Expert Speak India Matters
Published on Aug 25, 2017
India grows but inequality too rises

India at 70 has 101 dollar billionaires and 236,000 dollar millionaires. But it also has a large number of people lacking basic amenities like toilets and piped water. In big cities, mansions belonging to the rich and miles of shanty towns and slums coexist. The Indian economy is huge with GDP amounting to $9.4 trillion (PPP) but there are pockets of extreme deprivation and visible inequality. While inequality of income and wealth is inevitable and is present in all countries, rising inequality has become prominent in India in the last three decades.  There has been a rapid rise in the gap between the rich and everyone else.

The wealthy have increased their influence in politics and economics of the country while the declining influence of low income marginalised groups has undermined democracy and stifled the voices of ordinary citizens.  The degree of inequality however is different across the world and many countries have been able to reduce inequality faster than others by taking appropriate policy measures.

Rising inequality threatens the long term social and economic development of countries even when they are experiencing high GDP growth.

It destroys people’s self-worth and confidence, breeds crime, leads to various illnesses due to inadequate public healthcare facilities and can lead to terrorist activities and environmental degradation. It definitely does not lead to a happy or harmonious society.

A recent report by Oxfam and Development and Finance Inc. (July 2017) has ranked governments according to their commitment to reduce inequalities across the world.  An index has been computed by them regarding the commitment of countries and India ranks very low at 132nd among 152 countries.

Even though the NDA government is pursuing policies of financial inclusion to reduce inequalities, there seem to be few debates on the subject. Clearly, we only want to project India as the fastest growing Emerging Economy with great investment prospects. While it is true that extreme poverty has come down in India, there are still 250 million people earning less than $2 a day. Extreme inequality has been shown to inhibit social mobility which means that children of poor parents will stay poor. Unless they come from privileged backgrounds, the young people of India will have fewer opportunities to make the most of their skills and talents. There have been a few exceptions of course!

In the Oxfam and DFI report, different governments’ active role in reducing poverty and inequality has been assessed. The 13 developing countries that have reduced their overall inequality have done so because of an increase in public services, progressive taxation and labour rights.  These three areas have been found to be critical for reducing inequality. India has fared poorly on labour rights as well as respect for women in the work place.

The government’s spending on health, education and social protection is woefully low compared to other BRICS countries and the tax structure though progressive is in practice full of loopholes, exemptions and widespread evasion.

On labour rights India performs poorly because majority of the labour force works in the agricultural and informal sectors which lack union organization. Labour unions are useful for collective wage bargaining but since the era of economic liberalization began unions have become weaker even in the organized sector. Strong labour rights in a country help young people secure a fair wage.

In South Asia, surprisingly Nepal ranks first according to the index for Commitment to reduce inequality, Maldives stands 2nd, India 3rd, Sri Lanka 4th, Pakistan 5th Bangladesh 6th Bhutan 7th and Afghanistan 8th. Nigeria is the worst performer among all countries and Sweden is number one.

The measure of inequality taken into consideration is the Palma ratio which compares the incomes of top 10 per cent to the bottom 40 per cent. This is considered the best measure of inequality because it takes into account the incomes of the extremes of the income distribution whereas the Gini coefficient focuses more on incomes of those in the middle and can underestimate the importance of top incomes. In Sweden, the Palma ratio is less than 1 because the top 10 per cent is earning the same as the bottom 40 per cent. According to the report all countries should aim at a Palma ratio of no more than 1. India’s is at 1.5.

Although the three pillars used in the calculation of the index are important, other government policies are also important for reducing inequality. For example, policies towards small and medium enterprises, rural development and agricultural spending by state governments are important for reducing inequalities.

India’s huge number of small and marginal farmers and landless labour need help in various ways for raising their incomes. Government spending on infrastructure is important in rural areas and this has not been taken into account in the index. Lack of connectivity and good roads lead to isolation of villages from towns and cities and this can increase poverty. Similarly corruption also leads to a rise in inequality. The NDA government’s interest in eradicating corruption is in the right direction but it will take long to do so though the demonetization experiment has helped a little.

The government’s spending on education is 3.1 per cent of the GDP but the quality of primary education remains a problem and needs improvement. Government expenditure on health is very inadequate at 1.3 percent of the GDP as a result of which there are not enough public hospitals easily accessible to the poor. They have to go for private healthcare which is expensive and often unreliable with many add on costs. The out of pocket expenditure for citizens in India is one of the highest in the world.  The result is an increase in inequality as middle income people lose their assets and savings undergoing private medical treatment and sink into poverty.

More jobs will reduce inequalities as it will increase family incomes. This is taking place at a tardy pace and remains a sore point. More manufacturing jobs will give employment to unskilled labour but unfortunately industrial growth has shrunk by 0.1 percent. A social safety net for the informal sector workers like life insurance and pension policies is important and has been initiated by the Modi government. But a lot needs to be done to have growth with equity.

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Jayshree Sengupta

Jayshree Sengupta

Jayshree Sengupta was a Senior Fellow (Associate) with ORF's Economy and Growth Programme. Her work focuses on the Indian economy and development, regional cooperation related ...

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David Rusnok

David Rusnok

David Rusnok Researcher Strengthening National Climate Policy Implementation (SNAPFI) project DIW Germany

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