Model Answer

Introduction

India faces growing wealth inequality, with the top 5% of the population owning more than 60% of the country’s wealth, while the bottom 50% possess only 3%, as per Oxfam’s 2023 report. This stark disparity has sparked debates on whether implementing a progressive wealth tax could address these inequalities.

Potential Benefits of a Wealth Tax

1. Reducing Wealth Disparities: A progressive wealth tax can help reduce the concentration of wealth among the richest individuals. By redistributing resources, it could foster greater economic equity, reducing social tensions and promoting fairness in society.
2. Funding Public Services and Infrastructure: A wealth tax would generate substantial revenue for the government, which could be reinvested into critical public services such as healthcare, education, and infrastructure. For instance, a 4% tax on the wealth of the top 953 richest families could raise approximately 1% of GDP in additional taxes, which could be used to improve public welfare.
3. Encouraging Productive Investment: By taxing wealth, individuals might be incentivized to invest their assets in productive sectors of the economy instead of hoarding them in unproductive forms of wealth. This could lead to job creation and economic growth in the long run.

Challenges to Implementing a Wealth Tax

1. Administrative Complexity: Implementing a wealth tax would require an extensive infrastructure for assessing, valuing, and collecting taxes on assets. This could result in high administrative costs and complications for taxpayers.
2. Tax Evasion and Non-compliance: Wealthy individuals may find ways to evade the tax by underreporting asset values or using complex legal structures, reducing the effectiveness of the tax.
3. Capital Flight: Critics argue that a wealth tax might lead to capital flight, where wealthy individuals move their assets abroad to avoid taxation, as seen in several European countries that abolished their wealth taxes.
4. Impact on Wealth Creation: A wealth tax could discourage businesses from going public to avoid reporting wealth and paying taxes. This may reduce investment opportunities and harm the broader economy.

Conclusion

While a progressive wealth tax could address wealth inequality in India, its potential challenges—such as tax evasion, capital flight, and administrative costs—suggest that alternative fiscal policies may be more effective in reversing growing inequalities. Therefore, while the idea of a wealth tax is appealing, careful consideration of its implementation and possible alternatives is necessary.

Model Answer

India’s defense sector has seen significant changes through strategic institutional and policy measures that have facilitated indigenization, domestic capital procurement, and defense exports.

1. Defense Indigenization:
The Government of India has taken several steps to reduce reliance on imports and foster indigenization:

• Defense Procurement Procedure (DPP) 2016: This introduced the ‘Buy Indian-IDDM’ (Indigenously Designed, Developed, and Manufactured) category to prioritize indigenous equipment.
• Defense Acquisition Procedure (DAP) 2020: Emphasized increasing indigenous content in defense procurement. Between 2016-2020, 86 capital acquisition proposals were categorized under this initiative.
• Indigenization of Components: A policy was introduced to indigenize defense components and sub-assemblies. For instance, 1,499 items were indigenized against a target of 1,244 in 2020-21.
• Bilateral Agreements: Agreements such as the one signed in 2019 with Russia have promoted joint manufacturing of spares and components.

2. Domestic Capital Procurement:
India has allocated significant resources to support domestic defense industry growth:

• Budgetary Support: In 2022-23, 25% of the domestic capital procurement budget was earmarked for the private defense industry.
• Innovation Incentives: Rs. 1,500 Crore was allocated for procurement from startups to encourage technological innovation.

3. Defense Exports:
India has actively promoted defense exports, resulting in a 32.5% year-on-year growth in 2023-24:

• Streamlining Export Process: The establishment of defense export promotion cells and the Defence Exim Portal has simplified export procedures.
• Promotional Efforts: Platforms like Aero India exhibitions have helped increase international outreach.

Challenges Remaining: Despite these efforts, challenges persist:

• Production Shortfalls: India’s defense production has not met the armed forces’ requirements, with domestic procurement remaining stagnated at around 60% of the total needs.
• Technology Gaps: The domestic industry still faces significant gaps in designing and manufacturing major systems and critical components.
• Private Sector Participation: Limited long-term contracts and complex procurement procedures have hindered private sector involvement.
• Skilled Labor Deficit: There is a shortage of skilled workers, especially in high-tech areas like aeronautical engineering and cybersecurity.

Addressing these challenges will require further collaboration between the government, industry, and academia, with enhanced investments in R&D and skill development.

Highlights

• Policy Measures: DPP 2016, DAP 2020, and initiatives for indigenization and procurement from startups.
• Growth in Exports: 32.5% increase in exports in 2023-24, supported by simplified processes and international promotions.
• Challenges: Production limitations, technological gaps, private sector involvement, and skilled labor shortages.