Economic inequality is rising. Reasons are not difficult to find – and so are possible solutions
DS Saksena | January 22, 2018
Our constitution promises equality of status and opportunity to all citizens but statistical data suggests that inequalities in wealth and income have increased since independence and are now on an uncontrolled upward spiral.
Recently, Thomas Piketty and Lucas Chancel in their aptly titled study, “Indian Income Inequality 1922-2014: From British Raj to Billionaire Raj”, have pointed out that currently the richest 1% Indians earn 22% of our total income; up from to 6% in the early 1980s and somewhat higher than their 21% share in the 1930s. The Annual Global Wealth Databook published by Credit Suisse highlights the fact that the richest 1% of Indians own 53% of the country’s wealth – up from 36.8% in the year 2000. The richest 5% own 68.6% of the country’s wealth, while the top 10% own 76.3%. Significantly, the poorest 50% of our countrymen own only 4.1% of the nation’s wealth. About 2.5 lakh Indians are in the really big league – figuring in the top 1% of the world’s richest people.
Indians being argumentative by nature, our intellectuals have disputed both the authenticity of data sources accessed by Messrs Piketty and Chancel as also the ultimate conclusions drawn by them. With due respect, it would have been better if the causes behind the rising income inequality in India, the deleterious effects of income inequality and a possible recipe for countering income inequality had also received similar attention from our economists.
It is not difficult to see that the major reason for income inequality in India is the poor state of Indian agriculture which employs 45% of our workforce but accounts for only 15% of our GDP. The average farm size is 1.15 hectares, which explains the poor returns from agriculture for most of our farmers. Significantly, the average farm size in 1971 was 2.28 hectares which would indicate falling per capita farming income and a widening gap between farming income and other kinds of income. To address poverty and inequality, agricultural reforms should be the government’s first priority. Currently, we have the government’s promise of doubling farm income but in the absence of a proper action plan the government’s promise can only be taken as an acknowledgement of the problem, not its solution.
Liberalisation was a watershed event in our economic history, which had a huge positive impact on the services, telecom and financial sectors – none of which is labour intensive. Post liberalisation we opened our markets to global competition which forced our businesses to employ the latest technologies – which were also not labour intensive. According to Credit Suisse, the richest 1% cornered 61% of the extra wealth generated between 2000 and 2015, while the top 10% got 81% of the increase but 90% of us could get only the remainder, i.e., 19%. It would appear that big businesses bloomed in the aftermath of liberalisation which brought in financial deregulation, tax concessions and a liberalised credit regime but the poorer sections of society did not benefit proportionately, probably because they were out of the formal financial system.
Post liberalisation, growing consumption by the rich along with innovative schemes like MNREGA did lift a significant percentage of the poor out of abject poverty but as noted earlier, the pace of growth of the rich was much faster than that of the poor. The present government’s Make in India and Skill India initiatives aim to correct the anomalous distribution of income by expanding the manufacturing sector to generate employment and migrate labour to more productive jobs; sadly even after three years these well intentioned schemes are yet to take off.
The social ill effects of inequality – disharmony, increased crime and social unrest – are now playing out in our society. Concentration of wealth is not good from the economic point of view also. Firstly, persons with huge wealth do not spend a significant part of it. A family with limited means would spend the majority of its income but a really rich family would need to spend a very small proportion of its income. Thus money would get locked up – away from productive use. Moreover, scarce resources would get frittered away in catering to fancies of the rich. The healthcare industry is a glaring example of this phenomenon; we have no dearth of world-class super-speciality hospitals but we have very few facilities offering affordable healthcare because there is huge money in advanced healthcare. Then, concentration of wealth perpetuates income inequalities because really rich people need only to invest a part of their wealth to earn more than what they spend.
Of course, many eminent economists like Prof Jagdish Bhagwati espouse the ‘trickle-down theory’, which postulates that big corporates with sufficient funds at their disposal create jobs and the government needs only to ensure that big businesses do well to ensure prosperity for the poor. Evaluating the success of the trickle-down theory from the time we embraced it in 1991, we can see that initially the economy had a bull run but after the global meltdown of 2008 we only had jobless growth and growing inequality.
These developments have prompted the government to have a relook at the direction in which the economy is headed. The Economic Survey 2016-17 proposes a discussion on Universal Basic Income (UBI), without identifying rising inequality as the raison d’etre for advocating it. Rather, it portrayed UBI as a poverty reduction tool. The Survey noted that UBI would be a perfect substitute for the myriad government schemes with their huge administrative costs and leakages but qualified it with the rider that UBI would be difficult to “sell” to the majority of people. The Survey also said that the time for UBI had not come. With no definite plan in place, what needs to be done to tackle the problem of poverty and inequality?
To tackle poverty effectively, we have to understand that like wealth, poverty perpetuates itself across generations. A child born in a really poor household would not have access to proper nutrition, healthcare or education which would diminish his chances of breaking out of the stranglehold of abject poverty. Of course, we often read of children who break out from this trap but such instances are few and far between.
If we want to reduce inequality in our society in the near future, we would have to ensure proper nutrition, healthcare and education for all our citizens so that the poor escape the worst rigours of poverty and have a chance of coming out of the poverty trap. Most government schemes have the objective of providing either nutrition or healthcare or education but all such schemes have failed to achieve these objectives. Perhaps, the time has come for the government to strictly monitor existing schemes rather than formulating new ones at the drop of a hat.
Warren Buffet once pointed out that he was paying tax at 18% while his secretary was paying tax at 37%, which partly explains why the American economy is as iniquitous as ours. Such anomalies can be addressed only if the taxation regime closes all avenues for earning tax free income and accumulating wealth beyond a point. Sadly, in our current dispensation a sufficiently rich and tax savvy person can achieve both these objectives within the four corners of law. This was not the way our taxation system was designed to work. Prof Nicholas Kaldor, who was an advisor to a number of European governments, was invited to India by Jawaharlal Nehru in 1956 to propose a system of taxation for the nascent republic. He proposed two new taxes, wealth tax and gift tax, in addition to the existing income tax and estate duty, intending these new taxes to function as instruments to prevent transfer and concentration of wealth rather than as revenue collection measures.
However, the government abolished estate duty and gift tax in 1985 and 1987 respectively, while wealth tax was drastically truncated in 1993 and was finally repealed in 2016 precisely because there was no significant collection of revenue from these taxes. Significantly, the abolition of these taxes marks the beginning of the period of increasing inequality pointed out by Piketty and Chancel.
Currently, our economy is facing a slowdown which may further sharpen the differences between the rich and the poor. Therefore, to prevent our socialist republic from morphing in a plutocracy, income tax laws have to be amended to incorporate the relevant provisions of estate duty, gift tax and wealth tax to prevent concentration and transfer of income and wealth. Piketty and Chancel have given us a wakeup call; it is for us to heed it or dismiss it by semantics and nitpicking.
(The column appears in the January 31, 2018 issue)
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