Does India Have An Inequality Problem?

Residential and commercial buildings stand in the Bhendi Bazaar area of Mumbai. (Photographer: Dhiraj Singh/Bloomberg)

Does India Have An Inequality Problem?

BloombergQuintOpinion

Rising inequality is a worldwide problem. How does India look in this regard?

The Indian economy experienced the biggest contraction in the post-independence period in 2020-21 (7.3%; NSO, MOSPI) with the Covid-19 pandemic wreaking havoc. At the same time, the number of Indian billionaires rose from 102 to 140 last year; their combined wealth nearly doubling to $596 billion (Forbes, 2021). In the same period, the number of poor in India is estimated to have increased by 75 million due to Covid-19, accounting for nearly 60% of the global increase in poverty (Pew Research Center, 2021).

Analysis shows that India does have more than its expected share of multimillionaires (Ghatak and Ray, 2014). Additionally, India’s share of the world’s extreme poor is higher than its share of the world population. While India accounts for 17.8% of the world’s population (World Bank, 2019), at 139 million, it had 20.17% of the total number of people living in extreme poverty in 2017 (World Bank, 2020).

Does this mean that India has greater inequality compared to other countries? Not necessarily.

The pandemic is a once-in-a-century phenomenon and hence, we need to dig deeper to see what the story with inequality in India is.

Analysis of data from the World Inequality Database, developed by Thomas Piketty and his colleagues, points to an alarming rise in both wealth and income inequality in India. [1]

We first delve into the evolution of wealth inequality over time in the chart below. The share of the total wealth of the top 1% was constant around 12 percent from 1961, the earliest year for which we have numbers, to 1981. Since 1991, the year of liberalisation, it has steadily increased and reached 42.5% in 2020. We see the opposite trend for the bottom 50%.

Does India Have An Inequality Problem?

We compare the wealth inequality in India to other major economies in the next chart. India has a relatively large gap between the top 1% and bottom 50%. While the U.S. stands out in this respect, India has a larger gap than France, and China, and is only marginally behind Russia.

Does India Have An Inequality Problem?

Next, we look at the evolution of income equality in India. We find that the share of the top 1 percent in total income was 13% in 1961, and in fact, declined gradually to 6.9% in 1981. Then, it started climbing up from the 1990s, going up from 10.4% in 1991 to 21.7% in 2019. In general, wealth tends to be more concentrated than income as it reflects a cumulative process spanning across generations via inheritance and India is no exception.

Does India Have An Inequality Problem?

In terms of the gap between the top 1% and the bottom 50%, India stands apart among major economies (see chart below).

Does India Have An Inequality Problem?

The rise in inequality since the 1990s is in line with economic theory, first established by Nobel Prize winner Simon Kuznets. In thhe early stages of development, the rich take better advantage of new opportunities while a large population of unskilled workers keeps wages low thus leading to inequality. This empirical regularity is now being witnessed in India where GDP per capita has gone up 8.5 times between 1998 and 2019 while rural wages have grown up by only 5.4 times.

At the same time, the percentage of people below the poverty line has nearly halved from around 45% in the early 1990s (see Government of India, Planning Commission, July 2013). [2] Therefore, while growth may have increased inequality, it has also reduced poverty.

Growth Versus Inequality

Looking at our policy choices from only the growth or inequality perspective can lead us into a blind alley. The inequality perspective seeks redistribution. While redistribution may reduce inequality, it fails to make a lasting dent in absolute poverty. If we took the total billionaire wealth in India and divided it among the poor (139 million), everyone would receive Rs 3,17,930 ($4,288). [3]

This one-time transfer can help bring a poor individual in rural India above the poverty line for a period of 18 years only, while for a poor individual in urban India, this period is only 12 years. Considering a life expectancy of 70 years for an individual at birth in India, this redistribution, while offering temporary support, would not make a lasting dent in poverty.

The problem with the growth-centred narrative is that while growth is necessary for poverty alleviation, it is not sufficient.

If we ignore the pandemic and the resultant economic contraction and assume a dream growth rate of 10%, it will still take 22 years of sustained 10% growth to bring an individual on the rural poverty line up to merely India’s level of per capita income (low by global standards).

For an individual on the urban poverty line, it would take 17 years. And no country in history has had two decades of sustained double-digit growth!

So, the real questions are: What makes growth inclusive and what policies can facilitate it? Kuznets argued that with capital accumulation, the demand for labour would eventually go up and increase wages. Moreover, the returns from acquiring skills would go up, which would not only encourage greater investment in human capital, on average, but also open doors for upward mobility. Thus, the process of growth would reduce inequality in the long run.

Focusing on mobility allows us to look beyond inequality versus growth. It also highlights the aspects of inequality that are especially harmful. Inequality directly hurts growth prospects when those born poor but talented spend their lifetime in low-return occupations. When inequality creates impediments for the poorer sections to take advantage of economic opportunities (for example, by not being able to send their children to good schools), it hurts growth prospects. Of course, economic inequality is not the only barrier to mobility and social norms relating to gender and caste, for example, can accentuate the problems significantly.

While average levels of income and educational outcomes have improved following economic liberalisation, upward mobility in India has remained low over time. There is also evidence for limited intergenerational upward mobility across caste, location, and gender (Asher, Novosad, and Rafkin, 2021). Those who are born in poorer sections tend to stay poor, leading to the persistence of inequality.

Across caste lines, upward mobility has risen for Scheduled Castes and Scheduled Tribes owing to affirmative action and has remained high for those from Forward Castes and Other Backward Castes over time. Among the various sub-groups, however, Muslims experience the least upward mobility. [4] Across locations, urban and southern regions with high average educational levels experience the highest upward mobility. Also, regions with high values of development attributes (education, consumption, manufacturing employment, and school supply) have higher upward mobility, while regions with caste segregation and land inequality have lower upward mobility. Across gender, men experience higher upward mobility than women.

So, India surely has an inequality problem, driven by limited upward mobility driven by unequal opportunities. This leads to an uneven distribution of gains from growth.

Policy Choices

The thrust of our development policy initiatives should be on how to deal with inequality of opportunity. Clearly, a part of the answer is to enable the poor better access to health and education. But this is not possible without a sufficient increase in tax revenue. We need a more conscious effort to bring the rich under the tax net.

In India, direct taxes (personal income tax, and corporate tax) yield only half of the total revenue, with indirect taxes (GST, excise, and customs) making up the rest. Additionally, over the last decade, the share of corporate taxes in total tax revenue has decreased, that of indirect taxes and income taxes have increased.

Given the alarming state of wealth inequality, there should be greater emphasis on wealth taxes, such as capital income taxation, net wealth taxation, and transfer taxation (inheritance tax, estate tax, and gift tax). These could allow greater investment in health, education, and infrastructure all of which would create greater equality of opportunity as well as strengthen the foundations for a more dynamic economy as these would be investments in raising the overall growth potential. Policies such as these would go directly after the main source of inequality of opportunity—wealth—and ensure equality of opportunity.

This article was previously published by CEDA here and a longer version was published by The India Forum.

Maitreesh Ghatak is a professor of economics at the London School of Economics.

The views expressed here are those of the author, and do not necessarily represent the views of BloombergQuint or its editorial team.

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