Originally Published 2011-12-15 00:00:00 Published on Dec 15, 2011
There is a lot of disturbing news regarding the Indian economy today which is likely to spoil the outlook for 2012. One of them is regarding the rise in inequality.
Need for corrective policies to curb growing economic inequality
THERE is a lot of disturbing news regarding the Indian economy today which is likely to spoil the outlook for 2012. One of them is regarding the rise in inequality. A recent report from the Organisation of Economic Cooperation and Development (OECD), the think tank of a Paris-based forum of developed countries, shows that there has been a doubling of inequality of incomes in India during the last 20 years. According to the report, the top 10 per cent of wage earners got 12 times more than the bottom 10 per cent in 2010 as compared to the early 1990s when they were earning only six times more. It also says that India has the highest number of poor in the world and that 42 per cent of the Indians live below the poverty line, on less than Rs 65 (less than $2) a day.

Reducing inequality has to be a national priority because it is mainly the failure of redistributive tax policies that have been responsible for the rise in inequality as well as inadequate investment in human capital. Countries with low inequality have strong tax collection systems (high tax/GDP ratio) and a social safety net which takes care of all individuals from "cradle to grave". Rising inequality means that many people are missing the opportunity of raising their standard of living as the economy grows because they do not possess assets, marketable skills, proper education and proper healthcare. They have been left behind in the race for higher incomes, cars, mall shopping and international travel that many are now able to afford. Today, unfortunately India’s high GDP growth is also slowing down and the outlook for next year is for 6 to 7 per cent growth rather than 9 per cent. The poor will suffer more when economic growth slows down.

Between July and September 2010, GDP growth slowed down to 6.9 per cent and this was due to several factors like agricultural growth slipping and industrial growth falling. But certain things have not been under the UPA government’s control like the European Union (EU) debt crisis, which has been escalating for a year now. It has taken a toll on people’s jobs and incomes not only in Europe but also in the EU’s trade partners. The forecast for the EU countries’ economic future, according to European Central Bank, is grim for 2012 as it will experience GDP growth of only 0.23 per cent, and inflation is likely to rise to 2 per cent. There is a marked rise in unemployment in some of the countries like Greece, Spain and Italy. With austerity measures taken by most governments, more jobs are going to be cut and the demand from EU countries will shrink further.

The slowdown in the EU is affecting Indian exports which grew only by 4.2 per cent in November 2011. Since industrial growth also has shrunk by 5.1 per cent (in October) and the manufacturing sector by 6 per cent, jobs may be cut in the manufacturing sector. The lowest 10 per cent of wage earners have a greater chance of losing their jobs, accentuating inequality.

Inflation, which is close to double digit again, will also accentuate inequality unless food prices are brought down drastically. The good news, however, is that food inflation has started to come down. But the government’s bid at opening up the FDI in the retail sector as a wayout from high food inflation did not work. People and politicians could not be convinced about the advantages of opening up foreign direct investment in retail, especially in the face of an approaching global recession.

High food and general inflation has also not responded well to the RBI’s monetary policy of raising interest rates and tightening liquidity. With 13 attempts at raising the interest rate, only the consumer demand has been staved off and industrial investment has suffered in the past few months (growth of capital good industries plunged by 25.5 per cent recently). Many robust industries like automobiles are facing an stagnant demand. The RBI has tried to inject liquidity in the market by buying Rs 57.8 billion worth of bonds through open market operations because it wants to rev up demand and give a boost to industrial growth.

The eurozone crisis has also made the Indian companies which borrowed from abroad (around $29 billion) panicky in the face of slower dollar inflows through financial institutional investment channels and falling exports. As a result, they increased their demand for dollars. FIIs sold Indian shares worth $251.67 million in 2011 up to November. Importers also raised their demand for dollars and all this led to the rupee sinking to a record low of Rs 52.37 to a dollar in November. The RBI had to intervene to support the falling rupee recently as it would raise the debt payment charges of companies as well as increase import costs.

The withdrawal of money from the Indian stock markets by FIIs has been due to Indian stock markets’ poor performance in the past few months as compared to other emerging markets. With FIIs taking away the dollars, the current account deficit of $13.6 billion in November looks ominous.

Problems in the global economy and the government’s inability to control corruption will affect the government’s revenue-raising capacity in 2012. In fact, the Central excise collection fell by 6.5 per cent in November. Austerity measures will have to be imposed in India also which will affect the government’s important infrastructure development programme of $1.3 trillion adversely. Proper roads, power supply and railways would give a better opportunity to the poor to earn more. Thousands of villages remain with little or no power supply. Significantly, core sector industries (power, steel, coal, petroleum refining, electricity , cement, natural gas and oil) grew extremely slowly at 0.1 per cent in October 2011.

Thus, cash-strapped for funds and having spent a lot already, the government’s ability to meet the targeted fiscal deficit of 4.6 per cent is going to be watched by all credit-rating agencies because a wider deficit will mean further problems for sustaining India’s growth story. With problems in controlling expenditure, less money would be available for human development in areas like women’s and children’s health, education and skill development which will further widen the gap between the rich and the poor. In order to reduce inequality, there will have to be strong policies that empower individuals, especially women. There should be better tax collection, implementation of land rights and maintenance of law and order which will contribute to the emergence of a more equitable society.

(The author is a Senior Fellow at Observer Research Foundation)

Courtesy: The Tribune

The views expressed above belong to the author(s). ORF research and analyses now available on Telegram! Click here to access our curated content — blogs, longforms and interviews.