption. The proportion of income saved and invested into capital formation builds the capital or wealth of households, enterprises, and the nation. The larger the investment, the larger the GDP growth and the larger the formation of wealth.
The build-up of national wealth is necessary for national prosperity. Governments, therefore, need to pursue all policies which promote GDP growth and wealth creation.
The GDP/income, by the operation of the economic system, gets divided into three principle constituents:
Households and individuals (primarily as labour income)
Capital and enterprise (primarily as distributed dividends/interest and retained profits)
Government (primarily as taxes)
Income distribution is not equitable but is not quite lop-sided either.
The accumulation and ownership of wealth, however, is quite concentrated and lopsided. Only a fraction of people own more than 90 per cent of capital/wealth. The poor and the lower middle class, which constitute the bulk of the people, have very little or no capital/wealth/assets.
Such an unequal distribution of wealth is not in the real interest of the people and the nation. Governments, therefore, need to make sure that the wealth of the nation is distributed to serve the wider interests of the economy and people.
Wealth and Inequality Have Grown Enormously
It is the wealth owned by individuals and households that matter. Corporate wealth as such, does not matter, as it is indirectly owned by the individuals and households.
Indian statistical agencies do not collect data about individual and household wealth in India. A few global banking and wealth-tracking institutions do for the world and also for India.
The Global Wealth Report (GWR), brought out by the UBS/Credit Suisse, measures global/national wealth. The GWR has been providing wealth estimates consistently for about two decades now.
The GWR defines wealth as the value of financial assets (equity assets and debt principally) plus real estate assets (primarily housing) owned by the adults in a country minus the debts they owe. For the sake of global uniformity, these wealth estimates are provided in US dollars.
The global wealth was estimated at $360.6 trillion in 2019; India’s wealth at $12.61 trillion (3.5 per cent). In 2022, the global wealth increased to $454.4 trillion; India’s wealth also increased to $15.37 trillion (3.4 per cent).
India’s GDP was estimated at $3.39 trillion in 2022. India’s wealth, thus, was more than 450 per cent of its GDP and has been growing at rates higher than its GDP. It is expected to cross 500 per cent of GDP soon.
In terms of per-adult wealth, India is still relatively poor. India’s per adult wealth was estimated at $16,500 in 2022. However, the number of dollar millionaires is rising fast, as there were as many as 8.49 lakh dollar millionaires in 2022.
There is enormous wealth inequality in the world. The GWR informs that the wealth share of the top one per cent of adults was as high as 44.5 per cent in 2022 with an estimated 59.4 million dollar millionaires, a little more than one per cent of the global adult population. On the other hand, as many as 52.5 per cent of adults owned less than $10,000 of wealth.
The situation in India is quite bad. A study titled Income and Wealth Inequality in India, 1922-2023: The Rise of the Billionaire Raj published in March 2024 estimated, “In 2002, the top one per cent wealth share was 25.4 per cent compared to 16.7 per cent for incomes, a gap of 8.7 percentage points. Twenty years later, by 2022, the top one per cent wealth share had reached 40.1 per cent compared to 22.6 per cent for incomes, a gap of 13.4 percentage points.”
Other studies also reflect similar trends. There is no escape from the conclusion that wealth concentration is accelerating at a fast rate in India, much faster than the concentration of incomes.
Let's Encourage and Celebrate Wealth Generation
The economic system of the Industrial Age deployed vast machines and automation to harness scale economies and enhance labour productivity. It made the industry highly competitive and produced quality goods at cheaper prices. While this reduced employment in factories, the consumers loved cheaper and better quality products which generated an enormous welfare effect.
The operation of a large factory system led to a higher concentration of income in owners of capital, CEOs, and senior owner-managers. The labour incomes also rose but at relatively lower rates. Organised labour was better off despite income inequality expanding.
The current juggernaut of the digital economy is fast expanding with a far greater concentration of digital power and platforms, which now are substituting human intelligence. The largest market capitalisation is now concentrated in digital companies all over the world.
It has been quite convincingly argued that the digital economy feeds on network effects, and the best productivity and efficiency can be generated in these highly concentrated operations. So many of the top digital companies do not charge for their services and earn their income from advertisement revenues and unbelievable valuations.
Industrial machination and automation provided people with good quality products at cheaper costs. Digital companies have provided people with high-quality services at literally no cost.
Indian companies and entrepreneurs will have to invest in building collaborative (Indian companies do not own technology) and competitive businesses if they have to have any chance of building good digital and environmental businesses. Only the companies with real capital and wealth muscle will be able to do it.
We will have to facilitate the path of these wealthy entrepreneurs instead of eyeing their wealth. This can be done only when we have the mindset of celebrating the enterprise and wealth.
Time to Initiate Wealth Taxation
For most of the human societal existence, incomes were not taxed. It was primarily the production and sales of agricultural and industrial produce and imports, which were taxed.
The industrial revolution expanded the incomes of the few, massively generating gross inequality in the world.
Progressive taxation of income was initiated about a hundred years back in Nordics and the US. Higher rates for higher incomes. Incomes below a certain threshold were not taxed at all. This system brought tax resources for the government, which was used for redistribution, initiating many social security and welfare programmes.
Progressive taxation of income and its redistribution through social welfare programmes is now globally accepted as a sound public policy.
India also has a fair and progressive structure of income-tax rates and elaborate programmes of social security, welfare and also some pure cash redistribution or freebies.
The taxation of income and its redistribution is well accepted by society and it does not generate any outrage. It is the wealth which is not taxed in India. India had a moth-eaten wealth tax system, which was also abolished in 2015 by the Modi-led BJP government.
Wealth Taxation is a Fair Deal
The Prime Minister spoke in a manner as if taxation and redistribution of wealth is something of a horrible thing. He perhaps intended to generate outrage amongst people in general, and the wealthier middle class in particular.
This is a short-sighted approach.
As the moment for taxing incomes (that too progressively) came about a hundred years back, the moment to initiate the taxation of wealth is right here now.
The gross domestic wealth (GDW) of India is five times the GDP of India. The GDP is taxed but not the GDW. The wealth is also growing at rates higher than the GDP. The wealth is also concentrated in fewer hands making it the fittest resource to tax in a progressive manner.
The operation of the economic system is likely to render more and more people without jobs. That is not inherently bad. However, the new paradigm would require the consumption of the non-earning sections of people to be taken care of.
This can be done by way of implementing a new-age social welfare scheme, i.e., a well-designed universal basic income for non-earning people.
Taxation of Wealth Will Not Hurt Wealth Creation
The taxation of wealth is not the expropriation of wealth, just as how the taxation of income is not the expropriation of income.
A moderate but progressive system of taxing the annual addition in wealth (not the stock of wealth) at an average of one per cent of GDW can yield about $150 billion in tax resources, which will be almost equal to the current corporation income tax receipts.
Such a system would allow the capital/wealth of India to be deployed for building prosperity and at the same time make its contribution to creating a healthy and humane society.
(The author is the former Economic Affairs Secretary and Finance Secretary of India. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)
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