India’s high inequality is hurting growth

MADAN SABNAVIS | Updated on January 09, 2018 Published on December 20, 2017

Income concentration seems to have curbed the growth of broadbased demand, while the rich approach satiation levels

Inequality is one issue which Indians always shy away from; we do not want to accept that it is there, and that economic reforms have actually widened the wedge. While poverty definitions are fairly amorphous given the absence of a singular measure, inequality is even more nebulous on account of the absence of data, and hence it is hard to calculate the Gini coefficient.

While practical observations do reveal that billionaires living in mansions are surrounded by the destitute with little hope, the official argument is that even the poor have mobile phones which show that there is progress, and hence inequality has fallen.

The World Inequality Report 2018 has provided data on inequality across various countries which makes interesting reading. Besides picking up easy measures on inequality, benchmarks can be viewed across various nations to understand where India stands. A striking observation is inequality as a rule exists everywhere in the world where the rich have become proportionately richer than the other groups in the last three decades or so. India would look a bit more skewed in this respect.

For example, the share of the top 10 per cent in total national income in 2016 in India was 55 per cent. It was 47 per cent for the US, 37 per cent for Europe and 41 per cent for China. In our country, the top 1 per cent held 22 per cent of total income which was only below 28 per cent for Brazil. In case of China, it was 14 per cent and 13 per cent for Europe. This should give an indication of the concentration of income in certain pockets.

Wrong growth

There are two other interesting parameters which are spoken about here in the report. The first is cumulative growth per adult between 1980 and 2014. Given the low base, growth was 223 per cent for this period in case of India. For the bottom 50 per cent it was 107 per cent and 112 per cent for the middle 40 per cent, while for the top 10 per cent it was 469 per cent.

More alarming is the income growth for the top 1 per cent where it was 857 per cent. This is probably a sharper measure of inequality as it speaks of growth in income over various groups where the richest has witnessed the highest increase over higher base numbers compared with the other categories.

The second metric is the share of income growth of various classes for the period 1980-2016. The bottom 50 per cent had a share of just 11 per cent, which is not really out of place with other geographies except the US where it is 2 per cent. The middle 40 per cent had 23 per cent, one of the lowest across regions like the World, the US, Europe, and China. The top 10 per cent had share of 66 per cent (same as in the US but much lower than in Europe with 48 per cent and China 43 per cent) and top 1 per cent, 28 per cent. This talks of which groups have gained the most on account of cumulative growth.

Private push

Two conclusions can be drawn from this data. First, the level of inequality is very high in the country and cannot be disputed. Second, as a corollary, the benefits of growth have been extremely skewed towards the rich. How did this happen?

The growth model followed since reforms was tilted towards the productive sectors and liberalisation meant less of government and more of private enterprise. This was the chosen route to growth and hence it was felt that if the private sector was given space for expansion, the benefits would percolate downwards through employment opportunities as well as higher living standards.

This has not happened according to script and the benefits have largely flowed to the upper echelons. In fact, this limited growth syndrome acts as a useful social buffer as it gives the illusion of upward mobility even though the pace is much slower than that of the higher echelons. Therefore, it is not surprising that 90 per cent of the population accounted for just a third of the growth taking place during the period 1980-2016.

Reforms were focused on de-nationalisation. Privatisation meant that even public companies would be owned by private players, which began the process of heightened inequality. Governments have dithered on subsidies and the elite are anti-subsidy. The result has been that even government activity has tended to move towards projects generation in roads and city development. This is ironic, as we wanted the government to be out of productive activity when we went in for privatisation. This has actually meant that when a road is created the contracts go to private parties, which increases income of the relatively richer echelons.

Curiously, the NREGA has been rebuked by many as being a dole which has pushed up wages beyond productivity levels and affected corporate profits! This is so as NREGA wage has become a benchmark for all wages in industry. There is hence relentless pressure from the corporate world on the government to lower these allocations on grounds of its distorting the wage structure.

Further, the growth of crony capitalism has meant that the nexus between the government and some corporates has exacerbated the income distribution pattern. Privatisation programmes are normally for better performing companies — which is natural or else they would not be of interest to the private sector. Loss-making companies continue to be held by the Government. This is another reason which has fostered the inequality syndrome in the country and has been spoken about by Thomas Piketty in Capitalism in the 21st Century. Does this matter? While electorates seldom change governments on account of inequality or poverty, but rather on issues like caste and religion, permitting such a phenomenon is not good from an economic standpoint.

Demand saturation, and more

Higher inequality comes in the way of demand creation. Economic growth is sustainable provided the poor are also able to rise in the hierarchy and spend on goods and services. If these incomes do not rise, the demand cycle is interrupted.

Therefore, it is essential to keep their income increasing at a reasonable rate. The problem we have today of absence of demand is because of inequality. The rich run into a cliff of ‘demand-saturation’ where motor vehicles cannot be changed every year or houses bought periodically. The other income groups too have to spend. If they do not have this wherewithal, as is the case in the last three years, the tendency would be to spend more on essentials than consumer goods which impact growth.

India does revel in having an increasing number of millionaires irrespective of whether they are self-made or ancestral. Also, as pointed out by Piketty, some sections of the corporate world have also tended to add to the money cycle with exaggerated pay, which includes huge stock options that carry no commensurate responsibility.

Tackling inequality and reducing the gap between citizens is ironically a necessity to keep the economy ticking. In the West, high levels of prosperity across the citizens was one reason for expanding markets overseas. We do have a large populace that needs to move up the ladder or else will continue witnessing growth in waves rather than in a linear manner.

The writer is chief economist at CARE Ratings. The views are personal

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Published on December 20, 2017
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