Widening income disparities in India: A great concern

Prof Mithilesh Kumar Sinha
Finance Officer, Nagaland University, Lumami

An unequal distribution of income leads to pressure for redistribution through distortionary taxes, hence reducing growth. Inequality leads to socio-political instability, which will in turn reduce investment and hence growth. Widening income inequality is the defining challenge of our time. In advanced economies, the gap between the rich and poor is at its highest level in decades. High and sustained levels of inequality, especially inequality of opportunity can entail large social costs. Entrenched inequality of outcomes can significantly undermine individuals’ educational and occupational choices. Further, inequality of outcomes does not generate the “right” incentives if it rests on rents. In that event, individuals have an incentive to divert their efforts toward securing favoured treatment and protection, resulting in resource misallocation, corruption, and nepotism, with attendant adverse social and economic consequences. In particular, citizens can lose confidence in institutions, eroding social cohesion and confidence in the future.

 

Income Inequality: Global Scenario

In advanced economies like USA and France, the gap between the rich and poor is at its highest level. The top 0.1 per cent captured growth in income share i.e. 12% in India, 18% in USA, 12% in France and 6% in China. The top 1% captured 29% of growth in income share in India, 34% in USA, 21% in France and 15% in China. The bottom 50% captured growth in income share of 11% in India, 1% in USA, 17% in France, and 13% in China.

 

Inequality in India: Incomes of the super-rich in India are growing at a staggering pace. The wealth of the richest Indians reported in Forbes’ India Rich List, amounted to less than 2% of National income in the 1990sn, but increased substantially throughout the 2000s, reaching 10% in 2015 and with a peak of 27% before the 2008-09 financial crises. Such data suggests a rise in wealth inequality levels throughout the post-2000 period. The share of national income accruing to the top 1% income earners is now at its highest level since the creation of the Indian Income Tax (Act) in 1922. The top 1% of earners captured less than 21% of total income in the late 1930s, before dropping to 6% in the early 1980s and rising to 22% today. 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 the top 0.1% incomes decreased. Over the 1980-2014 period, the situation was reversed; the top 0.1% of earners captured a higher share of total growth than the bottom 50% (12% versus 11%), while the top 1% received a higher share of total growth than the middle 40% (29% vs. 23%). Income growth per adult growth can appear high for certain groups, but can represent little from the perspective of total growth at the country level. The top 0.1% earners captured more total growth than the bottom 50% (12% vs. 11% of total growth) over the period. The top 0.1% of earners represented less than 800 000 individuals in 2013-14; this is equivalent to a population smaller to Delhi’s IT suburb, Gurgaon. It is a sharp contrast with the 389 million individuals that made up the bottom half of the adult population in late 2013. At the opposite end of the distribution, the top 1% of Indian earners captured 29% of total growth, as much as the bottom 84%. The comparison of these figures with China and other countries is particularly noteworthy. Out of the four countries, India is the country where the middle 40% benefitted from the least from total growth over the period. The bottom 50% however captured a similar share of total growth in India and in China (respectively 11% and 13%).

 

Income growth rates in India over the 1980-2014 periods substantially increase as we progress upwards through the distribution of income. The bottom 50% of earners experiences a growth rate of 97% over the period, while the top 10% saw a 376% increase in their incomes. The equivalent figures for the top 0.01% and top 0.001% were 1834% and 2776%, respectively.

 

One of the reasons behind the increased income inequality observed in India in the post-reform period has been the stagnation of employment generation in both rural and urban areas across the states. Emphasis on reduction of the fiscal deficit also increased inequality in India during the reform period. Attempts to reduce government expenditure on food subsidies and social welfare schemes have also had serious negative effects on inequality in the country.

 

Policymakers of India need to consider policies to tackle inequality. The first is the crucial importance of continued and increased public expenditure for productive investments in infrastructure as well as for social expenditures and ensuring food access. Both aggregate expenditure and the pattern of public expenditure are important.

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