Budget 2021: Setting Priorities Amid Rising Inequality
A child has bread for lunch at a village in Banda District, Uttar Pradesh, India, on Sunday, Oct. 11, 2020. Photographer: Prashanth Vishwanathan/Bloomberg

Budget 2021: Setting Priorities Amid Rising Inequality

The Covid-19 crisis is widely believed to have worsened inequalities across economies, including in India.

In aggregate, India’s per capita GDP in FY21 is estimated to fall to Rs 1.43 lakh — a contraction of 5.2% in nominal terms. In nominal U.S. dollar terms, India’s GDP per capita is estimated to fall to $1,876.5 in FY21, from $2,097.78 the previous year, the International Monetary Fund said in October.

Beyond the headline, many believe that the impact of the Covid-19 crisis has been felt unequally by the lower-income wage earners. “The drastic cost-cutting measures adopted by the large Indian firms pushed the pain of the lockdown to the bottom 30-40% of the enterprises and individuals,” said Neelkanth Mishra, strategist at Credit Suisse in a recent conversation with BloombergQuint. The recent recovery seen in the economy, too, has been led largely by profits, while the labour market still has meaningful scars, said Sajjid Chinoy, chief India economist at JPMorgan.

Can government policies be designed to help tackle some of these worsening inequality? BloombergQuint speaks to economists.

Budget 2021: Setting Priorities Amid Rising Inequality

Arjun Jayadev

Jayadev, professor of economics at Azim Premji University, says that India’s decades-long failure in providing access to quality health services for a substantial proportion of the population has come home to roost this year.

But if there is a silver lining, it is that the crisis gives the country an opportunity to ‘build back better’ as the slogan goes, Jaydev said.

This would involve at least three elements — substantially increased allotments to health and education with a medium-term plan to keep these at a permanently higher level, a focus on improving environmental quality which is strongly linked to health outcomes and, finally, committing to supporting these elements through a third- something like an urban employment program.
Arjun Jayadev, Professor of Economics, Azim Premji University

While there has been criticism of schemes like MGNREGA for wastefulness, it has been the bulwark to minimize the malign effects of highly uneven growth and job creation, Javadev added.

The budget could also provide immediate relief by universalising PDS and providing income support through direct cash transfers, Jayadev said. “In general, a mix of short term relief and long term structural emphasis can  help in moving towards a more inclusive and viable growth strategy that is desperately missing in the current imagination.”

Alaka M Basu

While the pandemic has provided a convenient handle to explain the worsening of incomes and inequalities in India, according to the recently released data from the fifth National Family Health Survey, declines in the quality of life of Indians began well before the pandemic, said Basu, professor at Cornell University.

Much has been written about the stagnation or worsening of child nutritional status seen in this survey. But children live in families and their parents have not had it easy either, Basu said. For example, the percentage of adult men and women with anaemia has shot up everywhere, which suggests that foods rich in essential nutrients are being sacrificed to afford the cheaper carbohydrates needed to maintain energy levels.

Nutritional inequalities along lines of gender, region, class, seem to be steady or worsening according to the limited indicators available in the published data.

One important step would be for public distribution programs to go beyond basic carbohydrates to give poor households affordable access to a more varied and nutritious diet, especially vegetables, fruits, milk and eggs.
Alaka M Basu, Professor, Cornell University

A physically fitter adult population is a happier population of course, but it will also be a more productive population when economic conditions improve, Basu said.

Ankur Sarin

The flagrantly unequal consequences of pandemic and the ensuing lockdown needs a response that not only diverts resources where they are needed most but also shifts the structures that perpetuate the inequalities, said Sarin, professor of the public systems group at IIM-A.

Given limited resources, this has to be done while simultaneously ensuring that every rupee of expenditure is leveraged and made to count a lot more.

An urban employment program needs to find a place in the budget, targeting livelihoods and not simply growth, Sarin said. Besides providing an urban safety net, it should also be used as an instrument to strengthen local urban governance. Much like MGNREGA has done in rural areas for Gram Panchayats, the urban employment program can place ‘ward committees’ at the center of its implementation plans, thus energising platforms of democratic governance closest to urban residents, Sarin said.

Investments in such platforms will not only address immediate needs but also help build resilience for continuing and future challenges that go beyond livelihoods as well, he added.

Amiya Kumar Bagchi

Bagchi, emeritus professor, Institute of Development Studies, proposed additional taxes on incomes beyond a certain level and on wealth. India is one of the few countries in the world that does not have any death duty or long-term capital gains tax, he said.

The marginal tax rate in India should be raised to 40%, which will still keep India’s rich among the lowest taxed globally, Bagchi said.

He explains the math as follows:

  • In 2017-18, persons earning Rs 25 lakh and above annually earned around Rs. 6,25,000 crore on the basis of returns submitted to the income tax department. The figure is a serious under-estimate, because it does not take account of the numerous tax-free perks corporate managers enjoy, Bagchi added.
  • By raising the tax rate by 10% the government will be able to garner an additional Rs. 62,500 crore in tax revenue.
  • Likewise, India’s wealth has been estimated as $12.6 trillion, as estimated by Capgemini. Assuming that India’s rich own no more than 75% of the country’s total wealth, their share when taxed at even 1% will net the government Rs 64.65 lakh crore.
  • With this additional income, there can be a large increase in expenditure on social sectors like education, health care and nutrition.

The corporate sector should also welcome these proposals because they will expand the domestic market substantially and lift the economy out of the current state of depression, he added.

Maitreesh Ghatak

The negative effect of the pandemic has been disproportionate on the poorer sections, creating a strongly negative distributional effect, said Ghatak, professor of economics at London School of Economics.

The scale of the government’s relief measures — MGNREGA, increased PDS distribution and direct cash transfers — have not been commensurate to the magnitude of the problem faced by the poor, even in comparison with peer countries. The government should correct this in the current budget, by devoting more funds to each of these programs.

While the crisis lasts, these different methods of support for the poor are viewed as complements and not substitutes. For example, PDS assumes you have other complementary consumption items available through wage income in normal times, but because of the disruption to normal sources of earning income, the poor are cash-constrained and need cash for survival, which highlights the need for direct cash transfers or employment through MGNREGA.

Watch a discussion on data pointing to widening inequality below:

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