Using inequality to engineer growth

Income and wealth inequalities have thrown a dark shadow on the support and enthusiasm for the current approach to GDP growth


Illustration: Jayachandran/Mint
Illustration: Jayachandran/Mint

Income and wealth inequalities have thrown a dark shadow on the support and enthusiasm for the current approach to gross domestic product (GDP) growth. From a whole range of places—UN-led as well as from other global agencies and scholars. Fact-based arguments are appearing that dramatic and intense increases in national as well as international inequalities in wealth and income are responsible for many of the crises that shook the world recently and earlier.

These reports are supplemented by many academic papers and books, the latest to catch attention being ‘Capital in the Twenty-First Century’ by Thomas Piketty who calls attention to the fact that in the last 30 years inequality has exploded almost everywhere, especially in the United States and the United Kingdom. A review of these current reports from major global economic institutions offers significant lessons for course correction of the Indian economy, and of the macroeconomic policies that are driving it.

A striking report by the UN’s Department of Economic and Social Affairs, called ‘Inequality Matters: Report of the World Social Situation’, presents data on the increase in inequality within nations and globally and argues that “in addition to inhibiting economic growth over time, inequality can also generate greater market volatility and instability.” The report also suggests a relationship between inequality and the onset of economic recession.

The United Nations Development Programme’s 2013 Report, ‘Humanity Divided: Confronting Inequality in Developing Countries,’ shows how the sharpest increases in income inequality have occurred in those developing countries that were especially successful in pursuing vigorous growth and managed, as a result, to graduate into higher income brackets. It says, “Economic progress in these countries has not alleviated disparities, but rather exacerbated them.”

Oxfam has provided the most pertinent comment on the subject. Its 2014 briefing paper ‘Working for the Few: Political Capture and Economic Inequality,’ argues that inevitably, deep inequalities, where a few control the economy, will necessarily lead to decisions in economic policy which would support their interests.

However, into this gloom, a call that can provide the breakthrough comes from the International Labour Organization (ILO), in a paper titled ‘Wage-led Growth, An equitable Strategy for Economic Recovery.’ The ILO makes a strong argument that “It is time to reconsider the validity of these pro-capital distributional policies, and to examine the possibility of an alternative path, one based on pro-labour distributional policies, accompanied by legislative changes and structural policies that will make wage-led growth regime more likely, that is, pursue what we call a wage-led growth strategy, which, in our view, will generate a much more stable growth regime for the future.”

There are of course additional arguments supporting a broad-based employment programme—that the dispersed demand would generate demand for a broad range of goods and services which in turn propels the economy, especially the manufacturing sector and the agricultural sector.

The Indian economic landscape offers a fertile soil for reversing the current reform process, and putting on the ground broad-based growth that does not exacerbate inequality. The Indian economy, despite the prominence given to the corporate sector in public policy, is still tethered in a deeply embedded landscape of ‘small.’

In the farm sector, small and marginal farmers account for more than 80% of total farm households and are crucial in stimulating output as well as food security and livelihoods in India.

The largest employer after agriculture in India are the small and medium enterprises. It is estimated that this sector contributes about 45% of manufacturing output and 40% of total exports of the country and employs about 69 million people. The micro, small and medium enterprises sector has been consistently registering a higher growth rate than the overall growth rate of the industrial sector.

Opportunities for earning a livelihood in hand-driven industries rose between 2005 and 2010-11. The handloom sector as of June 2011, employed 4.3 million weavers/workers, with women contributing a majority (85%) of the pre- and post-loom labour and accounting for over 50% of weavers/artisans in the country. Employment in the handicrafts sector rose from 4.76 million in 2005–06 to 6.88 million in 2010–11. A significant mass of weavers/artisans belong to the scheduled castes, scheduled tribes, and other backward classes and religious minorities.

The khadi and village industries sector also provides a livelihood to about 12.2 million people (1.1 million in khadi and 11.1 million in village industries) by 31 December, 2012.

This review of contributions of the small and low-end sectors clearly indicates the potential in India to develop a wage-led strategy for enhancing gross domestic product growth. What is missing is not just efforts providing visibility to this space and support by various government stimulus programmes to companies, but also the fact that wages and protection by labour laws are grossly lacking in these sectors. Once these are provided, then it would be an opportunity for India to reverse the terms of agreement between capital and labour, the crux of the debate.

Devaki Jain is senior fellow, Delhi Policy Group.

Deepshikha Batheja is a doctoral student of economics.

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