Addressing a rally in Rajasthan’s Banswara on April 21, 2024 Prime Minister Narendra Modi referred to plans of the Congress party (if it were to come to power) to conduct a survey of the wealth held by individuals and redistribute it.
The trigger for what Modi said was Rahul Gandhi’s speech on April 6, 2024 in Hyderabad, wherein the latter promised what he termed as “financial and institutional survey” for re-distribution of the country’s wealth. The re-distribution would be taken up after a nation-wide Socio-Economic and Caste Census promised by the Congress party in its manifesto. The manifesto dwells on income and wealth inequalities, though not redistribution.
There is an inherent connection between economic growth and income inequalities.
Economic growth happens when the gross domestic product (GDP) – the market value of all the final goods and services produced and rendered in a specific time period – increases. The stakeholders involved in the production of goods and services operate either at the individual level viz. doctors, chartered accountants (CAs), architects rendering their services or they are an association of individuals working as firms – micro, small and medium enterprises (MSMEs) or large companies depending on the nature of activity and scale of operations.
The income generated by a person from the economic activity she is engaged in depends on the effort put in by her in particular, its ‘quality’ which in turn, is a function of her educational qualifications, skill set, expertise and so on. Thus, a blue collar unskilled or semi-skilled worker in a firm would get less salary when compared to skilled persons deployed in white collar jobs. Within the latter category also, it increases as a person moves up in the hierarchy performing more and more demanding functions. At the top of the pyramid, the salary peaks as the CEO/COO has to run the affairs of the company in the most efficient and profitable way.
Then, comes the owner or promoter of the company. She is the one who not only takes the initiative of setting up enterprise but also invests her own capital besides raising loans from banks and financial institutions (FIs) as well as garnering equity capital from other investors. When, the company makes profits from operations, she gets a share depending on her contribution in the equity capital. Being the promoter/owner of the firm, naturally, the income generated by her would be the highest amongst all the stakeholders in it.
Then, there are individuals who run their own businesses in diverse fields such as doctors, CAs, engineers, architects, advocates, literature, art, entertainment, cinema, culture and so on. If, their earnings generally happen to be high, these in all fairness are attributable to their capabilities, skill sets, expertise, and so on.
In short, there is an element of inevitability in the inequalities of income distribution across different class of people, these being the result of differential skill sets, their capabilities, entrepreneurial spirit and so on. When, GDP grows at a faster pace, even as the income of all participants in the economic activities increases, the addition in case of those with skills and higher skill sets is much more. Therefore, if we see increase in income inequalities as growth picks up momentum, this is only to be expected. This is a global trend that can be seen in all countries where market forces that incentivize higher productivity and efficiency are allowed to work unhindered.
But, it is also a fact that there are glaring inequalities in India. A report titled ‘Survival of the Richest’ released by Oxfam International at the 2023 annual meeting of the WEF in Davos, Switzerland, says that ‘the wealthiest one percent of individuals in India possess over 40 percent of the nation’s total wealth’. On the other hand, the bottom half of the population get a mere six percent of the nation’s wealth. This is not a healthy sign.
This has a lot to do with the way most of the businesses are structured, their over zealousness for profits, inherent tendencies to pay less to workers particularly to those at the lower rung (this trend is seen even among the owners of MSMEs), an exploitative traders class especially when it comes to buying the crop output of millions of small and marginal farmers. These tendencies need to be curbed to result in a better distribution of income and give a boost private consumption for sustaining high economic growth.
The solution lies in implementing policies that curb monopolies, create room for more players, inject greater competition, bring about labor market reforms, reforms in agricultural markets and so on. In other words, extreme inequalities in income distribution need to be addressed right at the source. But, going for ‘redistribution’ of income as alluded to by the grand old party is a dangerous idea.
Redistribution involves the government taking away a portion of a persons’ income/wealth and distributing it amongst those who have low income. For instance, in India during 1953 to 1985 there was a tax called estate duty levied on the wealth bequeathed by a person upon death to his children. This was applicable in case where the value of wealth transferred was in excess of Rs 20 lakhs. In USA, some states impose the so called ‘inheritance tax’ of 55 percent on the wealth bequeathed to a person’s children.
This can seriously impinge on growth in two ways.
First, it will kill the incentive of performers to do better as they face the threat of a slice of their earnings being taken away. It will strike at the very foundation of creating wealth. The entrepreneurs will desist from setting up businesses in India; instead they would shift to jurisdictions where such a threat of appropriation of wealth doesn’t exist. Start-ups where budding promoters give shape to new business ideas and take big risk will be a thing of the past.
During the last decade or so, foreign investment has been coming to India in droves driven by the opportunity to make good profits (courtesy, expanding market, skilled manpower, conducive policy environment and political stability). All such flows will dry up. Why would foreign investors come when they face expropriation of their assets merely for the purpose of redistributing them?
R&D and technological innovations hold the key to a country’s economic advancement. These can get a boost only in an environment where intellectual property rights (IPRs) are protected. Put simply, an innovator is enabled to realize the full commercial value embedded in her innovation by grant of patents, copyrights and so on. The State exercising a right to encroach on this value will kill the urge to undertake R&D and innovate.
Second, low income people – intended beneficiaries of redistribution – will become prone to not working forget enhancing skills that could help them earn more. When, the government promises to take care of their well being ad infinitum, why would they make efforts?
To conclude, the very idea of taking away wealth from those who have and giving to others who don’t have is flawed. It will create two sets of people viz. a class that is unwilling to work and another who are prevented from doing good work. It will lead to economic disaster.
The government should not even look at it.