7 PM | India’s economic mobility and its impact on inequality | 12th August, 2019

Context: Rising inequality due to reduced economic mobility

• ‘Income-mobility’ analysis involves following the same people for two or more points in time and studying the changes in their economic well-being.
• Economic well-being may be measured by income, consumption, or labor earnings, among others. The recipient units may be households, per capita, adult equivalents, or individual earners.

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• A 2018 Oxfam study reports a significant increase in the consumption Gini index (a statistical measure of inequality) in both rural and urban areas from 1993-94 to 2011-12.
• According to the Global Wealth Report (GWR) 2017, put out by the Credit Suisse Research Institute, between 2002 and 2012, the share of the bottom 50% of the population in total wealth declined from 8.1% to only 4.2%.

Reasons behind rising inequality:

• Growth rate: While the growth rate of Indian economy has been slow for most years since Independence, but at the same time increase in population is exponential
• Economic reforms: The acceleration in growth rate in the 1980s was accompanied by declining or stagnant inequality; the period after 2004-05 has seen a rapid rise in inequality.
• In fact, the period of rising inequality coincides with the beginning of economic reforms in 1991. Economic reforms focused only on some sectors like services (software) and financial sectors, where rural and illiterate people are out of reforms
• High debts: NSSO conducts All India Debt and Investment Survey (AIDIS) once in a decade, and the AIDIS data provides stark evidence of extremely high levels of wealth inequality and further worsening trends.
• Inflation: Another cause of inequality is inflation. During inflation, few profit earners gain and most wage earners lose. This is exactly what has happened in India. Since wages have lagged behind prices, profits have increased. This has cre­ated more and more inequality.
• Tax evasion: In India, the personal in­come tax rates are very high. High tax rates en­courage evasion and avoidance and give birth to a parallel economy. This is exactly what has hap­pened in India during the plan period.
• Here, the unofficial economy is as strong as (if not stronger than) the official economy. High tax rates are re­sponsible for inequality in the distribution of in­come and wealth. This is due to undue concentra­tion of incomes in a few hands caused by large- scale tax evasion.
• Agriculture: No doubt, India’s new agricultural strategy led to the Green Revolution and raised agricultural productivity. But the benefits of higher productivity were en­joyed mainly by the rich farmers and landowners.
• But the economic conditions of lan­dless workers and marginal farmers deteriorated over the years. Most farmers in India could not enjoy the-benefits of higher agricultural produc­tivity. As a result, inequality in the distribution of income in the rural areas has increased.
• Discrimination across Social Groups:According to a study based on the NSSO data for 2004‐05, while chances of securing a regular job were 21.5 per cent in the case of caste Hindus, they were only 6.7 per cent in the case of Scheduled Tribe and 12.4 per cent in the case of those belonging to Scheduled Castes.

Measures to increase in economic mobility and reducing inequality:

• Agriculture: land reforms and along with that increase in the viability of small and marginal farmers will decrease the inequality in rural areas and increase the productivity in agriculture
• Social protection: The recent theory and evidence “offers a new perspective on social protection policies in poor countries, suggesting that there is a scope for using these policies to compensate for the market failures that perpetuate poverty, particularly in high-inequality settings, so government should focus more on social welfare measures.
• Employment and skills:for increasing workforce, future employment has to be created in manufacturing and services. In this context, the Make in India initiative, focus on start-ups, Mudra, financial inclusion, etc., are steps in the right direction.
• Labor inequalities:Most of the inequalities (economic and social) will have labor market dimension. Some issues on inequality exclusively deal with labor market structures, processes, and mechanisms. So the government should pass the codified labor laws as soon as possible.
• Pro employment Macroeconomic policies: Appropriate macro policies such as trade, fiscal and monetary policies should promote employment by providing appropriate policies and institutions.
• Monetary stimulus in advanced countries helped preventing worse outcomes. In response to the global crisis developed countries reduced short term lending rates. These measures prevented a larger fall in employment.
• Education and Affirmative Policies:There has been social exclusion and discrimination of some social groups in labor market. There is a need for two types of policies. First one is education and skill improvement for the disadvantaged sections. Education is the key determinant of employment prospects.
• There is a strong link between educational attainment and employment outcomes, and people with higher levels of education enjoy a competitive advantage in the labor market, including higher wage levels. Education for these groups would reduce the gap with other groups. Second one is affirmative action in education.

Way forward:

• Rising inequalities is a concern in many advanced and developing countries of the world. Inclusive approach is needed for several reasons. In the context of ethics and humanism, equality is important for its own sake. Inequality reduction is also required for sustainability of growth.
• If we reduce personal, social, gender, rural-urban and regional disparities, both the objectives of ethics and growth of equality will be achieved. Lower inequalities would result in higher demand from bottom deciles, vulnerable and disadvantaged sections and lead to higher growth.
• If we define equity in terms of empowerment and increase in participation of the poor, there is no trade-off between growth and equity. Reduction in corruption can help in improvement of equality.

Source: https://www.livemint.com/opinion/columns/india-s-economic-mobility-and-its-impact-on-inequality-1565547531046.html.