Income Inequality and its Impact on Economic Growth in an IndianPerspective
Dr. Binu Thomas Chandy
Department of Sociology
Sikkim Government College, Burtuk
India has made significant economic progress over the last ten years and is rapidly emerging as a major economic force.It is widely understood that income equality can provide stability for a nation, which can only help in fostering long-term economic growth. Income equality provides opportunities for employment, product consumption, access to borrowing, and the ability to invest and save. India is an incredibly diverse nation with widely varying cultural, economic, political, social and religious norms. Thus, the implications for income equality are indeed significant in maintaining stability in such a large and diverse nation. This paper evaluates whether the nascent economic prosperity has also caused an increase in income inequality. This study examines the empirical relationship among inequality, poverty and economic growth in India.
Keywords: Income Inequality, economic growth, income distribution, poverty, progress
India embarked on a journey of economic liberalization, opening its doors to globalization and market forces. Rest of the world, have watched as the investment and trade regime introduced in 1991raised economic growth, increased consumer choice, and reduced poverty significantly. A countries economic growth depends on many factors like Natural resources, human resources, physical capital, technological development, and social and political factors. Income inequality has reached historically high levels in India since the 1980s when economic and trade liberalisation began in the country, with the top ten percent of the population accounting for 56% of the national income in 2014, The top one percent of the population accounted for as much as 22% of the country’s total income in 2014. The absolute growth in income of the top one percent of the population since the 1980s has been more than that of the bottom 50% people taken together, according to the report coordinated by economists Thomas Piketty, Facundo Alvaredo, Lucas Chancel, Emmanuel Saez and Gabriel Zucman. According to the report, inequality within the top ten percent group was also high. The higher up the Indian income distribution one looks, the faster the rise in their share of the national income has been since the early 1980s. The income share of India’s top one percent rose from nearly six percent in 1982-1983 to above ten percent a decade after, then to 15% by 2000, and further still to around 23% by 2014, says the report (According to the Report :Income Inequality Highest in India Since 1980s, 14/Dec/2017). Persson, and Tabellini (1994) shows that there is significantly negative relationship between inequality and growth in democratic countries. On the contrary, Barro (2000) concludes that there is a negative relationship for poor countries, but a positive relationship for rich countries. Quah (2001) raises that inequality can increase or decrease economic growth. Recent studies have involved economic inequality and economic growth with social environment spillovers (Durlauf, 1994); human capital investment and neighbourhood effects (Durlauf, 1996); social unrest and conflict ( Alesina and Perotti, 1996) and political economy (Chang, 1998).
Overall economic growth has continued at an impressive rate while specific sectors, most notably software and related services, are recording exponential rates of growth. The gap between rich and poor is at its highest level since 30 years. The booming software and technology sector receives daily world attention; however those languishing in poverty remain largely ignored. The surging economic growth has improved living conditions of its citizens, but these improvements were not uniformly distributed among India’s diverse population. The rise in overall income inequality is not only about top income shares but also the incomes at the bottom grew much slower during the prosperous years and fell during downturns. The topic has waxed and waned in importance over the years, with many academics and policy experts choosing to focus more on absolute poverty than overall income distribution. However, income equality is important because of the implications for social and political development. It is a matter of concern that economic inequality is far exceeding the economic growth rate in India. The growing income disparity is driving the deprived more to crimes .The increasing rich-poor divide poses a big challenge to the country’s social and public policy formulation and implementation. The income inequality and growing rich-poor divide in most parts of the world are leading to increasing human trafficking and menace of terrorism. Yet, it may be unfair to suggest that the government is not doing anything to reduce the social and income inequality. The labour force in agriculture has come down, but the workers who have left farms have not got jobs in modern factories or offices.
Why income inequality is at its highest in India
According to renowned economists Thomas Piketty and Lucas Chancel rising income inequality is a major problem in India because the distribution of gains of growth has been extremely uneven.. When rules are dismantled and economy is freed from control, it leads to higher growth, opportunities and enterprise. The ones who take advantage of opportunities are obviously those who are rich, enterprising and have access to capital. This leads to a bump up in income and wealth creation in the top class, while excess supply of skilled and unskilled labour keeps wages low for the middle and lower classes. This leads to higher inequality in income and explains why inequality increased during the high phase of growth, as growth rates of the richer class was much higher than the growth rates of those in the middle and at the bottom. When rules are dismantled and economy is freed from control, it leads to higher growth, opportunities and enterprise and those who take advantage of opportunities are obviously are rich, enterprising and have access to capital. This leads to a boost in income and wealth creation in the top class, while excess supply of skilled and unskilled labour keeps wages low for the middle and lower classes. Hence higher inequality in income exists which explains why inequality increased during the high phase of growth, as growth rates of the richer class was much higher than the growth rates of those in the middle and at the bottom. India opened up and liberalised its economy favourable to top income earners and capital owners. To reduce the anomaly in income, appropriate policy measures are needed to promote inclusive growth. Inclusive development involves the engagement of all the stakeholders of a society including the socially and economically marginalized sections. It is with this version of growth and development that India has been able to experience and accept the involvement of the grass root level of the society in the decision making process. So, a robust inclusive growth and development strategy would enhance both social inclusion (across genders) and economic efficiency. To check the rising income inequality at the top there should be tax progressivity. At the middle and lower end of the socio-economic ladder, significant investment in healthcare and education besides land reforms will play a key role in raising their income.
Focus on income equality
The main reason for low level of income of the majority of Indian people is unemployment and underemployment and the consequent low productivity of labour. Low labour productivity implies low rate of economic growth which is the main cause of poverty and inequality of the large masses of people. Economists and social scientists have dedicated significant effort to the study of income equality. This has waxed and waned in importance over the years, with many academics and policy experts choosing to focus more on absolute poverty than overall income distribution. Income equality is important because of the implications for social and political development and can provide stability for a nation, which will help in fostering long-term economic growth. It also enables many more individuals to participate more fully in the economy. This is due to income equality providing opportunities for employment, product consumption, access to borrowing, and the ability to invest and save. Therefore, it is necessary to understand the income distribution effects in India, with a primary emphasis on the last fifteen years when India began significant market reforms. India has had a relatively short history as an independent nation and during that time, has embarked on a variety of economic development strategies. India is an incredibly diverse nation with widely varying cultural, economic, political, and religious norms so the implications for income equality are indeed significant in maintaining stability in such a large and diverse nation. By comparing India’s economic growth and income equality, one can determine whether the recent economic prosperity has been realized by many or relatively few individuals. This will aid in understanding the implications for other dimensions of development, including those pertaining to social and political aspects. India’s new agricultural strategy led to the Green Revolution and raised agricultural productivity but the benefits of higher productivity were enjoyed mainly by the rich farmers and landowners. At the same time, the economic conditions of landless workers and marginal farmers deteriorated over the years. Most farmers in India could not enjoy the benefits of higher agricultural productivity. As a result, inequality in the distribution of income in the rural areas has increased. It is important to note that India’s economic growth is a relatively recent phenomenon and the current global economic environment is increasingly more complex. The dynamic nature of global economic integration has rendered many traditional economic theories irrelevant in several situations. Income equality may refer to Economic egalitarianism, a state of economic affairs in which equality of outcome has been manufactured for all participants.
Important causes, effects measures to overcome income inequality in India
Inadequate job creation is a cause of income inequality in the country besides growth factor and unequal ownership of property in India. It is clear that the poor group would improve their living standards and earn decent incomes if they had work to do with their skills. Because of the differential regional growth in India, the poor live in backward states while the rich live in suburbs across the whole country. The disparities exist in states of the same class where people earn different incomes comparatively which is a product of different states experiencing varied economic growth. While few enjoy exceptional growth, many lag behind because of income inequality in India. States with majority of people earning low incomes have high rates of poverty and their children hardly access education with poor social amenities dotting the country. Besides poverty, India still grapples with poor infrastructure like its road network especially in poor states undermines the ability of people to enjoy good life. Based on causes and effects of income inequality in India, the government should adopt policies that will promote an equal society. The safety net programs are no longer functioning, with several public systems performing below their potential and hence Indians in rural areas are suffering as the gap between the rich and the poor widens. Consequently, those in rural areas are getting poorer every day, as they cannot access education and good healthcare. The poor work for long hours yet they earn low wages, and they lack basic services such as first aid, sanitation and drinking water. India’s industrial sector is growing exponentially while agriculture is experiencing stunted growth and hence the agriculture sector accounts for a smaller proportion of the total income in the country.
Measures have been adopted by the Government during the plan period to reduce inequality in the distribution of income. The payment of annual payment or bonus has been made compulsory in every industry. A ceiling on landholdings has been imposed in the rural areas where each household (or family) is allowed to hold a certain amount of land. Anybody who holds surplus above this is taken over by the Government and is redistributed among the landless workers and marginal farmers. To solve the growing unemployment problem various self-employment projects have been taken both in rural and urban areas. Transfer payments such as unemployment, compensation, soft loans, pensions to freedom fighters, concessions to senior citizens, etc.have been made for improving the welfare of certain weaker sections of the society.
Economy of India
India has come a long way in modernizing its economy, reducing poverty and improving living standards for a large segment of its population. India has one of the fastest growing service sectors in the world with an annual growth rate above 9% since 2001.Its economy has been one of the largest contributors to global growth over the last decade, accounting for about 10% of the world’s increase in economic activity since 2005, Despite India’s relatively strong record in terms of economic growth over the last decade, its middle class remains small and getting a job is no guarantee of escaping poverty. India must take further action to ensure that the growth process is broad-based in order to reduce the share of the population living on less than Rs.150 a day many of whom are employed in informal and low skilled jobs. Educational enrolment rates are relatively low across all levels, and quality varies greatly, leading to notable differences in educational performance among students from different socioeconomic backgrounds. The gender gaps in labour force participation and wages are both high, showing that India’s women are not benefiting equally from economic opportunities. India scores well in terms of access to finance for business development and real economy investment (investment channelled towards productive uses), yet new business creation continues to be held back by administrative burdens. India scores relatively well in terms of access to finance for developing businesses and investing in the economy. India’s entrepreneurs have better access to bank accounts, credit, venture capital, and equity markets than their counterparts in most peer countries. However, access to finance remains limited for low income individuals, especially women. 400 million people remain unbanked in India and disconnected from the financial system despite impressive gains in recent years. Most unbanked are poor and female: only 27% of individuals in bottom quintiles and 37% of women have access to a bank account. Finance can help poor households optimize severely constrained resources across their lifetime.
Literacy and level of education are basic indicators of the level of development achieved by a society. Spread of literacy is generally associated with important traits of modern civilization such as modernization, urbanization, industrialization, communication and commerce. Literacy forms an important input in overall development of individuals enabling them to comprehend their social, political and cultural environment better and respond to it appropriately. Higher levels of education and literacy lead to a greater awareness and also contributes in improvement of economic and social conditions. It acts as a catalyst for social upliftment enhancing the returns on investment made in almost every aspect of development effort, be it population control, health, hygiene, environmental degradation control, employment of weaker sections of the society.
India’s Literacy rate (2016)
Source: Census 2011, Ministry of HRD, UGC, AICTE, NCTE, MHRD and INC. , UGC Annual Report 2013-14
Indian States by Population
Tamil Nadu 5.96
West Bengal 7.54
Andhra Pradesh 6.99
Madhya Pradesh 6
Source: Office of Registrar General of India, Ministry of Home Affairs, Government of India
Moderation in merchandise imports which began in June 2013 intensified further in Q3 of 2013-14 but the pace of decline moderated marginally in Q4 of 2013-14. On cumulative basis, India’s merchandise imports at US$ 450.1 billion recorded a decline of 8.3 per cent in 2013-14 as compared with a marginal increase of 0.3 per cent in 2012-13 (Table 1). In India, policy measures aimed at curbing gold imports, as well as weaker domestic demand for non-oil non-gold imports, caused fall in merchandise imports during the period.
India’s Top Imports – US$
Commodities Percentage (%)
Jewellery Stones 5
Chemicals ; Plastics 6
Transport Equipment 3
Edible Oil 2
Crude Oil 37
Source: Department of Commerce, System on Foreign Trade Performance Analysis (FTPA)
India’s external sector witnessed significant improvement during 2013-14. Some pick-up in growth of trade partner economies and depreciation of the rupee helped India’s exports to grow in 2013-14. India’s exports started improving in July 2013 with a pick-up in exports and moderation in Imports.
India’s Top Exports – US$
Gems ; Jewellery 13
Transport Parts 7
Metal Products 3
Fabric ;Textiles 7
Agricultre(Rice etc) 10
Source: Department of Commerce, System on Foreign Trade Performance Analysis (FTPA) Government of India (July 2014)
The Indian Economy and the Rise of the Software Sector
India succeeded in software because of its entrepreneurs and hence had opened up and connected to the world economy. When the I.T. boom opened a window of opportunity in the early 1990s American multinationals played their part as well. Firms like Citigroup, Motorola and Texas Instruments showed that India had good software talent, and Indian software entrepreneurs seized the opportunity. India had become connected to the broader global economy especially the U.S. in many different ways. India was connected through a common language, English economic liberalization in the 1990s that opened the country to foreign trade; and through its diaspora which connected the nascent software industry to its clients in America and Western Europe. For the first time in India, wealth was seen to be created in an honest and transparent fashion, and the consensus in India in favour of market-based growth has not wavered despite many changes in the party in power. The growth in the software and services sector has enabled the middle class, but also increasing disparity. This is due to the fact that most of the technology centres are clustered in just a few localized areas (e.g. Bangalore, Delhi, Hyderbad, Pune) and that the jobs available require English proficiency and technical aptitude. Most of India’s population lies outside of these regions and lacks the necessary skills to participate in the nascent economic prosperity. Also, limited spill over effects have been realized in other sectors, because of India’s undeveloped status. For the millions employed as welders, shop keepers, drivers, etc., the technology revolution has yet to impact them in any discernible way. It does not appear that the software and services sector by itself will have any chance at fostering the same scale of development in India as in China the rest of the Indian economy that is responsible for most of the economic growth and the relative constant income equality. While the Indian software and services sector has received significant growth, it has yet to become a considerable force in the overall Indian economy.
The recent economic growth in India states that the relative income equality has also remained largely stable makes this growth all the more remarkable. India has clearly shown that a nation can experience steady economic growth, while maintaining stable income equality. This has been due to a variety of factors, although India’s strong commitment to democracy. The nascent software and related services sector has made a steadily increasing contribution to overall economic growth, however this contribution remains relatively small. Because India has reformed under a gradualist approach, a burgeoning technology sector has been able to emerge while the greater Indian population has not lost pre-existing benefits .The software industry and related services sector has made a steadily increasing contribution to overall economic growth, however this contribution remains relatively small. The best opportunity to bring economic prosperity to more individuals, besides the software and services sector are to improve its infrastructure to support continued growth in the improvements in highways, airports, and utilities are all desperately needed which could generate numerous jobs in other sectors. Any compromise will require significant political will and effective leadership. India should capitalize on the momentum from the current growth by expanding and developing other industries, most notably in manufacturing and textiles. The Indian government should also provide additional welfare benefits so that more Indians can participate in the growing and changing economy. Specifically, health and educational services can dramatically improve the nation’s human capital and ensure more Indians have the capabilities required to participate in the economy. This paper has noted several times that while income equality has remained relatively low, there is significant potential for that to change for the worse. By allowing income equality to worsen, stability could become an issue thereby jeopardizing all that has been gained. The Indian people have waited for a long time to take advantage of the benefits of globalization and a new market economy.
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