Should we worry about inequality?

Should we worry about inequality?

The ranking of billionaires is out again. The good news is that Indian billionaires have, once again, done better than the rest of the world—at a time when almost half a billion people are also going through recession, unemployment, drought and food price inflation. But does that mean we should not celebrate the glory the minuscule minority of billionaires has brought to the country? Perhaps not.

In any case, it is argued that there is no cause for panic as inequality in India is much lower than what is seen in most developing countries, especially Latin America. Based on the Gini coefficient, the most commonly used measure of economic inequality, India’s inequality coefficient of around 0.35 in 2004-05 is much lower than that for most of the Latin American countries (0.50) and China (0.39).

However, while Gini measures for most developing countries are income inequalities, the Gini for India is consumption inequality. It is well known that consumption estimates are smoothed compared with income measures and shows much lower inequality.

Based on income inequality, India is among the worst afflicted countries. One inequality measure based on incomes and comparable with other income inequality measures across the world is the Human Development Profile of India Survey, conducted by the National Council for Applied Economic Research in 2005. It estimates income Gini coefficient for India at 0.52 compared with consumption Gini of 0.38. If corrected for the price differential between rural and urban areas, the income Gini increases to 0.54. By this estimate, India is a high inequality country.

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The level of inequality has also been increasing steadily. It is true for both rural and urban areas, with a slightly faster rate of growth in inequality in urban areas. Inequality increased by 3 percentage points between 1993-94 and 2004-05 in villages and almost 6 percentage points in urban areas.

Inequality has been increasing also by other measures. For example, between 1999-00 and 2004-05, while real wages of regular employees declined for most educational classes, it increased for the regular workers who are graduates and above. Similar data on income by various occupational categories from the national accounts reveals that the fastest growth in income was for private organized sector employees, followed by government employees. On the other hand, income of cultivators and agricultural labourers stagnated.

Why should we necessarily look at inequality as something bad? Isn’t it an obvious outcome of the market principle of factor pricing? Those who are earning billions are creating wealth for themselves but also contributing to the growth of the economy. The differential earning of some sections of the population is simply the premium to the skills they own. And these skills are in short supply.

This was the essence of the famous proposition captured by Simon Kuznet’s famous curve, which shows that inequalities initially rise during periods of growth before coming down. However, empirical as well as theoretical literature does not always look at inequality as a normal corollary of market-led growth.

For those who see the growth spurt in recent years as a success of the current economic paradigm, the rising inequality is less of a concern as long as growth is not compromised. In fact, there are some who still justify some increase in inequality as a natural outcome of growth.

They argue there are good and bad inequalities. Good inequalities are those that arise from the functioning of the market principle based on differential payments to skills. It means an engineer will earn more than a mechanic or a manual labourer. Bad inequalities are those which are rooted in rent-seeking, largely through land or primary commodities. But bad inequalities are also those which inhibit growth of human capital such as education and health—that is opportunities based on identities, regions and gender.

A strong body of evidence shows inequality may impede growth. As Michael Walton of the Kennedy School of Government argues, the real obstacles to growth in India will be structural inequalities that result from the inefficiency of institutions, particularly market and public institutions.

While the net worth of the billionaires club increased from less than 5% in 1996 to a little over 10% in 2007, it was almost one fourth of the gross domestic product of India in February 2008. Further, almost two-thirds of wealth of the billionaires club is generated in rent-thick industries (defined as primary source from land, natural resources, or activities involving government contracts or licences). The second set of structural inequalities revolve around identity-based differences (such as caste, religion), spatial inequalities (across states and even within states) and across skills. Our record on these is far from satisfactory. There is a considerable body of evidence to suggest that these inequalities increased significantly in the last two decades.

If growth has to be inclusive, there has to be a concerted effort to tackle structural inequalities.

Himanshu is an assistant professor at Jawaharlal Nehru University and visiting fellow at Centre de Sciences Humaines, New Delhi. Farm Truths looks at issues in agriculture and runs on alternate Wednesdays. Respond to this column at