Inequality of income distribution in India

poverty_india

The one of the major factor of poverty in India is unequal distribution of resources.Resources include many factors but today I’d like to go with subject “Inequality of income distribution in India”.Its very apparent that the distribution of income in the India is unequal.
Those who are likely to receive less than ‘average incomes’ include:

  • The unemployed
  • The underemployed
  • The sick and disabled – Here i also consider lazy & daydreamer’s as a mentally sick who are in millions in India,unfortunately!
  • Those with poor qualifications or low skills
  • The elderly
  • Those working in the unofficial labour market where pay is below the legal minimum

 

What are Remedies we may expect from government? 

[1] Progressive taxes 
Governments can intervene in the labour market by altering personal disposable income via the tax and benefits system. This means employing a progressive tax system. Progressive taxes take proportionately more tax at higher incomes and proportionately less tax at lower incomes.

If this is accompanied by welfare payments to those on lower incomes, any gap between high and low income earners can be reduced.

Income tax in the India is mildly progressive and helps to redistribute income. This is because:

Individuals on low incomes pay no income tax.As per the latest budget for 2015,an individual tax payer can claim tax exemption up to income of Rs. 4,44,200

Beyond this, income earners pay tax at the ‘basic rate’, which is currently from 10% to 30%.

Those on ‘higher incomes’ pay tax on some of their income at a higher tax rate, which is 30% above the income limit of Rs.10,00,000.

Its fine to the best of me but  a higher rate of 35%,40%,45% and 50% should be applicable,gradually,  for those earning over Rs. 20 lac,Rs. 30 lac,Rs.40 lac and Rs. 50 lac & above, of taxable income limit.This sort of progressive taxation is expected in country like India,where inequality of income distribution is at extreme level.

These tax bands help narrow the income gap and so help reduce inequality.

[2] Regressive taxes
Regressive taxes are those where the tax paid, as a percentage of income, falls the higher the level of income, and hence where the burden of the tax is largely on the poor.

Example of a regressive tax
VAT, currently at 15.%, is a regressive tax as it takes no account of an individual’s income. For example, consider three different drivers, all of whom drive the same distance each year, but each earn a different incomes.

  • Mr X Family  earns Rs. 1 lac per year
  • Mr Y Family earns Rs. 5 lac per year
  • Mr Z Family  earns Rs. 20 lac per year

If it is assumed that they need to  buy 3000 units  of basic needs per year at Rs. 100 per unit, of which X% are  Indirect taxes, then it can be seen that there is a considerable difference in terms of the proportion of their income that goes to the government in Indirect taxation:

  • Mr X Family  earns Rs. 1 lac per year, and pays zero % of his income in Indirect taxation for basic needs.
  • Mr Y Family earns Rs. 5 lac per year, and pays relatively low Indirect taxation for basic needs, and
  • Mr Z Family  earns Rs. 20 lac per year, and pays X% Indirect taxation for basic needs

[3] Welfare benefits
Not all individuals have the opportunity or ability to sell their labour in the labour market. To help provide a basic level of personal income a government may also provide transfer benefits, such as:

  • Unemployment benefit (Job Seekers Allowance )
  • Income support (IS)
  • Housing benefit
  • Optimum subsidy  for basic needs
  • Old age pension
  • Child benefit
  • Sick benefit
  • Disability benefit
  • Education benefit
  • Self Employment benefit
  • Direct control of top government on benefit/subsidy distribution
  • Encouraging tiny,small & medium enterprises to raise their employee’s benefits.

 

Of course,these types of implementation is challenging in democratic country like India but again where there a will there is a way.

 

 

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