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View PointOpinion: Plugging chronic economic inequality

Opinion: Plugging chronic economic inequality

Published: 8th Oct 2021 12:49 am

By JR Janumpalli

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There is a wide variation in the key economic indicators of the Indian States. GDP, GDP per capita, GINI(ce) and percentage of poverty differ greatly, underlining the very uneven economic performance, in the country’s 33 States and UTs. (See infographics). The configuration is as spiked as in the case of the countries of the world, indicating the great diversity and the contrast in the economic ecology of the States and UTs in India. The problem is that the inequality is becoming chronic — poor States continue to stay poor.

In India, the economy is improving and its GDP is also growing well. The GDP (nominal) which was Rs 10,596 crore in in 1951-52 grew to Rs 19,745,670 crore in 2020-21. The GDP growth rate before the Covid pandemic was 6-7% and said to be the fastest in Asia.

The size of the economy, along with population, has changed enormously but it has also opened new challenges. India’s GDP per capita also increased. But while the GDP of India ranked 6th in the world in 2021, its GDP per capita scored a low rank of 162 with $2200. The highest GDP per capita in the world is about $1,30,000. Although the increase in population and the techno-economic progress in the country increased the GDP, India did not do well in increasing its GDP per capita and the wealth distribution quotient.

Widening Divide

In India, along with the increase in population, economic inequality has also increased. There is a continuing upward march of the GINI coefficient and inter-State inequality. Coinciding with it, nearly 22% of the total population of India, about 300 million, have remained below the poverty line. (See infographics). Added to this, there is also a marked geographic disparity of income in the States. East and North are poorer than South and West.

According to a report by Johannesburg-based New World Wealth, in 2016, India was the second-most unequal country globally, with millionaires controlling 54% of its wealth.

Though the country is among the 10 richest countries in the world, the average Indian is relatively poor. Compare this with Japan, the most equal country in the world, where millionaires control only 22% of total wealth. As per Credit Suisse, in India, the richest 1% own 53% of the country’s wealth and the richest 5% own 68.6%. While the top 10% have 76.3%, the poorer half jostles for a mere 4.1% of national wealth. What’s more concerning is, things are getting better for the rich. The share of the top 1% now exceeds 50%. This is far ahead of the US, where the richest 1% own 37.3% of total wealth.

Oxfam International believes that this sharp rise in inequality is detrimental. Rising inequality will lead to slower poverty reduction, undermine sustainability of economic growth, compound inequalities between men and women, and drive inequalities in health, education and life chances. The World Economic Forum’s Global Risks Report 2016 has found ‘severe income disparity’ to be one of the top global risks. A growing body of evidence has also demonstrated that economic inequality is associated with a range of health and social problems.

Government’s Job

It is felt that the continued rise in economic inequality is not ineluctable. It is the result of policy choices. Governments can start to reduce inequality. They need to implement reforms that redistribute money and power and level the playing field for the people.

Specifically, there are two main areas where changes to policy could boost economic equality — taxation and social spending. Progressive taxation is where corporations and the richest individuals will pay more to the state to redistribute resources across society.

Tax can play a progressive role, depending on the policy choices of the government.
Social spending on public services such as education, health and social protection is very important. Evidence from over 150 countries – rich and poor, and spanning over 30 years, shows that overall, investment in public services and social protection can reduce inequality. The key indicators are commitment of government spending on education, health and social protection and the progressive levels of the spending on them.

India performs relatively poorly on both counts. Its total tax effort, currently at about 17% of GDP, is low and is about 50% of its potential. When it comes to social sector spending, India compares less well. Only 3% of GDP goes towards education and only 1.5% towards health. South Africa spends more than twice as much on education (6.1%) and more than three times as much on health (3.7%). While it’s assessed as more unequal than India, South Africa ranks much higher than India in its commitment to reducing inequality.

Lacking Commitment

India, along with all the countries in the world, has committed to attaining the Sustainable Development Goals by 2030, and to ending extreme poverty by that year. But unless we make an effort to first contain and then reduce the rising levels of extreme inequality, the dream of ending extreme poverty for the 300 million Indians will remain a pipe dream.

In the post-reform period, the Indian economy got elevated to a high growth path triggered mainly by the expansion of economic activities across sectors. However, there are serious concerns about a number of imbalances in the growth scenario – intersectoral, interregional and inter-State. These have a serious impact on the goal of ‘inclusive growth’, which implies delivering social justice to all, particularly the disadvantaged groups.

One aspect of social justice is that all programmes that provide generalised access to essential services such as health, education, clean drinking water, sanitation should be implemented in a way that ensures that disadvantaged groups get full access to these services. This may need an innovative approach to public-private partnership.

There is also an imperative need to address the chronic geographical economic inequality, which is making some States stagnate at the bottom rungs. They need to be groomed properly and monitored closely to make them improve progressively in all the sectors.

(The author is a freelance journalist)

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