Model Answer

Effects of Persistent Economic Inequality in India

India’s persistent economic inequality has far-reaching consequences that affect various aspects of society and the economy:

1. Economic Risks: High levels of inequality can undermine economic growth and macroeconomic stability. When lower-income households struggle to maintain health and accumulate capital, overall economic productivity suffers. Additionally, extreme inequality can erode trust and social cohesion, leading to conflicts that deter investment.
2. Increased Social Polarization: Economic inequality hampers poverty reduction and social mobility. In a country already divided by religion, region, gender, and caste, rising inequality introduces another layer of division, exacerbating social tensions .
3. Political Risks: Concentration of wealth can lead to a concentration of political power, marginalizing vulnerable populations in policy-making processes. This dynamic can foster crony capitalism and monopolistic practices, further entrenching inequality .
4. Hampering of Social Justice: Inequality contributes to various health and social issues, including reduced life expectancy, higher infant mortality rates, and poor educational outcomes. These factors collectively hinder social justice and equity .
5. Policy Risks: Growing inequality may provoke backlash against economic liberalization and fuel protectionist sentiments against globalization and market reforms.

Challenges in Addressing Economic Inequality

Several challenges complicate efforts to reduce economic inequality in India:

• Proliferation of Low-Paid Jobs: The NITI Aayog has noted a significant prevalence of low-wage, low-productivity jobs, which restrict upward mobility for many citizens.
• Low Investment in Health and Education: Economic inequalities limit the majority’s ability to invest in health and education, stunting human capital development. Furthermore, government spending in these sectors is minimal compared to developed nations .
• Taxation Issues: Ineffective redistributive policies result in an uneven tax burden, disproportionately affecting the poor. For instance, the poorest half of the population bears nearly two-thirds of the Goods and Services Tax (GST) burden .
• Social Factors: Caste and gender inequalities significantly restrict both intra-generational and inter-generational mobility, perpetuating cycles of poverty and disadvantage .

To address these challenges, measures such as taxing the wealth of the richest 1%, easing the tax burden on marginalized groups, improving access to public services, and strengthening labor rights are essential for promoting equity and social justice in India.

Model Answer

India has witnessed impressive economic growth in recent decades, but the benefits have been disproportionately distributed, leading to significant wealth and income inequality. As per the Oxfam 2023 report, 5% of Indians control more than 60% of the nation’s wealth, while the bottom 50% own just 3%. This stark disparity is driven by several key challenges:

1. Dependence on Indirect Taxes: A significant portion of India’s tax revenue comes from indirect taxes, which are regressive. These taxes impact low-income households more, exacerbating wealth inequality. Since indirect taxes are levied on goods and services that everyone must buy, they disproportionately burden the poorow Female Labour Force Participation:** Gender inequality further deepens economic disparities. The female labour force participation rate in India dropped from 27% in 2010 to just 22% in 2020, according to the Global Gender Gap Report 2021. The lack of economic participation by women limits the overall income distribution and the country’s inclusive growth .
2. Government Spending on Social Sectors:** India’s government has struggled to allocate sufficient funds for critical social sectors like health and education. Between 2014-2020, the budgetary allocation for healthcare remained between 1.2% and 1.4% of GDP. This underinvestment leads to rising out-of-pocket health expenses, pushing millions into poverty annually. Oxfam reports that around 63 million people fall into poverty every year due to healthcare costs .
3. Lower Shafacturing in GDP: The Indian manufacturing sector, unlike China’s, has not seen a significant rise. Manufacturing jobs are often low-paying and offer limited social mobility. This stagnation in the manufacturing sector limits upward mobility for a large portion of the population .
4. Large Informal Eco A significant portion of India’s workforce operates in the informal sector, which lacks social security, legal protection, and decent wages. This exacerbates income inequality as workers in this sector are more vulnerable to exploitation .

Addressing these challenges requprehensive approach: increasing government investment in health and education, improving tax policies, encouraging female workforce participation, and expanding formal sector employment.

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Introduction

Unified Payment Interface (UPI), launched in 2016 by the National Payments Corporation of India (NPCI), has become a game-changer in promoting financial inclusion in India. By leveraging mobile technology, UPI has revolutionized financial services, making them more accessible, efficient, and inclusive.

Widespread Accessibility

UPI has significantly increased the accessibility of financial services across India. The number of banks participating in the UPI network has grown from 21 in April 2016 to over 550 in 2023, ensuring that millions of individuals, including those in rural and remote areas, can access financial services through their smartphones. This widespread accessibility has empowered previously underserved populations to engage in formal financial systems.

Empowering MSMEs

Micro, Small, and Medium Enterprises (MSMEs) have greatly benefited from UPI. It has simplified the acceptance of digital payments, allowing MSMEs to seamlessly integrate into the formal economy. According to a study, 90% of retailers make payments to suppliers digitally, with 70% of MSMEs reporting that half of these payments are made via UPI.

Empowering the Unbanked and Underbanked

UPI’s mobile-based model has empowered the unbanked and underbanked populations. Linking bank accounts to UPI IDs enables individuals in remote areas, who lack traditional banking infrastructure, to access financial services. This feature has been especially critical in increasing financial inclusion in rural India.

Reducing Transaction Costs and Increasing Efficiency

UPI has drastically reduced the cost and increased the efficiency of transactions. As per the Reserve Bank of India (RBI), UPI’s share in India’s digital payments ecosystem reached nearly 80% in 2023, highlighting its growing role in streamlining financial transactions for lower-income individuals and small businesses.

Innovative Tools

UPI’s innovative features, such as UPI 123PAY, which allows users of feature phones (without internet access) to make digital payments, have bridged significant demographic gaps. These innovations have made financial services accessible to a broader population.

Promoting Savings and Financial Literacy

By simplifying access to banking, UPI has fostered financial discipline and increased financial literacy. Individuals previously excluded from the formal banking system are now more aware of savings and financial management.

In conclusion, UPI has paved the way for a more inclusive and financially empowered India, enabling millions to access and benefit from the formal financial ecosystem.