Context

This upsurge of inflation is affecting the poor more than any other social group because some of the commodities whose prices are increasing the most (like petrol and certain food items) represent a larger fraction of the budget of the most vulnerable sections of society.

Factors fueling inflation in India

• The Wholesale Price Index (WPI) and the Consumer Price Index (CPI) show an upward rising trend, annually, at 13.11 per cent and 6.07 per cent respectively.
• Falling rupee: Inflation is here to stay because it has much to do with the decline in value of the rupee that has fallen to its lowest, which makes imports of oil and gas more expensive.
• Ukraine crisis: The war in Ukraine has the same effect and pushes the price of some food items upward.

Rising inequality

• Impact on the poor: This upsurge of inflation is affecting the poor more because some of the commodities whose prices are increasing the most represent a larger fraction of the budget of the most vulnerable sections of society.
• Rising inequality: As a result, inequalities — which were already on the rise — are increasing further.
• Recently, the State of Inequality in India report showed that an Indian making Rs 3 lakh a year belonged to the top 10 per cent of the country’s wage earners. 
•  Inequalities are also increasing among salaried people, who are privileged compared to those of the informal sector: The bottom 50 per cent account for only 22 per cent of the total salary income.
• The situation of the lower-middle class and poor is deteriorating.
• The Reserve Bank of India shows slow farm wage growth in nominal terms: From an average of 6.6 per cent in fiscal 2021 to 5.7 per cent in fiscal 2022 (April-November average). This is below the inflation rate.

Inequality in healthcare

• India’s spending on healthcare is among the lowest in the world.
• A decent level of healthcare is available only to the ones who can afford it because of increasing out-of-pocket expenditure — the payment made directly by individuals for the health service, not covered under any financial protection scheme.
•  Overall, these out-of-pocket expenses on healthcare are 60 per cent of the total expenditure on public health in India, which is one of the highest in the world.

How policies are contributing to the increasing inequality?

• High indirect taxes: The share of indirect taxes in the state’s fiscal resources has increased from 2014 to 2019 to reach 50 per cent of the total taxes in 2019.
• Higher indirect taxes are the most unfair as it affects everyone, irrespective of their income.
• Taxes on alcohol and petroleum products are cases in point.
• In contrast, the big companies are flourishing, again, partly because of certain fiscal policies. 
• Low corporate taxes: The government’s budget in 2015 substantially lowered the corporate tax.
• Withdrawal of enhanced surcharge: In addition to these tax cuts, the government withdrew the enhanced surcharge on long- and short-term capital gains for foreign portfolio investors (FPIs) as well as domestic portfolio investors.
• These government policies are clearly promoting the supply side at the expense of demand.
• The central bank has raised interest rates and CRR in an attempt to curb demand, but demand in the country is already choking.

Way forward

• Higher allocation for MGNREGA: A higher allocation of funds for MGNREGS in rural areas, as well as the introduction of similar employment generation schemes in urban areas, should, therefore, be a priority.
• Municipal bonds at state level: At the state level, the development of municipal bond markets could be a plausible alternative.
• Reduction on excise duty on fuel: A reduction in the excise duty on fuel prices and easing the fuel tax burden could also supplement the disposable income and reduce the input cost burden for producers.

Conclusion

Though the government is opting for market-based economics, currently, India needs a mixed solution that comprises price stability via government channels and subsidies.

UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)

Back2Basics: Long and short-term capital gain

• When you buy and sell assets, the profit that you earn is called a Capital Gain.
• Long Term Capital Gains are those that you earn when you sell an asset after 36 months (3 years) from the date on which you acquired the asset.
• Short Term Capital Gains are those that you earn when you sell an asset in under 36 months (3 years) from the date on which you acquired the asset.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now