Policy Measures to Reduce Income Inequality in India

India’s economy has grown at a blistering pace over the past two decades, yet the gap between its richest and poorest citizens has barely narrowed on some measures and worsened on others. This isn’t for lack of trying. Successive governments have rolled out a mix of taxation policies, land reforms, social security nets, and employment schemes specifically designed to spread the benefits of growth more evenly. So why does inequality still make headlines? Let’s unpack the major policy tools India uses and where they fall short.

How unequal is india, really? 🔗

The picture depends on what you measure. Going by consumption-based data, India’s Gini index stands at 25.5, putting it in the “moderately low” inequality bracket, better than China and the United States. But consumption data tends to smooth over extremes because wealthy households save a large share of their income instead of spending it. Look at income and wealth instead, and the story flips. One assessment found that India’s income-based Gini coefficient climbed from 52 to 62 between 2004 and 2023, with the top 10% of earners making roughly 13 times more than the bottom 10% by 2023-24. This gap between the “official” equality narrative and the lived reality of income disparity is exactly why policy measures matter so much.

Progressive taxation: the first line of defence 🔗

India’s core strategy for redistributing wealth runs through the tax system. Under a progressive tax structure, people with higher incomes pay a larger share of their earnings as tax, and that revenue is meant to fund schools, hospitals, and welfare programmes that disproportionately help lower-income households.

The idea behind it 🔗

Someone earning a modest salary might fall into a low tax slab, while a top executive or business owner pays a much higher marginal rate. In theory, this narrows the post-tax income gap and gives the government resources to invest in public goods. Economists studying inequality broadly agree that taxation and social spending are the two levers where policy choices matter most for closing the equality gap.

Where it falls short 🔗

The gap between design and delivery is significant. India’s overall tax collection has historically stayed well below its potential, and direct taxes, the progressive kind, have made up only about a third of total tax revenue, with the rest coming from indirect taxes like GST that hit everyone regardless of income. On top of this, India’s tax structure looks reasonably progressive on paper, but much of the tax owed by the wealthiest is simply not collected in practice. Widespread use of loopholes, under-reporting, and a large informal economy that stays outside the tax net all blunt the redistributive punch that progressive taxation is supposed to deliver.

Reining in monopolies and unfair market power 🔗

When a handful of firms dominate a sector, they can set prices, squeeze suppliers, and underpay workers without much competitive pressure to stop them. This concentration of economic power feeds inequality just as much as an unfair tax system does. India addresses this through competition law, primarily enforced by the Competition Commission of India, which investigates cartels, blocks anti-competitive mergers, and penalises abuse of dominant market position. The logic is straightforward: a more competitive market keeps prices honest and spreads opportunity across more players instead of letting wealth pool at the top of a single dominant company.

Land reforms: fixing the oldest imbalance 🔗

Long before modern tax codes existed, land was the primary source of wealth and power in rural India, and it was distributed extremely unevenly under colonial-era systems like the zamindari and ryotwari arrangements.

What the reforms tried to do 🔗

Post-independence land reforms focused on three broad moves: abolishing intermediary landlords who extracted revenue without cultivating anything themselves, granting secure tenancy rights to the farmers who actually worked the land, and imposing ceilings on how much land any single household could hold, with the surplus redistributed to landless families.

Why the impact has been patchy 🔗

Implementation varied wildly by state. Political resistance from landowning classes, poor land record-keeping, and weak enforcement meant that surplus land redistribution fell well short of its targets in many regions. Land inequality in rural India remains a live issue today, which is part of why newer welfare schemes now specifically target beneficiaries of past land reforms and marginal farmers as a vulnerable category.

Social security: catching people who fall through the cracks 🔗

Taxation and land policy address the structural side of inequality. Social security measures tackle the human side, cushioning families against the medical emergencies, old age, and job losses that can push them from poverty into destitution overnight. India consolidated its fragmented labour welfare framework through the Code on Social Security, 2020, which merged nine separate central labour laws into a single framework covering pensions, insurance, and worker benefits. Health coverage has expanded significantly too: the same source notes that the Ayushman Bharat scheme now offers up to five lakh rupees in annual hospitalisation cover to more than 12 crore vulnerable families. Pension schemes for unorganised sector workers, life insurance products with minimal premiums, and employee provident fund coverage round out the safety net, though gig and informal workers still remain only partially covered compared to salaried employees.

Employment generation: mgnregs as the flagship example 🔗

Perhaps no single scheme illustrates India’s approach to inequality reduction better than the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS). Launched in 2005, it legally guarantees up to 100 days of paid, unskilled manual work per year to any rural household that demands it, acting as both an income floor and a rural infrastructure builder.

Research examining consumer expenditure data found that Rajasthan, which implemented the scheme most intensively among less-developed states, saw the sharpest decline in food-spending inequity between vulnerable and non-vulnerable rural households. But the scheme isn’t a silver bullet. A review across three states found that while the programme offered some basic employment to marginalised groups, it did not provide substantial support to the most vulnerable workers, largely because implementation quality and wage levels varied so much from one state to another.

Why inequality still persists despite all this 🔗

If India already has progressive taxes, competition law, land reforms, social security, and a rural jobs guarantee, why does the gap between rich and poor remain so visible? The honest answer is that each tool has structural leaks. Tax evasion undermines redistribution. Weak land records undermine reform. Informal employment undermines social security coverage. And employment schemes only help the households that can access and complete the paperwork for them. Inequality is rarely solved by any single lever; it responds to how well all the levers work together, and in India, execution gaps have historically been as big a problem as policy design.

Beyond current policy: what else needs to happen 🔗

Policymakers and economists generally point to five additional areas that need attention alongside existing measures.

Population control: A rapidly growing population dilutes the per-capita benefit of any welfare scheme or job creation effort, making it harder for growth to outpace the number of people who need to share in it.

Boosting employment: Beyond guaranteed rural work, India needs enough formal, well-paying jobs in manufacturing and services to absorb the millions entering the workforce each year.

Increasing production: Higher output across agriculture and industry expands the overall pie, which matters because redistribution alone cannot compensate for a shortage of goods and income to redistribute.

Controlling inflation: Price rises hit poorer households hardest since they spend a larger share of their income on essentials, effectively cancelling out any wage or welfare gains.

Enhancing capital formation: Higher domestic savings and investment build the productive capacity, from factories to infrastructure, needed to sustain job creation and income growth over the long run.

What do you think? Given how uneven the implementation of schemes like MGNREGS has been across states, should India focus more on strengthening enforcement of existing policies rather than introducing new ones? And can taxation alone meaningfully reduce inequality if a large share of the economy remains informal and outside the tax net?

References

1. https://www.pib.gov.in/PressNoteDetails.aspx?NoteId=154837&ModuleId=3&reg=48&lang=2
2. https://www.deccanherald.com/opinion/editorial/india-s-inequality-what-rankings-reveal-3624960
3. https://www.weforum.org/stories/2016/10/inequality-in-india-oxfam-explainer/
4. https://www.oxfamindia.org/blog/india-committed-reducing-inequality
5. https://socialwelfare.vikaspedia.in/viewcontent/social-welfare/social-security-and-insurance/social-security-in-india?lgn=en
6. https://pmc.ncbi.nlm.nih.gov/articles/PMC3856602
7. https://onlinelibrary.wiley.com/doi/full/10.1111/dpr.12220