Decoding economic inequality in India

In a recent panel discussion held in Bangalore, celebrated Nobel laureate economist Joseph Stiglitz stated that globalisation has resulted in economic inequality throughout the world.

To him, the USA has the highest level of economic inequality. The upper 1 per cent of Americans gets 20-25 per cent of all national income in the USA. After the last recession, 93 per cent of the growth in US went to 1 per cent of the population at the top.

The Indian parliamentary standing committee on finance in its recent report highlights the widening gap between the rich and the poor in our country. Economic inequality is the fundamental disparity that permits one individual certain material choices, while denying another individual those very choices.

Though there are some claims that inequality of income has decreased in India, a realistic analysis will show that it has actually increased both in rural and urban India. Over the last 10 years the income gap between the rich and the poor in India has widened. India’s neighbours, Bangladesh,Nepal and Pakistan - have  lesser income inequality.

The expenditure share of the top 1 per cent of India’s population increased from 6.5 per cent in 1993 to 9 per cent in 2010. India’s top 5 per cent of the population spends 21.3 per cent of the total expenditure as against the 17.7 per cent of 1993.
Research studies by Sen and Himanshu (2005) convincingly establishes the growing inequality in India in the post-reform period.

The unequal income distribution has resulted in the consumption levels of the top 20 per cent of the population going up, where as the bottom 80 per cent of the population continue to suffer.

A similar study by Banerjee and Piketty (2001) also highlighted disproportionately large income /consumption gains by the upper tail of the population. Based on income tax reports, they found that in the 1990s, the real income of the top one per cent of income earners in India increased by about 50 per cent.

Recent  policies like reduction in public investments in crucial sectors like agriculture and infrastructure development, downsizing of employment in key public sector industries, closing down of loss-making public sector units,casualisation of labour etc, had adverse impacts on the income-earning capabilities of the working population.

Financial sector and trade liberalisation policies favouring the rich also resulted in growing inequalities in India. Reluctance of banks to lend to the priority sectors and the failure of many microfinance institutions have resulted in reduced financial empowerment of small farmers and medium-scale industries.

Trade liberalisation in favour of the export sector is adversely affecting the import, substituting domestic production. Labour-intensive sectors were relegated to the background and capital-intensive, labour-displacing sectors were encouraged. The much-hyped IT and ITeS sectors employed only a very small percentage of the labour force. As professor Stiglitz has stated, in India too, “the nexus between politicians and lobby groups had distorted the economy resulting in economic inequality”.

Shortly after he was sworn in as the 13th President of India, Pranab Mukhejee in his short acceptance speech stated that “economic equity should be above all the basic fundamentals of a modern nation.

Trickledown theories do not address the legitimate aspirations of the poor”. Trickledown theory is an economic theory which advocates letting business flourish, since their profits will ultimately trickle down to lower income individuals and the rest of the economy.

Unfortunately in India many businesses flourish by unethical practices and by exploiting the working class. For reducing economic inequalities, concerted efforts targeted at the lower-income group in the population are required. If incomes go up at the bottom, lifting people out of the wretchedness of poverty, even if incomes go up faster at the top of the social pyramid, choices would have widened for both the groups.

Massive investments in agriculture, including rural infrastructure and road construction can greatly enhance incomes across the board for the poor. A major breakthrough in agriculture is the need of the hour. Since the Green Revolution of the 60s there were no noticeable breakthroughs in agriculture.

For reducing the income gap and thus economic inequality growth and growth efforts should really be inclusive.

(The writer is professor of economics at Christ University, Bangalore)

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