Why India Ignores Inequality: Government Trying to Project a Positive Image, Says Economist Nitin Bharti

The rising income and wealth inequality is creating a situation where the majority of the population (the bottom 90%) has an ever-shrinking share of money to spend. On one hand is the rich class with excessive spending power, and on the other, the poor class with just enough to sustain itself.

Consider a simple example: of 100 units generated in society, 60 go to the top 10%, 27 to the middle 40%, and only 15 to the bottom 50%. The poor thus have just 0.3 units per person to spend, the middle class about twice that, while the rich have nearly 20 times as much. Such concentration means the rich spend not only on better-quality essentials but also on luxury goods, often imported. This extreme inequality is likely also affecting the country’s growth potential.

The government’s move to subsidise the salaried class, on the assumption that this is the middle class, is flawed. Our data show that those paying income tax are not the middle class but largely the top 10%. This move therefore benefits the top 90–95%, reflecting policy design that ignores available data. While the government has long avoided capturing income information, the recent move to set up a committee to design income surveys is welcome and should make this clearer.

This policy goes against basic public finance logic. Around half of government revenues come from indirect taxes, which are regressive since everyone pays the same tax on goods regardless of income. Increasing reliance on indirect taxes will make the system even more regressive. Other countries have expanded their tax base by taxing lower incomes at very low rates and gradually increasing rates with income.

Given technological advances, tax collection costs are no longer a constraint. Seen this way, the move appears populist and disproportionately beneficial to the rich.

The arguments developed in both papers complement each other. India is caught in a trap of high inequality and weak public finances.

Public delivery of essential human capital–building services, especially health and education, must be expanded and improved. The country needs resources to invest in these services, and increasing government finances through a wealth tax, or a combined income and wealth tax framework, is therefore essential. Our accompanying policy paper shows that even a small wealth tax on a very limited number of wealthy individuals can generate significant revenue for social sector spending.

While public finances need to be strengthened, the government also requires a fundamental shift in priorities towards these neglected sectors. The share of government revenue allocated to health and education must rise from its abysmally low levels. India spends far less on the social sector than most developing countries, and even less compared to developed economies. Notably, countries that achieved sustained economic success first invested heavily in human capital to enable structural transformation.

Certainly not! Over the years, India has seen a massive expansion of the private sector in education and health, reflecting weak commitment and poor implementation of public service delivery.

Education and health need to be examined separately. Since the 1990s, government spending on education has improved and has helped bring most children into schools. While some additional investment is needed, the core challenge in public education today is quality. This can be addressed through measures such as stricter control over teacher absenteeism, better teacher training to move away from outdated pedagogical practices, and greater emphasis on hands-on learning.

At the same time, there has been a rapid expansion of “low-cost” private schools, which now enrol around 40–50% of students. Parents sending their children to these schools spend nearly ten times more on education than those relying on public schools, indicating a strong and growing demand for education.

The health sector, however, has been relatively neglected and will require significantly higher investment in the coming years, especially with an ageing population. Underinvestment in health is reflected in India’s high adult mortality rates. Private healthcare is often prohibitively expensive, leading many to rely on home remedies instead of formal medical care.

Unless the government substantially increases investment in public health, there is a serious risk that the gains made in reducing extreme poverty will be reversed, with many households falling back below the poverty line.

In the past, wealth tax did not work for several reasons. Large asset classes were kept out of its purview, evasion was easier, and, most importantly, there was a lack of strong political will. The situation today is different.

Tax avoidance and evasion are less serious concerns due to technological advances such as Aadhaar linkage, computerisation of land records, and digitised stock market transactions. The government is far better equipped to implement a wealth tax now, making the challenges less severe than in the past.

This is already evident in the case of income tax. Earlier, individuals could conceal certain income sources; today, it is increasingly common for people to receive tax notices for secondary incomes credited to their bank accounts. This has been made possible through Aadhaar–bank account linkage and the enhanced capacity of the income tax department.

Our proposal is for a wealth tax on overall “net wealth,” without excluding any asset class, and limited to the top 0.04% of the population, meaning 99.6% of people would not be affected. While evasion is an implementation challenge and must be addressed carefully in policy design, tackling these issues is far more feasible now than before.

As for political will, one can only hope that growing evidence of rising wealth inequality in India, including findings from our paper, is taken seriously.

Also, to build trust among wealthy taxpayers, it is crucial that the government transparently allocates wealth tax revenues to social sector spending, such as improving the quality of public schools and hospitals. Many wealthy individuals would be reassured to see their taxes being used for clearly defined and socially beneficial purposes.

The proposed wealth tax would compel owners to use their accumulated wealth to generate income exceeding the tax liability. For example, consider wealthy individuals owning multiple houses or land plots lying idle. With a tax of, say, 2%, these assets would need to generate income to cover the tax, encouraging idle houses to be released into the rental market or land to be put to productive use. If the income generated is insufficient, the asset would have to be sold.

This would increase the overall supply of real estate, easing pressure on property prices that have been rising for decades. A significant portion of these rising prices is speculative rather than reflective of real value, and a wealth tax could reduce such speculation. It is well known that wealth holders often buy land, hold it to create artificial scarcity, and later sell it at higher prices without productive use. A wealth tax would discourage this behaviour.

Similarly, large pools of idle financial wealth would face incentives to be channelled into productive investment rather than remaining unused.

Capital flight is less of a concern since the proposed wealth tax is levied on “net wealth” regardless of where assets are located, that is, on worldwide assets. Care can be taken to avoid double taxation, as is done for income through double taxation avoidance treaties. Moreover, individuals often have strong reasons to hold assets in particular countries, making the extent of potential capital flight uncertain.

Similar concerns are frequently raised about fiscal expatriation, where individuals relocate to avoid taxes, but empirical studies show such migration to be limited. In addition, ongoing international discussions on coordinated wealth taxation across countries raise the possibility that capital flight will become an even less viable option.

I can only speculate why the government resists such measures or why economists associated with it deny rising inequality as a concern. There appears to be an excessive emphasis on projecting a uniformly positive image of the country. While this is understandable to an extent, completely ignoring the problem is difficult to comprehend.

One does not need to read our paper to see rising inequality, it is visible in everyday life. A visit to any city reveals the widening divide: luxury five-star properties on one hand, and stagnant living conditions for the masses on the other. Persistent issues such as traffic congestion, poor waste management, and water-logging continue to affect most people. The stark contrast between government schools and hospitals and their private counterparts further underlines this divide.

It is therefore puzzling that the government is quick to endorse studies claiming lower inequality in India, even when such studies contain basic methodological errors. It is essential for the government to acknowledge the problem of rising wealth and income inequality. Since the proposed tax affects only the top 0.04% of the population, there is no real vote-bank risk. What is required is political prioritisation and a genuine effort to build consensus in the right direction.

Historically, every major wave of innovation, from the Industrial Revolution to the IT era, has enabled greater wealth concentration, displaced some jobs, but also created new sectors, higher productivity, and new livelihoods. We are witnessing a similar transition today with AI and automation.

Over the next one or two decades, technology is likely to trigger deep restructuring of labour markets and wealth distribution as human work is increasingly replaced across sectors. A significant share of service-sector jobs may become redundant, although automation is more likely to redefine roles than eliminate them entirely. This shift will intensify competition to upskill, especially in areas such as creative thinking, emotional intelligence, and problem-solving, skills that remain difficult for AI to replicate.

Given how the Indian IT and services sector is integrated into the global economy, the initial impact is likely to be a decline in projects outsourced to India. Some of this is already visible, with fewer projects flowing into Indian firms, leading to job losses, particularly in roles that can be automated. Much will depend on how the Indian services sector responds to this transition.

As the cost of technology and AI tools falls, individuals and startups will gain access to advanced capabilities, potentially driving a new wave of tech entrepreneurs and lean, highly automated firms. While this may appear to broaden wealth creation, returns are likely to remain highly concentrated.

The top 0.1%—those controlling major platforms, networks, and intellectual property—will continue to consolidate wealth. There may be some redistribution within the upper tier, with the top 1–2% gaining access to scalable digital assets such as startups, creator platforms, and algorithmic trading. Beyond this, overall wealth inequality is likely to widen.

Politically, rising inequality will increase pressure on governments to strengthen social safety nets, not only through unemployment support but also via universal access to quality healthcare, education, and digital infrastructure.

Socially, the challenge will be keeping large populations meaningfully engaged. We are likely to see growth in “pseudo-productive” digital activities, such as online trading, gaming, and content creation, that provide a sense of agency, even if their economic productivity is limited. This trend is already visible among younger generations supplementing incomes through these channels.

Ultimately, the social and political outcomes will depend on how effectively governments invest in skilling, human capital, and smart policy so that productivity gains translate into inclusion rather than exclusion. Technology itself does not determine inequality, how we design and deploy it does.