Why Income-Based Reservation Policies in India Struggle in Practice

 

Why Income-Based Reservation Policies in India Struggle in Practice

Income-based reservation policies, designed to uplift economically disadvantaged groups by reserving seats in education, jobs, or other opportunities, appear equitable and progressive on paper. Unlike caste-based reservations, which have long sparked debates over fairness and merit, income-based systems aim to target economic deprivation directly, offering a seemingly neutral criterion. In India, where economic disparities are stark, such policies hold intuitive appeal. However, in practice, these policies often fail to deliver their intended benefits due to widespread exploitation, systemic loopholes, and the ease with which affluent individuals manipulate income records. Drawing from real-world observations, including experiences like those at BITS Pilani, where students exploited merit-cum-need (MCN) scholarships, this article explores why income-based reservations falter in India and the loopholes that enable their misuse.

The Promise of Income-Based Reservations

Income-based reservations aim to level the playing field by prioritizing economic hardship over social identity. In theory, they address the root cause of inequality — poverty — while avoiding the contentious issue of caste. In 2019, India introduced a 10% reservation for Economically Weaker Sections (EWS) in education and government jobs for those with an annual family income below ₹8 lakh, excluding those already covered by caste-based reservations. The policy was hailed as a step toward inclusive growth, targeting families struggling to access opportunities due to financial constraints.

The appeal lies in its simplicity: income is a measurable metric, and helping the poor aligns with social justice goals. However, this simplicity is precisely why the system is vulnerable to exploitation in a country like India, where bureaucratic inefficiencies, corruption, and a thriving informal economy create fertile ground for manipulation.

The Reality: Loopholes and Exploitation

In practice, income-based reservations are undermined by the ease with which individuals, particularly from the business class or affluent sections, can falsify their financial status. Unlike salaried employees, whose incomes are documented through tax returns and pay slips, business owners, self-employed professionals, and those in the informal sector have significant leeway to underreport earnings. Below are some key loopholes that enable this exploitation:

1. Underreporting Income in the Informal Economy
   India’s economy has a large informal sector, with many businesses operating on cash transactions that are poorly documented. Business owners can easily underreport their income on paper while maintaining a comfortable lifestyle. For instance, a shopkeeper or small business owner might declare an annual income below ₹8 lakh to qualify for EWS benefits, despite earning significantly more through unreported cash flows. The lack of robust mechanisms to verify actual income makes this a common tactic.
2. Manipulation Through Tax Deductions
   Affluent individuals often exploit tax laws to reduce their taxable income, thereby qualifying for income-based benefits. One notorious method involves donating large sums to political parties or charitable trusts. Under Section 80G of the Income Tax Act, donations to certain organizations qualify for tax deductions. In some cases, individuals donate to entities with questionable legitimacy, only to receive a portion of the donation back in cash (black money). This reduces their reported income while preserving their actual wealth, allowing them to claim EWS status or other income-based benefits.
3. Asset Concealment and Income Splitting
   Another loophole involves concealing assets or splitting income among family members to stay below the income threshold. For example, a family might transfer assets like property or investments to relatives or trusts to appear less wealthy on paper. Similarly, income can be distributed among multiple family members or fictitious entities to lower the reported household income. These strategies are particularly effective for business families with complex financial structures.
4. Corruption and Forged Documentation
   India’s bureaucratic system is plagued by corruption, making it easy for those with resources to obtain fraudulent income certificates. Local officials, often under pressure or inducement, may issue certificates attesting to low income without proper verification. This allows affluent individuals to access reservations meant for the genuinely poor.
5. Exploitation of Scholarships as a Precedent
   The misuse of income-based systems is not new. At prestigious institutions like BITS Pilani, students from well-off families have been known to exploit merit-cum-need (MCN) scholarships by submitting falsified income documents. These scholarships, intended to support financially disadvantaged students, are often claimed by those who can afford the fees but manipulate records to secure financial benefits. If students go to such lengths to avoid college fees or gain scholarships, it’s not hard to imagine the extent to which similar tactics are used for high-stakes benefits like reservations in jobs or elite institutions.

Case Study: The EWS Reservation

The EWS reservation introduced in 2019 is a prime example of a well-intentioned policy undermined by practical challenges. The ₹8 lakh income threshold is relatively high, covering many middle-class families, yet it fails to account for regional disparities in living costs or the informal economy’s opacity. Reports have surfaced of affluent families, including those owning businesses or multiple properties, securing EWS certificates by exploiting the loopholes mentioned above. In 2021, the Supreme Court raised concerns about the income ceiling and the lack of robust verification mechanisms, noting that the system risks benefiting the undeserving while sidelining the truly needy.

Why Verification Fails

Effective income verification requires a transparent, centralized system that cross-references income declarations with assets, lifestyle, and tax records. However, India’s administrative infrastructure struggles to implement such checks. Key challenges include:

• Lack of Digital Integration: Tax records, property holdings, and other financial data are often siloed across different government departments, making comprehensive verification difficult.
• Overburdened Bureaucracy: Local authorities lack the resources or training to scrutinize income claims thoroughly, leading to reliance on self-declared affidavits.
• Cultural Factors: In India, social and political influence often overrides procedural rigor. Those with connections can bypass scrutiny, further eroding the system’s integrity.

The Consequences of Misuse

When affluent individuals exploit income-based reservations, the truly disadvantaged are crowded out. Students from genuinely poor backgrounds lose seats in premier institutions, and job seekers from marginalized economic groups miss out on opportunities. This breeds resentment and undermines public trust in reservation policies, fueling debates about fairness and merit. Moreover, it perpetuates inequality by allowing the already privileged to access benefits meant for the underprivileged.

The Way Forward

To make income-based reservations effective, India needs systemic reforms:

1. Robust Verification Mechanisms: Implement a centralized database linking income, assets, tax returns, and lifestyle indicators (e.g., vehicle ownership, property records) to flag discrepancies.
2. Stricter Penalties for Fraud: Impose heavy fines and legal consequences for falsifying income documents to deter manipulation.
3. Dynamic Income Thresholds: Adjust income criteria based on regional cost-of-living differences and inflation to ensure fairness.
4. Focus on Assets, Not Just Income: Include asset ownership (e.g., land, property) in eligibility criteria to prevent wealthy individuals from qualifying through income manipulation.
5. Leverage Technology: Use AI and data analytics to detect patterns of fraud, such as unusual income drops or suspicious donations.

Conclusion

Income-based reservation policies hold immense promise for addressing economic inequality in India, but their success hinges on closing the loopholes that allow exploitation. The ease of faking income, whether through underreporting, tax deductions, or outright corruption, undermines the system’s integrity and deprives the truly needy. Experiences like those at BITS Pilani, where students manipulated MCN scholarships, underscore the lengths to which individuals will go for financial gain. Without robust verification, stricter enforcement, and a holistic approach to assessing economic status, income-based reservations risk becoming another tool for the privileged to maintain their advantage, leaving the poor further behind. For these policies to work, India must prioritize transparency and accountability to ensure benefits reach those who need them most.

Disclaimer: References to misuse of BITS Pilani’s Merit-cum-Need scholarships are based on my personal observations as a student. They reflect anecdotal instances, not the institution’s overall practices or policies.