Home / Economy / The hidden threat to our fledgling economic recovery

Earlier this month, the Paris-based World Inequality Lab released its annual World Inequality Report (WIR). While globally the pandemic has contributed to rising inequality across most countries, India was flagged as one of those with high and rising inequality. According to the report, the top 1% of Indians account for 22% of national income while the bottom 50% account for only 13%. What is also worrying is that the bottom 50% has actually seen a decline in its share of national income. The WIR also claims that the decline in India’s case was strong enough to pull down the income share of world’s bottom 50%. Excluding India, it actually increases. The overall conclusion of the report that “India stands out as a poor and very unequal country, with an affluent elite" is not far from the reality, as evident even from the government’s own estimates.

For example, the estimates of wealth inequality reported by the WIR are not very different from those for 2019 made by the All-India Debt and Investment Survey of the National Statistical Office (NSO), by which the top 10% of urban India held 56% of all assets, whereas it was only 6% for the bottom 50%. In rural India, inequality in wealth was less stark, with the top 10% reported owning 51% as against 10% by the bottom 50%.

While indicative of the high level of inequality that exists on income and wealth dimensions, these are gross underestimates. Partly because of the assumptions behind these numbers, but also because most surveys fail to capture actual asset ownership, particularly among the rich. Jewellery, financial assets and real estate can go uncounted. The NSO’s consumption surveys used to offer inequality data, but the scrapping of recent findings has meant we need other sources, especially given the sharp changes in our economy of late. All that’s available points to extreme inequality not only on monetary parameters but also on other socio-economic and human development indicators. Whether it’s muti-dimensional poverty data from the NITI Aayog or the recently released National Family Health Survey data, there is clear evidence of widening divergences across states as well as across gender, rural/urban and caste and religion classifications.

In a democratic country, growing inequality is not just a threat to political and social stability, but also crucial to understanding the changing structure of the economy along with drivers of economic growth. With the pandemic having devastated the lives and livelihoods of most Indians at the bottom end of the socio-economic pyramid, a clear picture is necessary. In this context, we need to look at recent estimates of growth from national accounts for this fiscal year’s second quarter. While private consumption in real terms was lower by 4% compared to last year, for the first half-year, it is 8% lower than the figure for 2019-20, a year that saw very poor growth in output.

This decline is partly the reason for the economy’s slowdown: its growth rate halved to 4% in 2019-20 from 8.2% in 2016-17. Large numbers, particularly those engaged in casual manual labour and in cultivation, have seen their real incomes fall. That these trends continue to worsen raises questions on our prospects of an economic recovery. With exports doing better only relative to the slump they have been in, and investment demand still weak, the rising affluence of the rich alongside the impoverishment of our multitudes is likely to compress broad purchasing power and demand even further. Recent indicators on unemployment, wages and incomes highlight a worsening crisis of earnings in the past two years. With inflation showing signs of rising now, particularly in food items, the disposable incomes of the majority could get squeezed even more, with discretionary spending is likely to be impacted. India currently seems in a vicious cycle of low incomes leading to low demand and low employment, resulting in even lower incomes.

This vicious cycle can only be broken if there is substantial increase in the incomes of India’s bottom 50%. Thatwill require a big hike in government expenditure that can generate demand and thereby employment. Policies must also seek to alter the structure of income distribution, which is skewed in favour of the rich. Multiple dimensions of inequality require multiple efforts to ensure that existing inequalities do not contribute to the exclusion of most of India’s poor and vulnerable from the process of growth. The solution lies in the choice of an economic strategy. It needs to be inclusive, sustainable and equitable. But, as the WIR argues, inequality is a political choice and so are the instruments needed to deal with it.

Himanshu is associate professor at Jawaharlal Nehru University and visiting fellow at the Centre de Sciences Humaines, New Delhi

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