Mitigating the huge divide between the rich and the poor is a major challenge for the government as it will require a big increase in public investment in enhancing social welfare for the poor.
This year it was a gloomier Davos than expected. Some key people who were present last year there and added colour were missing — like US President Donald Trump, Chinese President Xi Jinping and Indian Prime Minister Narendra Modi. Also, the IMF forecast about slow world growth presented a rather pessimistic picture for 2019. The rich present in Davos however had reasons to celebrate because in the last one year they became richer but unlike previous times when being rich was a passport to the event, this time, the shadow of growing inequality and its consequences loomed large.
While last year, Xi Jinping and Narendra Modi defended globalisation in Davos, this year it was felt by those present that a crisis was emerging. Indeed, there has been a slowdown in globalisation over the years, its heyday being 1990-2010. All cross border investment, trade, bank loans and supply chains seem to be losing ground or stagnating. In the days of globalisation’s uptick, transportation of goods was shifted to a large extent from using shipping to air transport because it got cheaper and tariffs were cut and the financial system got liberalised. The telecom revolution made phone calls cheaper to facilitate globalisation. Things have changed and wages have risen in the West though less than the big hikes in executives’ salaries, raising the costs of making goods and exporting them globally. Also, multinational companies have increasingly found tough competition from local producers and this has cut into their profits, making such markets less attractive. As a result, cross-border investments sank by 20 per cent in 2018. Regionalism and service trade instead have been on the rise.
The slowdown in globalisation has much to do with the trade war between the US and China and the US and the EU. Both China and the EU are showing slower GDP growth which is not good news for India’s exports which have been sluggish on the whole in 2018. The EU is a big market for India and China also buys a large quantum of raw materials from India. While some exports may benefit from the trade decline between the US and China, India is in a less advantageous position than some of China’s free trade partners. China is likely to outsource and buy whatever it requires from them on easier terms. India is likely to increase its exports to China in some agricultural products like soybean and cotton.
Another alarm bell was sounded when a famous American investor Seth A. Klarman, a billionaire, wrote a letter to Davos participants about a dangerous trend which is the growing sense of political and social divide around the globe which may end in economic calamity. “It can’t be business as usual amid constant protests, riots, shutdowns and escalating tensions,” he wrote. He has warned that social cohesion is essential for those who have capital to invest. India should take note.
He points out that national debt of all countries, including every developed country, is up since the financial crisis in 2008 to 2017. India is also in that league of moderately high national debt to GDP ratio at 70 per cent. This too is an untenable situation. The government has to pay a huge amount of interest for servicing the debt and it cuts into the resources that could have gone for funding social programmes. Already, the budget allocation for social programmes has received a cut in the past. The high debt profile will also be a disincentive for foreign investors and credit rating agencies are reluctant to give India an upgrade. India is aiming for a debt GDP ratio of 40 per cent by 2023 with debt-GDP ratio of States of around 20 per cent. This may not be achievable if States go for massive loan-waivers to farmers.
The high debt to GDP ratio of advanced countries of over 100 per cent has been accompanied by increase in the inequality of income and wealth globally. Just 26 people in the world now own the same amount of wealth as 3.8 billion people who make up the poorest half of humanity, down from 44 people last year.
The Oxfam report is ominous in declaring that India is witnessing rise in inequality at an alarming rate. In one year, 18 new billionaires were added to the list of existing billionaires making the total jump up to 119. Their wealth now amounts to $440.1 billion. The inequality between top 1 per cent and the rest of India is growing and it holds 51.53 per cent of the national wealth. The bottom 60 per cent of the population own merely 4.8 per cent of the national wealth. Such high level of disparity is dangerous and can subvert democracy, Oxfam has warned.
Between 2018 and 2022, India is estimated to produce 70 new dollar millionaires every day. Women and girls, according to Oxfam, are going to be the most hit by the rising economic inequality because poorer households will have less to spend on maternity, child birth and general healthcare. Unless the richest 1 per cent are taxed a little more, say by 0.5 per cent on their wealth, the situation for women and girls will worsen. The 0.5 per cent tax would be enough money to raise government spending on health by 50 per cent in India.
Mitigating the huge divide between the rich and the poor is a major challenge for the government as it will require a big increase in public investment on enhancing the social welfare of the poor in order to enable them to earn a decent living. Rising inequality is adding to social stress every day and can disrupt economic activity of the country, like the Gilets jaunes movement is doing in France, slowing growth and making the poor poorer.
With the focus on AI and automation in Davos where the fourth industrial revolution was discussed, it became clear that the future of jobs is bleak. In India, it will mean more retraining of people rendered jobless due to automation and digitalisation. Training of youth from low income groups will be a big challenge because being poorly educated in government run schools, especially in villages, they will need rigorous training.
Creating good quality jobs is a problem faced by many countries today. India can buck the trend by focusing and encouraging some labour-intensive industries in which we have traditional expertise — like textiles, garments and food processing — that will also help in job creation for women.
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David Rusnok Researcher Strengthening National Climate Policy Implementation (SNAPFI) project DIW Germany
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