5 Reasons We Need to Worry about Inequality Now

India cannot eliminate poverty unless it tackles inequality first.

 

In January 2018, at the World Economic Forum at Davos, an Oxfam report on global inequality reiterated, once again, that the rich are getting richer and the poor are getting poorer. According to the report, India’s wealthiest 10% now hold 77.4% of the total national wealth and the top 1% hold 51.53% of it. With the wealth of the top 1% increasing at an estimated rate of  ₹ 2,200 crores per day in 2018, it is no wonder that income inequality in India was called “morally outrageous.”

The obverse of this is evident: the poor get poorer because their share of the national wealth is getting smaller and smaller. Despite this, the central government continues to hold the view that a higher rate of economic growth will alleviate poverty. However, macroeconomic indicators like gross domestic product (GDP), or per capita income are insufficient to measure growth because they assume that the total national wealth is percolating to the lowest levels. This framework of growth also conceptualises poverty in objective terms, that is, it defines a certain level of income as the poverty line and aims to rectify that.

However, at the policy level, poverty needs to be conceptualised in relative terms. It needs to be seen as inextricably linked to inequality.

In this reading list, we look at six articles that help us understand why we need to account for inequality to effectively deal with poverty.  

1) Inequality Determines the Level of Poverty

Radhicka Kapoor argued that if economic growth automatically meant a reduction in poverty, India should have witnessed a steeper decline in poverty. In her article, she finds that states like Bihar and Chhattisgarh, which witnessed the highest growth rates between 2004–05 and 2009–10, did not record the steepest decline in poverty. But Tripura, that had a below-average growth rate, performed the best in terms of poverty reduction.

Poverty is a function not just of mean incomes but also of income distribution. Importantly, the relationship between growth and poverty is mediated by inequality … the level of inequality determines what the share of the poor in the growth process will be. In countries with high initial inequality, the poor tend to have a lower share of the gains from growth. This can be explained as follows: if we assume a growth process in which all levels of income grow roughly at the same rate, high levels of inequality will entail that the poor gain less in absolute terms from growth and that they will have a smaller share of both total income and its increment through growth. Consequently, the rate of poverty reduction will be lower.

2) Inequality is Not Measured Accurately in India

Thomas E Weisskopf wrote that in a country like India, where poverty is still an extensive problem, policy measures need to focus on the distribution of income. However, data on inequality does not adequately represent the real picture. In the absence of reliable data, how can effective policy be formulated?

In India ... the inequality data collected most frequently and most systematically—by the National Sample Survey (NSS)—involve the distribution of expenditure on consumption rather than income. Because the rich tend to save a significant fraction of their income, while the poor tend to use all of their income—and often some borrowed money as well—for consumption, the distribution of consumption is considerably less unequal than that of income. Furthermore, the NSS has a practice of oversampling the poor and undersampling the rich (often missing the super-rich altogether), so its survey results tend to understate the degree of inequality even of consumption. Thus measures of inequality calculated for consumption in India significantly understate the actual degree of inequality in income.

3) Inequality is Rising at an Alarming Rate

Ishan Anand and Anjana Thampi analysed the trends in wealth ownership in India between 1991 and 2012. They used three rounds of the All-India Debt and Investment Survey and found a greater concentration of wealth with the top 10% of the population, particularly after 2002. From their study, they hypothesised that the rising levels of wealth inequality were deeply linked to the neo-liberal growth process in India that resulted in a concentration of wealth in the urban areas.

The massive rise in wealth inequality was witnessed mainly between 2002 and 2012; this decade includes the high growth period between 2003 and 2008. The consumption and wealth data independently show that the gains from this growth have not been distributed equally. The latest round of AIDIS does not provide information regarding the National Classification of Occupations (NCO). This hampers a deeper understanding of the occupational and class categories that have gained the most in terms of wealth.

4) Inequality Worsened in the Post-reform Period

The discourse tying poverty to economic growth rate developed in the post-independence period. For the first three decades after independence, the Indian economy grew at a sluggish pace of 3.5%, while a large part of the population remained below the poverty line. An accelerated rate of growth per annum, it was thought, was the way to eliminate poverty. But this could only work while India was still following protectionist policies. In their article studying regional inequality in India during the 1980s and the 1990s, S Sakthivel and Sabyasachi Kar found that inequality rose along with the growth rate in the post-reform period. Through an analysis of the various sectors of the economy in the two decades, they found that regional inequality in India remained unchanged during the 1980s mainly due to a fall in inequality within the industrial and the service sectors.

In the pre-reform period, the public sector had played a crucial role in maintaining regional equality in the Indian economy by directing resources to backward areas. With a change in the focus of the public sector following the reforms, this process has become weaker. Secondly, the reforms gave greater freedom and impetus to the private sector and export-oriented production. These sectors, which were attempting to reduce costs and become competitive, were attracted to the areas that were relatively more developed. As a result, investment and activity shifted to these areas, strengthening the forces of divergence.

Another article by Angus Deaton and Jean Dréze, re-evaluating the decline of poverty, found that the post-reform period also aggravated rural–urban inequality. The official figures reflected a decline in poverty from 36% to 26% between 1993–94 and 1999–2000. But Deaton and Dréze have argued that this sharp decline is invalid, owing to methodological changes instituted by the National Sample Survey to estimate the second figure. Comparing data from the 50th and 55th Rounds of the NSSO, they suggested that the decline in poverty was not as drastic as was presented because in the same period after liberalisation, inequality, and particularly rural and urban inequality, rose sharply.

Three aspects of rising economic inequality in the nineties have come up so far in our story. First, we found strong evidence of ‘divergence’ in per capita growth rate of real agricultural wage. Proportionate decline in rural consumption across states. Second, our estimates of the growth rates of per capita expenditure between 1993-94 and 1999- 2000 … point to a significant increase in rural-urban inequalities at the all India level, and also in most individual states. Third, the decomposition exercise in the preceding section shows that rising inequality within states, particularly in the urban sector, has moderated the effects of growth on poverty reduction.

5) Inequality Compounds Over Time

Panchanan Das studied wage inequality using the 61st round of the NSS which corresponded to 2004–05. His study establishes a direct relationship between the availability of social goods and the wages that a worker can expect, thus making it apparent that privilege plays an important role in perpetuating inequality. He drew on the human capital theory and included variables like education, training and experience to estimate inequality, and found that these factors do affect wage inequality. He also studied how the wage gap is gendered.

A substantial wage gap exists between workers engaged in different sectors. Workers in the informal sector are paid even less than one-third of the formal sector wage. In India, the average wage in the formal private sector job is higher than that in the public sector. The wage differential is higher in rural as compared to urban areas, and is also higher among women than among men workers. By examining wages in public, private-formal and informal sectors, it is observed that the differences in wages among workers are the highest in the private-formal sector. Wage inequality among regular workers is considerably higher than that among casual workers. Women workers earn much lower wages than their men counterparts and inequality among the former is much higher than among the latter. Surprisingly enough, wage inequality among women is the highest in public sector jobs in the country.

Vamsi Vakulabharanam analysed India’s macroeconomic growth statistics for the period 1994–2005 and found that over that period, the class structure was witnessing a shift owing to rising inequality. From a loose coalition of dominant classes in the 1980s, India witnessed the emergence of the urban elite as the singular dominant class after liberalisation. Vakulabharanam found that luxury consumption, investment and exports had driven the growth observed in the post-reform period, while the rest of the economy did not really benefit. Particularly, investment in agriculture saw a stiff decline, and this led him to conclude that “the predominant majority in India has not significantly benefited from the growth process.”

This consolidation of a new class structure comes through largely in the analysis of the levels and changes in the consumption patterns as revealed by the NSS consumption surveys. Several policy conclusions follow if this skewed pattern of growth and rising inequality need to be counteracted. First, it is obvious that the agricultural sector needs higher public investments and better support in terms of promoting institutional lending and so forth. However, it is the poor peasants and agricultural workers who really need to be supported …  Second, the enclave sectors in the urban areas need to be opened up in favour of labour-intensive strategies of economic development. This will begin to generate more employment in urban areas, which will once again improve consumption levels of the poorer working groups. Third, the non-agricultural sector needs to be developed along cooperative lines, perhaps taking a cue from the Chinese growth strategy, especially in the 1980s and 1990s.

 

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