India Should Examine a Wealth Tax, Not Dismiss It, says Economist Ajit Ranade

In 1990, about 35 years ago, India and China started at almost the same level. Their GDP, per capita income, and international rankings were broadly comparable. Both had an aggregate GDP of around $350–370 billion, with India slightly higher, and their per capita income ranks were around 141–142.

Three decades later, China is now the world’s second-largest economy, with GDP close to $18–20 trillion, while India’s GDP is around $4 trillion. More importantly, China’s per capita income rank has risen to around 60–70, while India remains at about 141. This suggests not only faster growth in China, but also the distribution of growth that has been more inclusive.

China’s tremendous growth has generated more industrial jobs and has been more effective in raising incomes, even though it too now faces rising inequality, as do many other countries. Its higher per capita income today reflects a degree of inclusiveness that India has not been able to achieve.

China has also performed far better in industrial and manufacturing employment. In India, manufacturing’s share of GDP was about 16% in 1991 and remains roughly the same today. In contrast, China raised manufacturing’s share to more than 25% of its GDP and now also accounts for nearly 30% of global industrial output. Manufacturing employment in India has stagnated at around 12.5% of the workforce for a long period.

This suggests that India needs to rethink its growth strategy—how to raise the share of industry and manufacturing in GDP, as well as in the workforce, and promote more labour-intensive sectors, and build export growth that generates jobs.

On education, given that we are in an information age where the dynamic economic growth depends critically on human capital, a more educated and trained workforce is essential. Aggregate spending on education should be at least 6% of GDP, combining public and private expenditure. We are barely at half the required level. Even the National Education Policy 2020 has recommended a level of spending on education as 6% of GDP.

Similarly, on health—whether preventive or curative—spending should be at least 4–5% of GDP, and ideally closer to 6%. Of this, the public component must be larger, that is, at least half.  Beyond health and education there is also spending on R&D, which creates knowledge, patents, and future human capital; spending there also needs to be higher than the 0.6% of GDP presently.

On all three counts we are falling short. Government spending is insufficient and must be increased, and private spending on R&D must also increase substantially.

However, the automatic answer to how to raise revenues cannot simply be to increase tax collection. We also need to examine the quality and efficiency of the current government spending. Do we need to spend such large amounts on multiple subsidies, some of which may overlap or be redundant, or can they be consolidated? Do other large expenditures on freebies, statues, monuments, or very expensive projects like bullet trains make sense, or would it be better to prioritise health, education and R&D?

It is true that the spending pie also needs to be bigger, that is, higher GDP growth. But for that to happen we need more spending to enhance human capital, which brings us back to square zero.

Hence before expanding tax collection by raising tax rates, we must also ask whether existing spending priorities can be made more efficient.

Generally, a tax system is supposed to fulfil two objectives: fairness and efficiency. It should be fair, meaning richer folks bear a higher marginal rate of income tax. And it should be efficient, meaning the cost of collecting taxes should not exceed the revenue collected, and it should not cause any distortion.

Fairness has two dimensions: vertical equity and horizontal equity.

Vertical equity means that rich people should pay more tax than poor people. In practice, however, this often does not happen. Wealthier individuals may avoid tax because they get their income through dividends, while salaried earners above a threshold do pay their share.

Horizontal equity means that if two people earn the same income, they should pay the same tax irrespective of the source of income. So, whether income comes from agriculture, dividends, fixed deposits, or salaries, if the amount is the same, the tax paid should also be the same.  But in reality, two people with the same income may be treated differently if one claims it as agricultural income, which is tax-free.

As a result, both horizontal and vertical equity are frequently violated, not just in India, but in many parts of the world.

What is happening is wealth is getting accumulated across multiple generations and it is getting entrenched in a narrow section of society. The wealth accumulation is not leading to any social churning. The rags-to-riches stories are exceptions; such cases are very few. By and large, wealth keeps getting accumulated across generations, leading to a concentration of money power with barriers to entry into the wealth circle.

This increasing concentration of wealth, reflected in worsening wealth inequality, beyond a certain point is harmful for the economy. When inequality, whether of wealth or income, becomes too high, it leads to social instability, investor nervousness, capital flight, and eventually growth stagnation.

For sure, some inequality is inevitable and may even be welcome. In any economy, people in front-line sectors like IT or innovative startups will see their incomes grow rapidly faster than others. That widening gap is what we call inequality. But there comes a point where this inequality becomes excessive. How much is too much has no precise answer in economic textbooks; it is a societal choice. As (Thomas) Piketty and others have argued, inequality is becoming unhealthy across different countries.

One response is to aim for a fair and efficient taxation of income, ideally bringing all incomes, whether from agriculture or dividends, under one framework. Another additional option is wealth taxation. This is hard because people may find clever means of hiding their wealth in land, gold, benami properties or stash abroad.

One way is to focus only on financial wealth, which is already reported and well-documented—investments in stocks, mutual funds, bonds, bank deposits, private equity, and even sovereign gold bonds. Using market values or an average over six or twelve months, a modest tax could be designed.

There is strong opposition to this idea, with claims that it is unworkable. It is argued that people may simply hold their wealth in trusts which are tax exempt. But my suggestion was precisely to make it workable by excluding real estate and other forms of wealth, and focusing only on financial assets to begin with, and to examine the taxability of trusts which hold immense wealth.

Absolutely, there was a time when people said this was difficult. But today, technology makes it possible to do what I call triangulation, using multiple lenses to look at the same individual or entity. By triangulating data across sources, it is now possible to arrive at a reasonably good estimate of a person’s income or wealth, and build a better tax system.

You start small, at a very moderate level. I strongly believe we should be able to estimate incomes far more accurately. Salaried incomes, for instance, are already known because tax is deducted at source. A salaried person never receives their full salary—TDS is pre-emptive taxation. But there is no such pre-emptive system for business income, capital gains, or stock market earnings.

With today’s technology and the ability to triangulate data across multiple lenses, it is entirely possible to widen the tax net much more effectively. We should also examine the possibility of modestly taxing financial wealth, and finally, make a serious effort to reduce the burden of indirect taxes, especially GST.

Agriculture today accounts for about 14% of national income. Of this, roughly half comes from dairy, poultry, animal husbandry and livestock, while only around 30% comes from crops such as rice and wheat. This is why I feel that resistance to taxing agricultural income does not really come from farmers.

Most farmers operate very small landholdings—there are around 140 million small parcels of land, with average holdings of one to two hectares—and nearly 80–90% of farmers are small or marginal. Large farmers are very few.

The real resistance, I suspect, comes from the ease with which non-agricultural income can be disguised and masqueraded as agricultural income. The problem is not farmers agitating against such a tax, but the use of agriculture as a convenient route to hide other, often illicit, income. Once agricultural income is examined and reported, that avenue closes.

The second point is about wealth tax. Concerns are often raised that taxing wealth will hurt stock markets and corporate investment. I am not convinced this will necessarily happen; it is ultimately an empirical question. A very modest tax may not lead people to flee. Rather than dismissing wealth tax as impossible, it deserves serious examination to assess what is realistically feasible. Even if the revenue raised is modest, it would still carry moral weight.

Ultimately, of course, the decision rests with lawmakers who have to respond to popular pressure from their voters.

It was a very generous tax cut, driven partly by the fact that we now live in a far more internationally integrated world. India was competing with ASEAN countries such as Malaysia, Singapore, and Vietnam for investment, so corporate tax rates had to be aligned with peer economies.

That said, it is true that the generous tax cut did not lead to a sharp surge in corporate investment or R&D spending. The objective was to increase the share of private investment in GDP, but there has been a long stagnation in the corporate investment-to-GDP ratio.

In 2024–25, however, there are signs of improvement: corporate private investment rose to about ₹12 lakh crore, while government capital expenditure was around ₹10 lakh crore. For the first time, corporate investment appears to have overtaken government investment. Data for 2025–26 is still not available.