Rising inequality in India: The Pickety report

Context 

‘Inequality rose substantially since implementation of 80s’ deregulation reforms’.

World Inequality Report

Following are the finding of a new report by economists, including Thomas Pickety and Lucas Chancel:-

• Income inequality in India rose rapidly since the 1980s to a situation where the top 10% of the earners accounted for 56% of the income earned in 2014.
• The income share of India’s top 1% rose from approximately 6% in 1982-1983 to above 10% a decade after, then to 15% by 2000, and further still to around 23% by 2014
• In 2014, the share of national income captured by India’s top 1% of earners was 22%, while the share of the top 10% of earners was around 56%
• The top 0.1% of earners have continued to capture more growth than all those in the bottom 50% combined.
• By 2014, the national income share of the bottom 50% — approximately 390 million adults — was just two-thirds of the share of the top 1%, consisting of just 7.8 million people.

Why level of inequality was low after independence?

This rising inequality is in sharp contrast to the trends seen in the 30 years following Independence, when income inequality was widely reduced and the incomes of the bottom 50% grew at a faster rate than the national average.

It was mainly due to the socialist policies followed by the then government, like.

• Strict government control over the economy, with an explicit goal to limit the power of the elite
• Nationalization
• Strong market regulation and
• High tax progressivity

A comparison with China

• Share of national income captured by the bottom half in both India and China after 1980 has been broadly similar.
• Big difference lies in the income captured by middle income group. While middle 40% in India got 23% of the increase in national income since 1980 while the same group in China got 43%.
• It means that Chinese middle has benefited far more than the Indian middle, and the bottom half in both countries has had broadly similar experiences.

Why this Inequality increased after 80’s?

There are many reasons of this inequality, such as:-

• When economy was freed from the government control, it leads to higher growth and provide opportunities to the people.
• This opportunity was exploited by Upper class.
• While excess supply of skilled and unskilled labour keeps wages low for the middle and lower classes.
• Labour unions are useful for collective wage bargaining but since the era of economic liberalization began unions have become weaker even in the organized sector.

Other reasons

• Failure of labour-intensive manufacturing in India compared to its massive success in China.
• The proportion of the labour force in agriculture has come down, but the workers who have left farms have not got jobs in modern factories or offices.
• Majority of this labor force is employed in the informal sector.

Effects of rising inequality

Rising inequality may lead to:-

• Destruction of people’s self-worth and confidence
• Increase in Crime
• Increase in hunger and Malnutrition
• Disharmony in the society
• Terrorist activities and environmental degradation
• Dissatisfaction against government

What should be done?

• Job creation in the modern sectors of the economy rather than redistribution through fiscal spending.
• Focus more on economic growth rather than populist policies
• Strong labour rights in a country help young people secure a fair wage.
• Government spending on infrastructure is important in rural areas
• The government’s spending on quality of primary education remains a problem and needs improvement.
• Government expenditure on health must be increased.
• A social safety net for the informal sector workers like life insurance and pension policies is important.