Inequality and Its Impact

Source-This post on Inequality and Its Impact has been created based on the article “Does inequality lead to growth?” published in “The Hindu” on 3 May 2024.

UPSC Syllabus–GS Paper-3– Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.

Context-The leaders of major political parties have sparked discussions on inequality. Researchers from the Paris School of Economics have highlighted that inequality in modern India exceeds that of colonial times.

What is the multi-dimensional impact of inequality?

1) Political Impact– Inequality hurts democracy. However, some people think a bit of inequality motivates entrepreneurship, leading to more jobs and better welfare.

2)  Economic Effects of Inequality –

A) It concentrates resources and power among a small group of people. This concentration of monopoly power within capital compared to labor can harm consumption, welfare, and growth

B) Billionaires get their wealth from monopolies, so they can set prices higher than production costs, reducing real wages and buying power.

C) Monopolies contribute to phenomena like “greedflation” and high inflation rates, as seen in developed economies.

D) In monopolies, less output is produced to maximize profit compared to competitive markets, which results in lower welfare, output, and investment.

Read more- Status of Inequality in India

What is the impact of inequality on economic growth?

Investment has a weaker effect on growth under inequalities due to reduced consumption power and the multiplier effect. In an unequal economy, a smaller proportion of income is in the hands of those with a greater propensity to consume, leading to weaker economic expansion.

What role does redistribution play in addressing inequality and stimulating growth?

1) Some argue that redistribution through high taxes can deter entrepreneurs from amassing wealth, resulting in a scale-back of investment and jobs. However, taxes on wealth wouldn’t actually impact investment because they don’t change expectations of future profits.

2) Redistribution, through measures such as taxing billionaire wealth and providing basic income, can spur growth by strengthening the multiplier effect. It can also help in the creation of a new class of entrepreneurs that are freed from the necessity of working for wages.

Policies aimed at curtailing inequality, such as wealth taxes, redistribution, and curbing monopolies, can have positive effects on consumption, welfare, and growth. However, these policies need to be carefully implemented and balanced, as excessive taxation can become a net drain on the economy.

Question for practice

What is the multi-dimensional impact of inequality? What role does redistribution play in addressing inequality and stimulating growth?