- Nov 14 2016
To reduce inequality of income, the government should increase taxes rather than reduce taxes.
As India achieves a high rate of GDP growth, the highest in the world, will inequality of incomes be reduced? The Gini coefficient which measures inequality has risen from 45 % in 1990 to 51.4% in 2013( coefficient of 100 signifies maximum inequality and 0 means perfect equality). According to New World Wealth report 2016, India is the twelfth most unequal country in the world and 45% of its wealth is in the hands of millionaires. Another source — Credit Suisse Global Wealth Databook (2014) has claimed that the top 10 percent in India holds 70% of wealth. If these statistics are to be believed, then can we say that the poor are getting poorer and rich are getting richer in India?
According to scholars who have studied trends in global inequality, in times of prosperity there is a rise in inequality and in times of distress and disasters like wars, natural calamities, epidemics, there is greater equality.
Fortunately India is not engaged in a war or experiencing any other major calamity so it is expected that inequality will rise. Thus as long as there is high growth, people who are already rich will get richer because they already have the wherewithal for earning more and getting higher rental incomes.
The famous economist Simon Kuznets described the cycles of inequality as an inverted U-shaped curve in 1955 to describe the rise and decline of inequality of nations. First it rises as societies move from pre-industrial to industrial stages of development. People migrate from villages to towns in great numbers in search of jobs. They are paid low wages and live in poverty and inequality rises. As economies move to higher stages of growth, there is an increase in wages and access to better education and job seekers acquire skills and inequality begins to decline. It keeps declining as everyone gets the more or less the same quality of education and opportunities to better their lives and there is also progressive taxation by the state which equalises incomes to a great extent like in the Scandinavian countries. High taxation rates allow government to give welfare benefits to the population.
But Kuznets’ cycles have been proved wrong in many cases and India could be one such case. In India while there is an increase in urbanisation, there will be a rise in inequality in the way people live and there is a huge difference in the quality of education, nutrition and health. Rich people send their children to the best schools and colleges and that enables their children to get the best jobs and remain wealthy. The poor remain poor because their children get poor quality education in schools. Either they drop out or acquire low grade skills and end up in low paying jobs and remain poor for life. This cycle can be broken and has been broken in many countries.
Even the most developed countries had high Gini coefficients, according to Branko Milanovic, a leading expert on global inequality. In all countries he has studied inequality peaked at around 50 to 55 Gini percentage points . In his book — Global Inequality: A new Approach in the Age of Globalization — he says that US, UK and even the Roman Empire had high inequality when there was prosperity and high growth which was when they experienced industrial revolution. As US and UK became richer and their education system improved and wages got higher, inequality was reduced as more people were qualified to get higher paid jobs.
In the case of the Roman Empire when it fell to the Goths in 476 AD, there was a huge decline in inequality as the rich lost their fortunes and there was war and pestilence which equalised incomes.
In India’s case globalisation has created a middle class which is at around 300 million but the advantages of the rich with assets and access to quality education for their children and healthcare in best hospitals and owning property in prime urban and rural areas remains and therefore the inequality is high. The rich also have connections which matter in getting their children jobs in high places and cornering privileges, tax exemptions and subsidies. In China the same phenomenon can be observed. The rich businessmen and the corrupt officials who have amassed wealth disproportionately has led to high inequality of incomes. China’s inequality measured by Gini index is higher than India’s.
In India to reduce inequality access to good quality education, skill training, good nutrition in childhood, are important for children from underprivileged backgrounds to be able to get better paying jobs which however still remain with the chosen few who have wealth, foreign education and connections.
In India, there are additional problems of scheduled castes/tribes and Dalits experiencing deprivation for centuries. Even when young job entrants are qualified, their accent with which they speak English or Hindi is a giveaway. Unless these important things like same type of schooling and cultural education are looked into and harmonised, there is no way in which inequality can be reduced fast.
Somehow the ‘techies’ or software engineers much in demand at home and abroad need not be disqualified by their accents or inability to write English well because all that matters is their technical skills. In some ways higher technical education is reducing inequality and people with humble backgrounds can aspire to have higly paid jobs but only bright and tech- savvy youth make it to this list.
It is also a fact that people with low skills keep getting laid off by technology in India in the corporate sector and hence jobless growth. The low skilled workers have to be retrained and acquire new skills which alone can enable them to earn more.
Milanovic concludes by saying that globalisation does not decrease inequality because it affects people differently. People with assets, education and skills are favoured and their incomes rise quickly but people with low skills and no assets are left behind. To bridge this gap the government has to step in . It must increase taxes rather than reduce taxes — something which is an anathema for the current neo liberal policies of the government. It seems a long wait before all Indian citizens can have a decent standard of living and inequality falls.
This commentary originally appeared in The Tribune.
- Developing and Emerging Economies
- Development and Society
- Economy and Growth
- Indian Economy
The views expressed above belong to the author(s).