It is easy to say that India is an unequal country. If inequality measures are anything to go by, India is in the “Latin American range”, as Prof. Pranab Bardhan said in a recent Business Standard article. There is no escaping this fact. The more difficult question to answer is what can be done to change the situation.
On the face of it, the evidence appears to be contradictory—the Gini coefficient based on consumption data stood at 0.325 in 2004-05 (0 equals no inequality and 1 extreme inequality), a relatively low measure. This is misleading, as a more appropriate measure is income inequality. One study, carried out by the National Council of Applied Economic Research, based on income data collected in 2004-05, estimated the Gini coefficient at 0.535. This is indeed on the higher side.
Illustration: Jayachandran / Mint
Had India been a country with high per capita income and a more manageable level of poverty, inequality would not have been a concern. At $1,016 per capita and 28% of the population below the poverty line, Indian inequality is glaring.
The question is, what should be done? And what can be done? India’s choice, ever since Independence, has been biased towards consumption. Most “anti-poverty” schemes are based on such ideas, even if they alter their names to suit fashion (“entitlement-based programmes” is one such tag).
A large mass of citizens, even those above the poverty line, still earn less than $2 per day. At this level, most income is consumed away, leaving little for saving and investment in education and creation of assets. It is cruel to expect citizens to save at that level. At the same time, consumption spurred by taxation proceeds is not sustainable.
What is to be done is a question that cannot be answered in clear-cut terms. The Left thinks the answer is obvious: Tax the rich and “spread the wealth”. That is what India has always done, but to no avail. In India, the rise in incomes due to growth is occurring at the higher income levels. If that is taxed, it will set in perverse incentives of the kind found in the pre-1991 high tax regime, when rent seeking was more profitable than growth.
The sad answer is that today there is a trade-off between poverty reduction and income inequality. The poor don’t have the skills required to get decent jobs. Those who have them are leaving the poor behind. That is a big reason for the spread of inequality in India, apart from factors such as skewed endowments at birth. It is also a tale of policy failures: Investment in education and healthcare are two certain paths to reduce poverty. India has not even begun that task. It is time the government removed its focus from consumption-driven programmes to investment as a solution to reduce poverty.
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