We need a renewed conversation on inequality in India

Photo: Mint
Photo: Mint


Gaps of income and wealth have worsened after liberalization and a response is clearly necessary

In its latest monetary policy statement, the Reserve Bank of India (RBI) maintained that India will grow 9.5% in 2021-22. It also forecast fast economic growth for the first half of 2022-23. This growth will help India pull out of the economic contraction that happened due to the covid pandemic.

Also, fast economic growth needs to continue post 2022-23. At the same time, this growth needs to be more evenly spread across different sections of the population than it has been since the economic reforms of 1991. As per the latest World Inequality Report, from 1950 to 1991, the income of the bottom 50% of Indians was largely around a fifth of the total income of the country. It started to come down after 1991, and in 2021, it stood at 13.1%.

When it comes to the top 10% of the population, their income averaged around 36% of the total between 1950 and 1991, varying between 30% and 40% in individual years. This changed post 1991 and the share of the top 10% has been going up. It stood at 57.1% in 2021.

This has impacted the share of wealth. The World Inequality Report has data starting from 1995. In 1995, the top 10% of the population owned 54.4% of the country’s wealth. By 2021, this had gone up to 64.6%. As for the bottom 50%, their share fell from 8.4% to 5.9%.

This means multiple things. One, the top 10% of our population has benefited more from economic reforms than the population as a whole. This is a point that a few professional economists have reluctantly started to make in the past few years. But even with that, not enough conversation is happening around this distortion.

Two, the gap between haves and have-nots has become self-reinforcing. As Ray Dalio writes in Principles for Dealing with The Changing World Order: Why Nations Succeed and Fail: “Wealth gaps are self-reinforcing because rich people use their greater resources to expand their powers. They also influence the political system to their advantage and give greater privileges to their children—like better education—causing the gaps in values, politics, and opportunity to develop between the rich ‘haves’ and the poor ‘have-nots’."

Clearly, the economic machinery hasn’t produced opportunities for everyone. This can be seen in the fact that our labour force participation rate, or the proportion of the people in the working-age group who are working or looking for a job, has been falling over the years. What this means is that many individuals who can’t find a job when they enter the workforce or even otherwise, simply stop looking for one.

Further, this dynamic seems to have impacted women much more than men. Data from the Centre for Monitoring Indian Economy shows that the female labour participation rate (FLPR) stood at 9.3% as of November 2021. While the recent FLPR has been very low due the negative economic effects of the pandemic, the rate has been falling over the years. Data from the World Bank shows a similar trend. So, for inequality to come down at least at the household level, more women need to work and get paid for it.

Interestingly, income and wealth inequality is already having a political impact. This includes demands being made by land-owning castes across the country to be classified under the Other Backward Classes (OBC) category so that they are eligible for reservations in government jobs and educational institutes. State governments have been entertaining this idea.

Further, in 2019, the central government introduced a 10% reservation in government jobs for economically weaker sections. In 2019, the Centre also decided to provide income support to land-owning farming households by paying them 6,000 a year, under the Pradhan Mantri Kisan Samman Nidhi scheme.

While politicians in power do not like to acknowledge growing inequality, their revealed preferences or the actions that they have taken (or want to take) tell us a different story.

Of course, in the long-term, the best way to reduce inequality is the creation by policymakers of an environment where more enterprises can thrive and create jobs. This is ultimately likely to reduce inequality at least at the household level, with more women working. The trouble is this is not going to happen overnight, as it hasn’t happened in the past three decades.

Hence, governments are likely to resort to direct support of the population through income support schemes or subsidies. Such measures will have to be funded somehow, and this means both direct and indirect taxes are likely to remain high or possibly even go up.

This won’t go down well with capitalists and free marketers. As Dalio writes: “Capitalists are typically driven crazy by financial supports for people who lack productivity and profitability. To them, making money = being productive = getting what one deserves… They can also overlook the fact that their form of profit making is suboptimal when it comes to achieving the goals of most people." Dalio is no leftist ideologue. He runs Bridgewater Associates, the world’s largest hedge fund.

To conclude, while our free-market enthusiasts may believe what they do, the incentives of politicians are different. They have elections to fight.

Vivek Kaul is the author of ‘Bad Money’.

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