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Countering growing inequality

 


Context:

Income inequality in India has reached historically high levels with the share of national income accruing to India’s top 1 per cent earners touching 22 per cent in 2014, while the share of the top 10 per cent was around 56 per cent, according to the World Inequality Report 2018 released.

World Inequality Report 2018

World Inequality Report is a report by the World Inequality Lab at the Paris School of Economics that provides estimates of global income and wealth inequality based on the most recent findings complied by the World Wealth and Income Database (WID).

WID, also referred to as WID.world, is an open source database that is part of an international collaborative effort of over a hundred researchers in five continents.

The World Inequality Report 2018 has brought into focus an aspect of economic progress in India. The reported finding that the top 1% of income earners received 6% of the total income in the early 1980s, close to 15% of it in 2000, and receives 22% in 2014.

Trends in Global Income inequality

Global income growth dynamics are driven by strong forces of convergence between countries and divergence within countries. Global dynamics are shaped by a variety of national institutional and political contexts.

  • Since 1980, income inequality has increased rapidly in North America and Asia, grown moderately in Europe, and stabilized at an extremely high level in the Middle East, sub-Saharan Africa, and Brazil.
  • The poorest half of the global population has seen its income grow significantly thanks to high growth in Asia. But the top 0.1% has captured as much growth as the bottom half of the world adult population since 1980.
  • Income growth has been sluggish or even nil for individuals between the global bottom 50% and top 1%. This includes North American and European lower- and middle-income groups.
  • The rise of global inequality has not been steady. While the global top 1% income share increased from 16% in 1980 to 22% in 2000, it declined slightly thereafter to 20%.
  • In China, India, and Russia inequality surged with opening and liberalization policies.

Income inequality in India

Income inequality in India has reached historically high levels. In 2014, the share of national income accruing to India’s top 1% of earners was 22%, while the share of the top 10% was around 56%.

  • Since the beginning of deregulation policies in the 1980s, the top 0.1% earners have captured more growth than all of those in the bottom 50% combined.
  • The middle 40% have also seen relatively little growth in their incomes.
  • Inequality rose from the mid-1980s after profound transformations of the economy. In the late seventies, India was recognised as a highly regulated, centralized economy with socialist planning. But from the 1980s onwards, a large set of liberalization and deregulation reforms were implemented.
  • The structural changes to the economy along with changes in the regulation appear to have had significant impact on income inequality in India since the 1980s.
  • Indian inequality was driven by the rise in very top incomes.

Comparison between India and China

In particular, the report enables a comparison of economic progress made in India and China. Comparison between China and India is meaningful as they had both been large agrarian economies at similar levels of per capita income when they had started out in the early 1950s. Moreover, the absence of democracy in a society does not by itself guarantee faster economic growth and greater income equality.

  • Since 1980, while the Chinese economy has grown 800% and India’s a far lower 200%, inequality in China today is considerably lower than in India.
  • The share of the top 1% of the Chinese population is 14% as opposed to the 22% reported for India. It is emphasised that growing inequality need not necessarily accompany faster growth, observing that inequality actually declined in China from the early 21st century.
  • Post 1980s, inequality has risen in China and India. Inequality rose to extreme level in India and moderate level in China as China invested more in education, health and infrastructure for its bottom 50 per cent population.
  • China has grown faster, has far lower poverty and far higher average income, and its income distribution is less unequal at the very top. The World Development Indicators data released by the World Bank show that per capita income in China was five times that of India in 2016 while the percentage of the population living on less than $1.90 a day was about 10 times less at the beginning of this decade.
  • China had by the early 1970s achieved the level of schooling India did only by the early 21st century.
  • The spread of health and education in that country enabled the Chinese economy to grow faster than India by exporting manufactures to the rest of the world. The resulting growth lifted vast multitudes out of poverty.
  • As the human capital endowment was relatively equal, most people could share in this growth, which accounts for the relative equality of outcomes in China when compared to India.
  • An ingredient of this is also the greater participation of women in the workforce of China, an outcome that eludes India.

Democracy not a barrier to development

India has lower per capita income, persistent poverty and by all accounts rising inequality. Democracy per se cannot be held responsible for this. There are States in India with superior social indicators than China. This shows that not only is democracy not a barrier to development but also that similar political institutions across India have not resulted in same development outcomes across its regions.

Way forward

There is need to spread health and education far more widely amidst the population.

The role of progressive taxation is significant in tackling rising inequality at the top. At the same time, to tackle inequality at the bottom there is a need for more equal access to education and good paying jobs.

Government need to invest more in the future (education and health), both to address current income and wealth inequality levels and to prevent further increases.

 

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