Monday, June 24, 2024

The case for an inequality boom in India is greatly exaggerated

The editorial published in Mint on 16 March 2023, ‘India’s inequity boom is staring undeniably at us’ (bit.ly/3UjjTmF) deserves a counter view on the interpretation of latest income-tax data placed before Parliament recently. It is undeniable that the pandemic has profoundly impacted people’s lives, especially their economic status. The impact has been particularly severe on vulnerable sections of society, including daily- wage earners and informal-sector workers. There should be no attempt to trivialize their suffering.

At the same time, it must be acknowledged that the government took various measures to alleviate people’s sufferings and focused on protecting their lives and livelihoods. Be that as it may, the focus of this article is only to address the limited aspect of whether the pandemic accentuated India’s inequity problem and whether it is prudent to draw such conclusions largely based on income tax data, as the above-mentioned editorial does. Using income tax data to make such a case has its perils for reasons analysed here.

Graphic: Mint

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Graphic: Mint

At the outset, it must be borne in mind that the vulnerable sections of society most affected by the pandemic were not in the tax base at any point, whether in 2014-15 or 2020-21. This is because individuals whose taxable income is less than 2.5 lakh are not required to file tax returns, unless they need a refund of any tax which may have been deducted at source. Thus, any changes observed in the pattern of the tax base in the ‘Under 5 lakh’ group (i.e. lower income group) cannot be used as a dipstick to measure the impact of the pandemic or other policies on the most vulnerable sections of Indian society. The data placed in Parliament is recapitulated in a table here for ease of reference.

Firstly, there is a conspicuous increase in the number of taxpayers in the lower-income group from 2016-17 to 2018-19. Should demonetization and the GST rollout have had any impact on this group? As per the link drawn in the editorial, there should have been some reduction in the taxpayer base in 2016-17 and 2017-18. On the contrary, the numbers remained stable in 2016-17 (the year of demonetization) and saw a 13% increase in 2017-18 (the year of GST’s rollout). It then witnessed another 11% year-on-year growth, reaching a peak of 50 million in 2018-19. The spurt in this group can be attributed to many aspects—like the use of GST data, a crackdown on black-money post demonetization and the adoption of sophisticated technology by the income tax department.

One other development in the years 2016-17 and 2017-18 deserves mention here. Recommendations of the 7th pay commission were implemented in 2016-17. This could be seen in an increase in the number of government employees and pensioners in the overall taxpayer base. This category of taxpayers increased from 5.4 million in 2014-15 to 13.7 million in 2018-19. This data was also placed before Parliament very recently.

Secondly, growth in the low-income group of taxpayers after its 50 million peak in 2018-19 started to see a declining trend—it slipped to 46.3 million in 2019-20, dropping further to 41.2 million in 2020-21. The editorial attributes the latter drop to the pandemic, without an explanation for the previous year’s fall (referring later to demonetization and GST as a pre-pandemic cause of stress). While 2019-20 was a business-as-usual year for the most part, it was marked by an economic slowdown caused, in part, by stress in non-banking finance companies. Further, the slide of over 7% in the ‘Under 5 lakh’ category in 2019-20 could have also been due to some changes in the individual tax regime. A new provision of tax rebate of 100% tax for those earning below 5 lakh, standard deduction of 50,000, was introduced in 2018-19. Then a new simplified tax regime with fewer exemptions and deductions was also introduced in Budget 2020. All these changes may have had a spillover effect in 2020-21. Once we have data for 2021-22, the trend may be clearer.

Thirdly, the decline in the number of taxpayers in the lower-income group in 2020-21 should not be seen in isolation. The change between 2019-20 and 2020-21 need not be just one-sided; i.e., all the change need not mean taxpayers fell below the taxable income threshold. They may as well have graduated to the next slab of 5-10 lakh (which saw a 20% growth to 3 million), despite the pandemic, in larger numbers than new taxpayers entered the lower slab under discussion.

Finally, Ricardo Paes de Barros, et al, in their recent work, estimate a drop in the Gini coefficient for Brazil upon accounting for fiscal transfers via health, education support, etc, which led to a Gini coefficient reduction for 2017 from 0.67 (calculated by the World Inequality Database using income tax data) to 0.55. For the US, a Congressional Budget Office study estimates a drop in the Gini coefficient from 0.516 to 0.432 in 2019 after including federal taxes and transfers. These studies are relevant from an equity and poverty-alleviation point of view, and are better than an amorphous measurement of income gaps. India’s social security net is vast and expanding (elaborated in Chapter 6 of the Economic Survey 2022-23), and cannot be overlooked in any estimation or opinion of income inequality in the country. A similar all-encompassing exercise for India is likely to yield a lower estimate of income inequality, which would put much of these emotive debates to rest.

These are the authors’ personal views.

V. Anantha Nageswaran & K. Balasubramanian are, respectively, chief economic advisor to the Government of India (GOI) and joint secretary to GOI in the department of revenue, tax policy research unit.

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