Planning to Remove Inequality

Dr Vanita Mahajan
India has been ranked sixth in the list of wealthiest countries with total wealth of USD 8230 billion while the United states has retained its crown as the most affluent country in the world as the total wealth held in 2017 , amounted to USD 65,584 billion followed by China as the second globally, followed by Japan, United kingdom and Germany. While India is one of the fastest growing economies in the world with its GDP rising faster than most nations. But a rise in national GDP is not indicative of income inequality in India has negatively impacted poor citizens’ access to education and healthcare and the gap is widening further. Last year’s survey had showed that India’s richest 1 percent held 58 percent of the country’s total wealth, which was higher than the global figure of about 50 percent. According to the latest survey, the wealth of this elite group increased by over Rs 20.9 lakh crore during the period under review-an amount close to the total expenditure estimated in the Union Budget 2017. India’s top one percent of the population now holds 73 percent of the wealth, while 67 crore citizens, comprising the country’s poorest half, said their wealth rise by just one percent.
The billionaire boom is not a sign of thriving economy but a symptom of failing economic system. Those working hard, growing food for the country, building infrastructure, working in factories are struggling to fund their child’s education, buy medicines for family members and manage two meals a day. The growing divide undermines democracy and promoted corruption and Cynicism, said Oxfam India CEO Nisha Agarwal. Thus it can be said that Inequality slows economic growth, undermines the fight against poverty and increases social tensions. Commitment to reduce Inequality Index, released by Oxfam and Development Finance International ranks India 147/157 countries. It has been placed 151st on the index for public spending for healthcare, education and social protection, 141st for labour rights and wages and 50th on taxation policies. A general rise in Gini coefficient indicates that government policies are not inclusive and may be benefitting the rich as much as (or even more than) the poor. For instance, a subsidy on passenger train tickets may entail a big budget outlay and may be targeted at the poor. But its benefit could actually be derived by the non-poor. According to the World Bank, the Gini coefficient in India went up from 0.43 (1995-96) to 0.45 (2004-05). In 2016, the International Monetary Fund in its regional economic outlook from Asia and Pacific said that India’s Gini coefficient rose to 0.51 in 2013 from 0.45 in 1990 which is an alarming level of inequality. The Gini coefficient is said to decrease with the share of the population that achieves secondary or tertiary schooling.
The Gini coefficient is derived from the Lorenz curve, which follows the path of the 45 degree line equality. As inequality increases, the Lorenz curve deviates from the line of equality. Given the narrowing of inequality in the more developed nations, Kuznets’ analysis suggested that the inequality in poorer countries was a transitional phase that would reverse itself once these nations become more economically developed. Thus, similar to how the level of inequality was decreasing in wealthy nations, inequality would eventually decline in poorer countries as they become richer. A very strong presumption was that without high profits there will be no growth, and high profits imply substantial inequality. We find this argument already in Ricardo where profit is the engine of growth. We find it also in Keynes and Schumpeter, and then in standard models of economic growth. We find it even in the Soviet industrialization debates. To invest, you have to have profits (that is, surplus above subsistence); in a privately owned economy, it means that some people have to be weathy enough to save and invest, and in a state directed economy, it means that the state should take the entire surplus. But notice that throughout, the argument is not in favour of inequality as such. If it were, we would not be concerned about the use of the surplus. The argument is about a seemingly paradoxical behavior of the wealthy, they should be sufficiently rich but should not use that money to live well and consume but to invest. This point is quite nicely, and famously, made by Keynes in the opening paragraphs of his, “The Economic Consequence of the Peace”. For us, it is sufficient to note that this is an argument in favour of inequality provided wealth is not used for private pleasure. The empirical work conducted in the past twenty years has failed to uncover a positive relationship between inequality and growth.
COVID-19 has deepened existing inequalities, hitting the poorest and most vulnerable communities, the hardest. It has put a spot light on economic inequalities and fragile safety nets that leave vulnerable communities to bear the brunt of the crisis. At the same time, social, political and economic inequalities have amplified the impacts of the pandemic. On the economic front, the COVID-19 pandemic has significantly increased global unemployment and dramatically slashed workers’ incomes. Now it’s time for us to introspect as to where we are lagging what is going wrong with us. In India, inequality in the distribution of income has increased for various reasons and the main reasons are:
Unemployment and underemployment of large masses of people. In fact, inequality, poverty and unemployment are interrelated. Another cause of inequality is Inflation. During inflation, few profit earners gain and most wage earners lose. During Inflation, workers in the organised sector get higher wages which partly offset the effect of price rise. But wages and salaries of workers in unorganized sectors (such as agriculture and small scale and cottage industries) do not increase. So their real income (purchase income) falls. This is how inequality in the distribution of income increases between the two major sectors of the economy-organized and unorganized. Tax Evasion in India is also responsible for inequality in the distribution of income and wealth as it leads to undue concentration of incomes in a few hands only.
Credit Policy of commercial and development banks and other financial institutions are silently favouring the big producers from the very beginning, which discriminates against the small producers. Licensing Policy adopted by the Government is also responsible for the growth of monopolies over the years. Thus, the government has failed to protect the interests of small scale producers. This long standing policy has resulted concentration of economic power in the hands of some big industrial houses and finally increased income inequalities.
The indirect taxes give maximum revenue to the government. But they are regressive in nature. Such taxes have also created more and more inequality over the years due to growing dependence of the Government on such taxes. Moreover, no doubt, India’s new agricultural strategy led to the Green Revolution and raised agricultural productivity. But the benefits of higher productivity were again enjoyed mainly by the rich farmers and land owners. At the same time, the economic conditions of landless workers and marginal farmers deteriorated over the years. Most farmers in India could not enjoy the benefits of higher agricultural productivity. As a result, inequality in the distribution of income in the rural areas has increased.
Public policy can help to reduce inequality and address poverty without slowing economic growth which can have a positive effect on reversing rising inequality, closing economic disparities among sub groups and enhancing economic mobility for all. Various measures adopted by the government during the plan period to reduce inequality in the distribution of income are:
Firstly, the payment of bonus (called annual payment) has been made compulsory in every industry. Secondly, a ceiling on land holdings has been imposed in the rural areas. Investing in the agriculture which includes providing farmers with services such as access to seeds, plant nutrients and insurance against risk and loss can also uplift the farmers and reduce much of income inequality. Moreover, various self employment projects have been taken both in rural and urban areas to solve the growing unemployment problem. And governments can also intervene to promote equity and reduce inequality and poverty through the progressive tax and benefits system which takes proportionately more tax from those on higher levels of income and redistributes welfare benefits to those on lower incomes which is thus influenced by the desire to achieve both horizontal and vertical equity too. Above all, investment by the policy makers on vocational and higher education is also important for developing countries like India to remain competitive; and further expanding the skill-base of the labour force may lead to lower levels of wealth inequalities. Finally, various types of transfer payments (such as unemployment, compensation, soft loans, pensions to freedom fighters, concessions to senior citizens etc) have been made for improving the welfare of certain weaker sections of the society.
By way of conclusion, it should be noted that, although inequality is, to some extent, an inevitable phenomenon in modern economies, the latest empirical evidence suggests that, if inequality is reduced, particularly amongst the lowest income groups, this has a positive effect not only in terms of social justice but also in terms of economic growth.
(The author is Lecturer in Education Department)