Rising Inequality, Pampered Capitalists: Why India Must Tax its Rich

Delhi is the most polluted city in the world. Each winter, its air thickens until it feels like breathing inside a flour mill. The haze settles over everything. It crawls into homes. It clings to lungs.

And in this weather, if one has to sleep on the pavement outside India’s biggest government hospital for treatment, life itself can feel existential. Priyanka, a 30-year-old from Haryana battling a knot in her back, is living proof of what illness means when you are poor in India.

“There is no other option,” she says, shivering in the cold and polluted night outside All India Institute of Medical Sciences (AIIMS) in South Delhi. Around her, patients camp out on the cold concrete because they have nowhere else to go. They have travelled across the country with nothing but hope. Life narrows into a fight for breath, even as the city around them moves on.

It is a struggle Jyoti knows too well. “It took us four months just to confirm that my father had cancer,” she says. Her father, 67-year-old street vendor Sundar Lal from Raebareli, Uttar Pradesh, spent nearly a year shuttling between Delhi’s Ram Manohar Lohia Hospital and AIIMS. What began as a festering ankle wound ended with the removal of one of his lungs. By the time he was finally admitted in November, the family had lost its income, and Jyoti had lost a year of her education.

Doctors and economists say India’s premier government hospitals are overcrowded not because they are too successful, but because the system below them is too weak to hold. District- and state-run hospitals, starved of funds and stripped of expertise, cannot absorb the weight of demand. As a result, studies point out that India’s out-of-pocket health spending is among the highest in the world, a burden that extracts a punishing price.

Not far from the edge of this health-system collapse, another tragedy plays out. A short walk from the Murad Nagar metro station on the Delhi–Meerut corridor stands PM Shri Ukhlarsi Primary School No. 1. It tells a different version of the same national story, of a demographic dividend slowly and casually wasted.

This is a place meant to anchor children in learning but held together by the bare minimum. The classrooms do not have enough benches. The compound echoes with the absence of a much-needed support staff. The small building carries the exhausted look of an institution abandoned by the state, its needs piling up like dirt no one has been assigned to clean.

Teachers struggle to keep the school intact. Children clean the school themselves because there is no one else to do it. Most of the students come from the poorest families in the area. For them, this school is the first rung of opportunity, even as the structure meant to lift them falters in neglect. “We are managing with whatever little we get,” says Vartika Tripathi (name changed), a teacher at the school.

Across India, millions of children study in schools with facilities that belong to another century. As per the government’s own data, about 35% of state-run schools in India do not even have boundary walls, and therefore it is not surprising that only 46% have access to internet. In a nation that dreams aloud of becoming a superpower, many of its children sit in rooms that look as though they have been frozen in time.

This crisis in India’s health and primary-education sectors has a direct relation with the country’s economic growth.

“The productivity of India’s workforce has not risen significantly in recent years. If we want labour productivity to improve, we must invest in health care and education,” said Shamika Ravi, member of the Economic Advisory Council to the Prime Minister (EAC-PM), in a recent interview with Outlook Business. She warned that primary health care can no longer be narrowly defined, as chronic and lifestyle diseases now hollow out the workforce long before old age.

According to the International Labour Organisation, India’s labour productivity remains low by global standards. Its GDP per hour worked is estimated at around $10, placing it below countries such as the Philippines, Vietnam and Taiwan.

India at present fears a future in which it grows old before it becomes rich. A demographic dividend is never permanent. Indian policymakers have understood this in theory, but China always felt it in its bones. It acted with the instinct of a nation that knew history had offered only a narrow opening to escape centuries of deprivation. What followed was two decades of double-digit growth making it a power that the West fears today.

It is a case study in how two nations began alike but grew apart. In 1990, India and China stood shoulder to shoulder, young, restless and almost indistinguishable in promise. Three decades later, China has risen to become the world’s second-largest economy. India, now fifth, as per IMF’s October 2025 World Economic Outlook, is left to confront an uneasy truth. Its youthful workforce, once celebrated as its greatest strength, is edging towards becoming a burden, even as the gap in living standards between the two neighbours continues to widen.

Ask any wise policymaker in the country of 1.5bn, they say the solution is straightforward: spend more on health care and education.

Money spent on these sectors has increased in absolute terms, but their share of GDP remains well below the levels economists and government’s own documents prescribe.

Short on Cash

The story of underfunded hospitals and classrooms is ultimately a story of limits, of a country tasked with lifting a low per-capita-income country out of the middle-income trap, but without the financial muscle to do so.

India’s goals have expanded far faster than its public finances.

On paper, education and health care are national priorities. In reality, they sit on the edges of budgets, competing with other critical investments and the rising cost of debt. The Centre speaks confidently about demographic dividend and global leadership, but its balance sheet tells a harsher truth that there is not enough money to do everything, everywhere, all at once. And when resources are scarce, it is spending on human capital that takes a back seat.

It took more than two decades after economic liberalisation for public health spending to even cross the symbolic threshold of 1% of the economy. Experts have long warned that this was nowhere near enough, consistently arguing that the country needed to more than double, even triple, its commitment.

The Centre argues that health and education fall largely within the states’ domain, while it must reserve resources for national priorities such as infrastructure, defence and strategic industries. For instance, the resurgence of tensions on India’s borders has reopened questions about defence preparedness and whether current allocations are sufficient.

States counter that they are asked to shoulder the most politically and socially sensitive responsibilities without control over the richest tax sources, leaving them dependent on transfers that rarely match the scale of their obligations.

This has become a rare point of consensus across political lines. Both Bharatiya Janata Party- and Opposition-ruled states have repeatedly demanded a greater share of central taxes. A large proportion of their revenues is locked into committed expenditures such as salaries, pensions, interest payments and subsidies, leaving little room to expand public services or invest in human capital.

At the same time, political compulsions have hardened. In large parts of rural India, the absence of sustained big-ticket investments has made welfare support not just an economic tool but a political necessity.

The real challenge, then, is not simply how to divide a limited pool of resources more efficiently, but how to enlarge that pool itself. So far, India’s spending gap has increasingly been filled with borrowing. “The bigger weakness is around the high interest burden of the government, which is related to the high debt level,” says Jeremy Zook, director of Asia Sovereign Ratings at Fitch Ratings, which continues to place India at its lowest investment grade of BBB–. “Interest payments take up nearly 25% of the government’s revenue, more than twice the median for BBB-rated [second lowest] countries. This significantly limits fiscal flexibility by constraining the government’s ability to spend on other priorities.”

Unlike other countries of similar economic size and ambition, India raises a comparatively modest share of its GDP through taxes and other revenues. It collects only about 20%, while even smaller economies like South Africa manage roughly 27%. In this position, India cannot fund hospitals and schools by endlessly reshuffling scarcity.

It must bring in more money and unlock a more inclusive growth for its young population.

Milking the Middle

Anujesh Kumar (name changed) is not poor, and he is not wealthy. He lives in the narrow, restless country in between.

At 49, he works as a senior manager with a real estate firm in Gurugram. His annual salary, before taxes, is around ₹28 lakh. This should place him among India’s comfortable classes. But in reality, much of that comfort dissolves before it even reaches his bank account.

A significant part of his income, over 20%, goes straight to the state in the form of taxes, if one also includes indirect taxes. By the time the money is his to spend, what remains is around ₹22 lakh. From that, he pays school fees for two daughters—private, because the government system feels too broken.

Kumar pays health-insurance premiums that rise every year, because his job will not allow him to sit in the corridors of a public hospital for months, waiting for a bed. He budgets for rent, transport, groceries, ageing parents and the fear of one medical emergency unravelling everything.

“Often I ask myself what I am paying taxes for,” says a disappointed Kumar. He earns roughly 11 times India’s nominal per-capita income, placing him comfortably above the threshold for the top 10% of earners. Yet nothing about his life feels extravagant. Nothing feels secure.
At the top of the economy however, the story looks very different.

India is now home to more billionaires than almost any country in the world, bar the US and China. Their numbers have risen sharply in the past decade, from a few dozen in the early 2010s to well over 250 today, according to a Hurun report. Their companies dominate stock markets and the public imagination. They pay large absolute sums in taxes, and yet, relative to their wealth, the burden they carry is far lighter than Kumar’s. The reason lies in how their money moves.

A large share of their wealth sits inside companies, not in personal bank accounts. The profits their companies make do not always show up as personal income, because profits can be retained instead of distributed. Dividends from company to owners and shareholders, are kept deliberately modest. Across India’s largest private listed firms, dividend pay outs are barely a fraction of the value of their equity assets, hovering around well under 1% for many top companies, notes Ram Singh, director, Delhi School of Economics, in his study “Do the wealthy underreport their income?”

“One of the consequences of tax avoidance is that dividend pay outs by Indian companies are meagre compared to most other countries,” Singh points out.

This matters because dividends, once paid, become personal income, and personal income is taxed. By keeping pay outs low, wealth stays parked inside corporate structures, growing quietly but never quite crossing over into taxable hands. “[Their] effective tax rate reduces mainly due to this shift, as dividends face taxation at highest rates up to 39%, while long-term capital gains are taxed differently and taxed only when realised. Also, in India, unrealised profits on shares are not taxable,” says Prashant Bhojwani, a corporate-tax expert and partner with BDO India, an accounting firm.

As opposed to this legal architecture of avoidance, there is also a messier route that many choose. Officers of the Indian Revenue Service admit that the agricultural-income exemption has, over the years, turned into a convenient tax shelter. High-income individuals, especially in cities like Delhi and Mumbai, have been reported to purchase agricultural land with no real intention of farming. Their primary professions have nothing to do with the soil, yet portions of their income begin to appear, on paper, as “farm earnings”.

The evidence already sits with the government. In an early compliance audit of direct taxes, the Comptroller and Auditor General of India (CAG) examined a sample of 6,778 cases of claimed agricultural income. Delhi, strikingly, accounted for the second-highest number of claims that were ultimately disallowed. But the story does not end there. In a total 1,527 cases, agricultural income was allowed without adequate documentation or proper verification of supporting records, according to a report by the CAG.

“In cases where individuals earn both agricultural and non-agricultural income, it is remarkably easy to blur the lines between the two,” explains Akhilesh Ranjan, former member of the Central Board of Direct Taxes.

Media reports of celebrities and high-profile professionals increasingly buying farmlands suggest the problem is no longer marginal. Yet the Centre consistently shifts responsibility to state governments, citing their constitutional right to tax agricultural income. “Taxation of farm income constitutionally is a state subject. It is open to the states to levy this tax,” former finance secretary TV Somanathan told Outlook Business in an earlier interview.

Policy experts, however, say this deflection is driven less by constitutional restraint and more by political convenience. In a country with nearly 30 states, and where significant shares of legislators are themselves landowners, taxing farm income is politically combustible.

This system of convenient tax avoidance and evasion produces an odd result of a regressive tax system. Wealth expands. But tax liability does not rise in proportion. In fact, Singh’s study shows that as people become wealthier, the share of tax they pay compared to their wealth keeps shrinking. For those at the very top, income tax often amounts to around 1% of their total wealth. For the ultra rich, it falls even further to fractions of a per cent. The middle, meanwhile, bears a heavier relative load, even after accounting for exemptions.

Source: Outlook Business