The Widening Gap between India’s Rich and Poor

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According to a research paper by renowned economists Thomas Piketty and Lucas Chancel, income inequality in India is at its highest level since 1922.

What is income inequality?

Income inequality is the unequal distribution of household or individual income across the different participants in the economy.

What are the key findings of the paper?

  • The share of national income of the top 1% income earners is presently at its highest level since the creation of the Indian Income Tax Act in 1922.
  • The top 1% of earners acquired less than 21% of total income in the late 1930s. It dropped to before to 6% in the early 1980s. However at present it is 22%.
  • Over the 1951-1980 period, the bottom 50% group captured 28% of total growth and incomes of this group grew faster than the average,. While on the other hand, the income of the top 0.1% decreased.
  • Over the 1980-2014 periods, the situation got reversed as the top 0.1% of earners captured a higher share of total growth (12%) than the bottom 50% (11%)
  • During the same period, the top 1% received a higher share of total growth (29%) than the middle 40% (23%).

What are the causes of rising income inequality in India?

Though poverty declined but inequality increased in the post-reform period. The major reasons are:

  1. Post reform period, increased GDP growth has come at the cost of ever-widening inequality. India’s opening up of the economy and liberalization was much in favour of the top income earners and capital owners.
  2. Top Tax rates reduced: Tax progressivity was reduced progressively reduced. Top tax rates, which were very high in the 1970s (up to 98%), decreased to 30% in the 1980s and after.
  3. 3. Increasing wage inequality: Post-reform, privatization removed government set pay-scales which were less unequal. As a result, the wage inequality dispersion increased in many sectors.
  4. Lower growth rates for low income group: Growth at the bottom of the distribution was significantly lower than average growth rates since the 1980s.

What are the major consequences of rising inequality?

  • High levels of inequality may cause redistributive pressures and lead to an unstable growth path.
  • May lead to social unrest
  • Leads to various illnesses due to inadequate public healthcare facilities
  • Environmental degradation

What measures have the Government taken up to reduce income inequality?

  1. Land Reforms: Land reforms have been introduced to remove inequality in the ownership of land.
  2. Monopolies and Restrictive Trade Practices Act: Monopolies and Restrictive Trade Practices Act, 1969 was passed to put a check on concentration of economic power.
  3. Poverty Alleviation Programmes:
  • Integrated rural development Programme (IRDP)
  • Rural Landless Employment Guarantee Programme(NREGP)
  • Jawahar Rozgar Yojna (JRY)
  • Jawahar Gram Samridhi Yojna (JGSY)
  • Mahatama Gandhi National Rural Employment Generation Scheme (MGNREGS)

Few recent initiatives:

  1. Financial Inclusion of the Poor: Prime Minister Jan Dhan Yojana: It ensures economically weaker sections have access to banks
  2. Institutional Support for Subaltern Entrepreneurship:
  • This has been achieved through MUDRA Bank, to provide microfinance to entrepreneurs in rural hinterland of India.
  • National Hub for SC/ST entrepreneurs has been created to support the entrepreneurs coming from the marginalized communities.

3.‘Venture Capital Fund for Scheduled Caste Entrepreneurs’: The objective of this Scheme is to promote entrepreneurship among the Scheduled Castes and to provide concessional finance to them..

  1. Credit Enhancement Guarantee Scheme for the Scheduled Castes:The objective of the Scheme is to promote entrepreneurship amongst the scheduled castes and to facilitate concessional finances to them.
  2. Green Business Scheme: The scheme has been started by NSFDC, with the aim of promoting green businesses to support sustainable livelihoods of Scheduled Castes and Safai Karamcharis.
  3. Sanitary Mart Scheme: under the scheme, loans are provided to up to Rs. 15 Lakhs to Safai Karamcharis for construction of toilets.
  4. Stand up India– This scheme has been launched to boost the spirit of entrepreneurship among the most vulnerable groups of the society.

Even though the government is pursuing policies of financial inclusion to reduce inequalities, inequality continues to rise- Why?

  1. Failure on labour rights:
  • On labour rights India performs poorly because majority of the labour force works in the agricultural and informal sectors which lack union organization.
  • After economic liberalization began labour unions have become weaker even in the organized sector.
  1. Inadequate spending on public services:
  • The government’s spending on health, education and social protection is very low.
  • Thus, if non-income indicators like health and education are considered, inequalities between the poor and rich are very high.
  1. Lack of distributive justice is also a major issue.

What steps should be taken to reduce income inequality?

  • More tax progressivity to limit rising income inequality at the top
  • Creating productive employment and providing quality education
  • Fiscal instruments like public investment in physical and social infrastructure can be used to reduce inequality.
  • More diversified agriculture for raising the income of farmers. However, future employment has to be created in manufacturing and service.
  • Ensuring equal opportunities in education, health, employment and entrepreneurship irrespective of caste, class and gender
  • Efficient delivery systems of public services
  • A major institutional challenge is the accountability of service providers, particularly the public sector. Eradication of corruption is required for reduction in inequalities.
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