Delivering the Richard Dimbleby lecture in London recently, the IMF (International Monetary Fund) managing director, Christine Lagarde, has said that economic inequality in the world is increasing at an alarming rate. While developed countries focused on economic growth, on the size of their GDP (Gross Domestic Product) rather than its distribution, developing countries focused on increasing their growth rate with utter disregard to distributional justice. The richest 20 per cent of the global population account for 86 per cent of private consumption, while the poorest account for just 1 per cent. In many urban centres of the world, economic growth and the resultant affluence has not resulted in raising the living standards of all. In many countries, wealth is being overly concentrated in a few hands making the society unstable. Such imbalances in income distribution harm the pace and sustainability of growth over the longer term. Societies featuring economic inequality promote socio-economic exclusion and underutilisation of human potential. The Global Economic Forum’s Global Risks 2014 report highlighted severe income inequality as one of the 10 global risks.
Economic inequality results from the differences in the accessibility levels of material choices by individuals. In India, the parliamentary standing committee on finance highlighted the growing economic inequality in India. Over the last 10 years the income gap between the rich and the poor in India has widened. As the recent OECD (Organisation for Economic Co-operation and Development) report says, “Inequality in earnings has doubled in India over the last two decades, making it the worst performer on this count of all emerging economies. The top 10 per cent of India’s wage earners now make 12 times more than the bottom 10 per cent, up from a ratio of six in the early 1990s.” The expenditure share of the top 1% of India’s population increased from 6.5% in 1993 to 9% in 2010.India’s top 5% of the population spends 21.3% of the total expenditure as against the 17.7% in 1993. As Lagarde said, “In India, the net worth of the billionaire community increased 12-fold in 15 years, enough to eliminate absolute poverty in the country twice over.”
The neoliberal and market-oriented policies that are being followed in India for the last 23 years have contributed to the growing income inequality. Post-reform policies like reduction in public investments in crucial sectors like agriculture and infrastructure development, reductions in employment opportunities in most public sector industries, closing down of loss-making public sector units etc. had adverse impact on the income earning capabilities of the working population. Financial sector reforms and the export-import policies implemented in the post-reform period also resulted in growing inequalities in India. Reluctance of banks to lend to the priority sectors has resulted in reduced financial empowerment of small farmers and medium-scale industries. Trade liberalisation is in favour of the export sector, adversely affecting the import substituting domestic production.
Labour-intensive sectors were relegated and capital-intensive labour displacing sectors were encouraged. Declining labour share in national income and the failure of wages to keep up with productivity are also among the major causes of increased inequality. There has been a shift in the distribution of income from wages to profits, a drop in the rate of labour absorption and rapid growth of the FIRE (Finance, Insurance, and Real Estate sector) economy. FIRE economies are able to generate huge profits without exhausting productive resources, since they rely almost exclusively on skilled labour to make deals and securing agreements. This has increased the demand and, therefore, the remuneration of skilled labour and factors of production. The much-hyped IT and ITES sectors employed only a very small percentage of the labour force.
At the root of the crisis is the skewed distribution of assets including land and capital, access to education, coupled with growth imbalances and slow job creation. The moral indifference towards the poor within our burgeoning middle class has contributed to growing inequality.
What should be the policy response to rising income inequality? Lagarde’s suggested solutions for reversing the increase in inequality were limited to progressive taxation, better access to health and education, targeted social programmes and increased labour force participation of women. Interestingly, some of the policies that IMF has supported in the past have contributed to increased income inequality. The IMF’s recent policies supporting financial deregulation and austerity measures have resulted in increased miseries of the masses. In several countries, particularly in Europe, recent IMF programmes have actually reduced minimum wages and undermined worker’s rights by requiring the dismantling of collective bargaining institutions. In many countries the workers are not benefiting from their countries’ increasing prosperity.
In India, the Centre has launched several flagship programmes like the Mahatma Gandhi National Rural Employment Guarantee Scheme, National Rural Health Mission and the National Rural Livelihood Mission to protect the poor from the ill-effects of income deprivation and inequality. But most programmes have failed to bridge the socio-economic divides. In seeking solutions to rising inequality we should go beyond the conventional options like taxing the rich. Taxing the rich can be a disincentive to become rich.
Concerted efforts targeted at the lower income group in the population are required. Growth and growth efforts should really be inclusive. If India has to reduce economic inequality it will have to radically redistribute assets, institute land reforms, and provide universal health care, quality education, food security and social protection to all. Education and up-skilling of labour force are crucial to build an egalitarian society. A more redistributive progressive tax system and transfer policy, ceilings on profits and executive incomes and the introduction of a luxury rate of value added tax can help reduce income inequality.
Union governments can insist on fair pay practices by private contractors. Trade unions can strengthen worker rights as a key instrument for reversing the trend. Possibilities of inheritance taxes should be fully explored. Taxes on amounts received in bequests and gifts and transferring the revenue collected for poverty alleviation programmes can enhance government efforts to curb grave inequalities in the distribution of assets.
The writer is professor of economics at Christ University, Bangalore, and can be reached at pmat2012@yahoo.com