Set priorities to bridge inequalities

Mythili Bhusnurmath

Thomas Piketty's book, Capital in the 21st Century, highlighting growing income and wealth inequalities, might have made waves in the West when the first English translation appeared in 2014. But it received scant attention in India. However, Piketty's new paper,  Income inequality, 1922-2014: From British Raj to Billionaire Raj?, co-authored with Lucas Chancel, has more than made up for that.   

Perhaps, it is the catchy title. The paper has brought long overdue attention to an issue that we in India have not been sufficiently cognisant of: growing income and wealth inequalities. Many would disagree with the findings, given the paucity of reliable data on income distribution and the difficulties in measuring the Gini coefficient, the income inequality measure favoured by economists (higher the Gini coefficient, greater the inequality). But the broad thrust of Piketty's arguments is undeniable: income inequality in India is unconscionably high, and worse, is increasing.

Income inequality rising

Consider this. The share of national income accruing to the top one per cent income earners is now at its highest since income tax was introduced in India in 1922, say the authors. Indeed, after showing a welcome decline in the early years after Independence, income inequality has been rising since the 1990s, coinciding with our shift to a market economy.

So while the bottom 50% accounted for 28% of the total growth between 1951 and 1980 and their position improved faster than the national average, the tables have since been turned. The very rich now get a much larger share of the pie. The top 0.1% income earners, for instance, represented less than eight lakh individuals in 2013-14, in contrast to the 389 million who constituted the bottom half in late 2013.

Inevitably, these findings have been seized upon, especially by the Left, as evidence of the failure of the market-driven model. However, it is important we do not draw the wrong lesson: that the market economy is associated with rising inequality and hence we should turn the clock back on opening up. For, what is just as undeniable as the fact of rising income inequality is the rapid reduction in poverty witnessed in the post-reform years. 

As the paper points out, per capita adult income growth increased significantly after the 1991 reforms —  from 0.7% in the 1970s, to two per cent in the 1990s and further to 4.4% since 2000. Also, the proportion of population living below the poverty line of $1.90 a day has declined from about 46% in 1993 to about 21% in 2011.

It is important also to bear in mind that the 1970s and 1980s, when income inequality fell to the least was also the period when India's GDP and per capita income growth rates fell dramatically. The reality, as eminent economist and former Chief Statistician, Pronab Sen, pointed out, correctly, is that while “fast economic growth has helped in reducing absolute poverty, relative inequality has worsened.”

Indeed, India is not an outlier when it comes to income inequalities. According to Picketty, rising income inequalities are part and parcel of capitalism, thanks to the concentration of wealth, especially inherited wealth. The net effect of concentration of wealth combined with the distinctly softer tax treatment given to capital gains relative to wage income, results in a steady rise in inequalities over time. What is distressing about inequality in India, though, is the abysmally low levels of income at the bottom of the pyramid.

Ironically, while Picketty castigates the capitalist system for being at fault, somewhat counter-intuitively, increasing prosperity seems to be accompanied everywhere with rising income inequalities, cutting across different political systems. Income inequalities in Communist China, for instance, are higher than in India. According to the IMF Regional Economic Outlook for Asia, 2016, India's Gini coefficient rose from 45 in 1990 to 51 by 2013, mainly due to rising inequality between urban and rural areas and within urban areas. During the same period, China's Gini coefficient rose from 33 in 1990 to 53. 

India insensitive to gap

However, India is an outlier in the relatively scant attention that is given to addressing rising income inequalities. Post the global financial crisis of 2008, western societies have become much more concerned about rising income inequalities. In a recent article in the Financial Times, Justin Welby, Archbishop of Canterbury and member of the Institute of Public Policy Research's Commission on Economic Justice, points to the “profound state of economic injustice” in the UK. He writes, “Our economic model is broken and we are failing those who will grow up into a world where the gap between the richest and poorest parts of the country is significant and destabilising.”

Unfortunately, we in India have been far less sensitive to the dangers posed by rising inequality in a society already struggling to overcome the deep fissures in our fragile social fabric. It is simply not enough that every (emphasis added) Indian today is better off than he was 25 years ago when we started on the path of reform. It is essential that the fruits of reform are distributed more equitably so that relative disparities are less extreme. The way to do this is not by giving the poor innumerable handouts but by empowering them. 

This is where the role of the state becomes important. Education is the most efficient route to upward mobility. But education can be meaningfully imparted only to a healthy population. The answer, therefore, is to increase state spending on both education and health,  areas where the private sector will not enter. A fiscal policy that increases social spending, and also ensures the better-off contribute more to the tax kitty, is the way forward.

The Scandinavian countries are the best example of the success of this approach. The state in these countries plays a strong role along with the market.  Consequently, they perform much better when it comes to income inequalities.

The bottomline is: It is far better to create a bigger pie (economy) and then divide it more equitably through active state intervention than to divide and sub-divide a static pie. In the state vs markets debate, the golden rule must be: leave it to market forces where the market is more efficient, provided there is a strong regulator in place, as in running airlines, hotels etc. But the state must intervene where markets fail, as in the provision of health care, education, law and order and clean air.