Why many Indians are trapped in poverty, inequality

Five facts came to light after Budget 2024. These need to be seen in the right perspective to understand how and why a majority of Indians are in the grip of poverty and inequality traps.

These are: 

(a) On July 29, 2024, MoS Finance Pankaj Chaudhary told the Lok Sabha that 12 public sector banks (PSBs) collected ₹8,494.8 crore as “penalty for not maintaining average monthly minimum balance” in five fiscals of FY20-FY24.

(b) On August 4, 2024, a Lok Sabha answer said that SCBs had written off ₹1.7 lakh crore of corporate loans – of which PSBs wrote off ₹1.15 lakh (67.3%). This takes the total corporate loan write-offs over the 10 fiscal years from FY15-FY24 to ₹16.3 lakh crore – of which 73.4% were by PSBs. The same day, another detail came to light: SBI’s provisions for bad corporate loans jumped 70% in Q1 of FY25.

(c) The receipt budget of July 23, 2024 showed that ‘revenue foregone’ (tax exempted) for political donations by corporates, firms, and individuals went up 12.8% to ₹3,981.5 crore in FY23, up from ₹3,528.44 crore in FY22. A national daily added up the tax exemptions over the past nine fiscals of FY15-FY23 to ₹12,270.19 crore. The data for FY24 are yet to be released.

(d) The receipt budget also showed that the total “revenue foregone” for corporates, firms, and HNIs went up 12.8% to ₹3.097 lakh crore in FY23, up from ₹2.74 lakh crore in FY22 (including for political donations). The data for FY24 are yet to be released. The actual revenue foregone would be much higher due to ‘unconditional’ exemptions in indirect taxes on the specious plea that these are for ‘all industries’ – introduced in FY16.

(e) The receipt budget further showed that within corporates, bigger ones continue to pay least effective tax rates – which progressively rises towards smaller ones. For example, in FY22 (up to which it provides data), those with PBT of more than ₹500 crore paid 20.42% of effective tax (less than the average of 23.26%) – which progressively climbed up to 21.5%, 22.58%, 22.75%, 23% and 24.1% (24.1% for PBT of ₹0-1 crore). It is inequality even at the top.

All the above are symptoms of a bigger issue.

Penalty for ‘extreme poor’, ‘revdi’ for ultra-rich

The first (a) is a penalty on the poorest Indians who can’t afford a monthly minimum balance of ₹500-1,000 in rural and ₹1,000-10,000 in semi-urban, urban, and metro areas.

On December 31, 2018, it was pointed out that the penalty collected by PSBs – ₹10,391.43 crore during April 2015-September 2018 for lack of minimum balance and excess ATM use (as per a Lok Sabha answer on December 21, 2018) – was ‘more than’ what fugitive Vijay Mallya owed to banks (₹9,000 crore) and ‘92%’ of what fugitive Nirav Modi owed to banks (₹11,300 crore).

Public backlash had forced the SBI to waive off the minimum balance requirement from March 11, 2020 (having re-introduced it from April 2017, after five years, and then lowering it in September 2017). So, the SBI collected ₹640.2 crore of penalty in FY20; but other PSBs didn’t follow it. PSBs penalise the poor in many other ways too, like keeping interest rates so low that actual returns are negative in savings accounts and near zero on FDs.

Tax exemption for ultra-rich political parties

Indian political parties and politicians, particularly ministers and MPs, are ultra-rich (‘crorepatis’) and yet enjoy generous salaries, allowances, perks, and pensions – all at public cost.

The Association for Democratic Reforms (ADR) compiled the assets and incomes of political parties their ITRs and found:

(i) The BJP’s assets were ₹6,046.8 crore in FY22 and the Congress’ ₹805.7 crore.

(ii) ‘Total income’ of all six national parties in FY23 was ₹3,076.9 crore – up 13.6% from FY22 – of which the BJP’s share was ₹2,360.84 crore (up 23.2%) and the Congress’ ₹452.38 crore (down 16.4%).

(iii) ‘Unknown sources’ accounted for 59.6% or ₹1,832.9 crore of all incomes of six national parties in FY23 – of which 82.4% came through the opaque Electoral Bonds (declared ‘unconstitutional’ by the apex court in February 2024. The BJP accounted for 76.4% (₹1,400 crore) and the Congress 17.2% (₹315 crore) of such money.

Individually, politicians are ultra-rich too (self-declared assets compiled by the ADR):

(iv) 68% candidates from national parties and 79% from state parties contesting the 2024 Lok Sabha elections were ‘crorepatis.’

(v) Of 543 who got elected (MPs) in June 2024, 93% are ‘crorepatis’ with average assets of ₹46.36 crore; 99% of Union Ministers are ‘crorepatis’ with average assets of ₹107.94 crore.

(vi) Average assets of 214 re-elected MPs grew by ₹7.5 crore or 40% between 2019 and 2024.

Whatever the logic for tax exemptions to political parties was in the past, doesn’t hold any more. But they run governments and hence, the bias runs through the budget.

Rich-poor tax anomaly

The budget for FY25 shows:

1. More tax exemptions for corporates: Abolition of angel tax, ‘simpler tax regime’ for foreign shipping companies, ‘safe harbour rates’ for foreign mining companies, a corporate tax cut for foreign companies from 40% to 35%, and new incentives to attract FDI etc. This is despite inversion in tax: In 2014, corporate tax collection was 1.6 times more than individual income tax collection – but fell below it in FY22, FY23 and FY24 and is headed in the same direction in FY25. The budget for FY25 estimates corporate tax at ₹10.2 lakh crore, lower than income tax at ₹11.9 lakh crore.

2. Cuts in basic customs duty (BCD) on imports of mobiles phones and components. The industry assessment is that it would benefit select MNCs – rather than local manufacturers or customers.

3. Minor tinkering in income tax rates will benefit those in the tax bracket of ₹4-12 lakh (maximum of ₹17,500 a year). Tax rates for ₹12-15 lakh (20%) and above (30%) remain unchanged. The 2023 budget had lowered the peak surcharge for the super-rich (income above ₹5 crore) from 37% to 25%. Peak corporate tax rate was lowered to 15-22% in FY20 – less than that for individuals with income crossing ₹15 lakh.

4. Abolition of indexation in real estate is a burden on ordinary households, despite lowering of tax rate (from 20% to 12.5%), because it is applicable from 2001. This change came after the Economic Survey of 2023-24 said, “retail investors have cashed in their gains in financial markets and been investing in real assets.” Later, it was amended to give two options: 20% LTCG tax with indexation or 12.5% LTCG tax without indexation.

5. Tax hike on security transactions, particularly in F&O, is a burden on middle-income groups (retail investors) too. This came with a sudden change in official narrative. Top officials called stock market activities as “speculative” and expressed concern that households are increasingly getting into it. Defending the higher tax in F&O, the Finance Minister said that F&O was a ‘very speculative area.’ The RBI Governor said (July 19, 2024) ‘households and consumers’ were ‘increasingly’ shifting savings to ‘capital markets and other financial intermediaries,’ potentially posing ‘structural liquidity issues.’ The SEBI chief said (June 20, 2024), she was “worried that the household savings are not going into capital formation but into speculative activities.” RBI and SEBI officials warned (July 22, 2024), household savings going into F&O threatened to hurt capital formation and growth– after the Economic Survey of 2023-24 (July 22, 2024) flagged, “20% of the Indian households now channelling their household savings into financial markets."

6. Tax hike in LTCG (from 10% to 12.5%, with limits raised from ₹1 lakh to ₹1.25 lakh) would burden retail investors more than institutional ones or HNIs. LTCG was once tax-free, but a 10% tax was imposed from FY19. The Finance Minister defended the hike saying it was meant to bring similarity in tax on ‘different asset classes.’

7. GST collection is set to rise by 11% (from ₹9.6 lakh crore to ₹10.6 lakh crore) – another burden on the masses (indirect tax). For example, non-branded food consumed by masses attracts a 5% GST, biscuits and educational instruments 18%, while gold attracts 3% and diamonds 0.25% or less. GST was brought to reduce the cascading effect on corporates by cutting down multiplicity of central and state indirect taxes – by default, this should have lowered tax burden on consumers too. But the reverse has happened.

A post-budget analysis pointed out that the ruling dispensation lost the vote shares of middle-income and higher-middle income groups in the 2024 Lok Sabha elections – and they are the ones now ‘upset’ with the budget.

Are Indians prospering?

India remains a ‘lower-middle’ country with a per capita GDP of $2,484.8 (current USD) – waybelow the global average of $13,138. Income and wealth inequalities reached ‘highest historical levels’ in 2022-23, making India ‘more unequal than the British Raj’ and ‘among the very highest in the world.’ The income share of the top 1% has gone up from 21.3% in 2014 to 22.6% in 2022 and that of wealth from 33.3% in 2014 to 40.1% in 2022 and 39.5% in 2023 (World Inequality Lab report of March 2024).

Here are other perspectives.

Academician V. Raghunathan wrote on August 1, 2024, that India’s per capita income of $2,800 (using GDP of 2024 at $4 trillion and population base of 1.4 billion) was ‘misleading’ when wealth distribution was considered. He explained: “…excluding Ambani and Adani, India's per capita wealth drops to $2,700. Excluding the top 10 individuals, it falls to $2,500; excluding the top 200, it drops to $2,150; excluding the top 1%, it plummets to $1,730; and excluding the top 5%, it sinks to about $1,130. This last figure is below the per capita income of most Sub-Saharan African countries.”