Because of its
far-reaching consequences, governments must be involved
This article was first published in GARP, Risk
Intelligence on June 28, 2019. Co-author: Sai Nitya Bodavala; https://www.garp.org/#!/risk-intelligence/all/all/a1Z1W00000551qTUAQ
In his victory speech on May 23, 2019, India's newly re-elected prime
minister, Narendra Modi, said that “from now on, India will only have two
castes: the poor and those that want to remove poverty.”
Historically, the Indian government focused policymaking on alleviating
the social inequality cemented by caste differences. The primary focus was
bridging the gap between the upper and lower castes through financial and
educational parity, like reservations in educational institutions and
government jobs. Of late, however, there has been a shift to targeting policies
to inequalities presented by income.
India began to face issues of heightened inequality post-1991, when
economic reforms and liberalization were initiated, ending the license-quota
regime, following a balance of payments crisis. Pre-reform, the public sector
ensured that resources were diverted to those geographic areas that required
them, and thereby leveled the playing field. After the private sector entered
the playing field, however, things changed. The private sector focused on
cutting costs and profit-making. Businesses moved to more developed areas where
access to resources was easier and cheaper. This led to regional income
inequality.
During its last tenure, the National Democratic Alliance (NDA)
government, led by Modi, targeted income inequality with a bill that aims to
introduce a 10% reservation in jobs and educational institutions for those
belonging to the “economically backward” sections of the general category.
Economically backward is defined as families receiving less than Rs. 800,000 of
income per annum and possessing fewer than five acres of land, in addition to
other measures based on residence.
In the recently held elections, the Congress party's manifesto also
incorporated an element that aimed to do the same. It proposed the Nyuntam Aay
Yojana (NYAY) scheme, according
to which 50 million of the poorest families in India would receive Rs. 72,000 a
year. It was assumed that each family has at least five members, meaning that
250 million people would benefit – if the Congress party had come to power and
implemented scheme.
UBI and Wealth Taxes
India is not alone in moving toward policies that aim to reduce income
inequality. Andrew Yang, a candidate for the Democratic presidential nomination
in the United States, has based his campaign on the idea of Universal Basic
Income, which guarantees to each adult a certain amount of money per
month. Yang proposes to pay for UBI through a
value added tax (VAT) and the revenue from the envisaged increase in
productivity from receiving an unconditional cash transfer.
Billionaire philanthropist Eli Broad, writing in the New York Times, said,
“Our country must do something bigger and more radical [than steps such as
raising the minimum wage and building affordable housing], starting with the
most unfair area of federal policy: our tax code. It's time to start talking
seriously about a wealth tax . . .
“Don't get me wrong: I am not advocating an end to the capitalist system
that's yielded some of the greatest gains in prosperity and innovation in human
history. I simply believe it's time for those of us with great wealth to commit
to reducing income inequality, starting with the demand to be taxed at a higher
rate than everyone else.”
If governments are attempting to curb income inequality, it is only
right to explore why.
The Bigger Picture
The Gini coefficient is used to measure income inequality. On the scale
of 0 to 100, 0 is perfect income equality, with everyone receiving an equal
amount. At 100, there is perfect inequality, with one person receiveng all
income.
Studies have found that low levels of income inequality may actually be
beneficial for the economy.
Income inequality denies educational and culturally stimulating
opportunities for children from low-income households. This deprivation keeps
them from obtaining relevant skills that the job market requires, making them
less employable. They end up being paid low wages.
The wealthy, meanwhile, produce with the intention of earning profits.
If the masses cannot afford to buy what is produced, the wealthy suffer losses,
leading to their inability to reinvest, and making the economy worse off.
Income inequality at a level below 27 on the scale allows for entrepreneurs to
invest more into their businesses, thereby allowing for greater economic
growth. On the other hand, a high level of inequality has a snowball effect,
with negative repercussions for all.
A 2015 study by the
Organisation for Economic and Cooperation and Development (OECD) found that
between 1990 and 2010, the rising income and wealth inequality in the U.S. “knocked about five percentage
points off cumulative GDP per capita over that period.” It is
thereby a misconception that income inequality is an issue only of those in the
low-income bracket. It affects the economy as a whole.
Crime
A paper by Nobel Prize-winning economist Gary Becker, “Crime and
Punishment: An Economic Approach,” posited that wherever there exists a large
gap between the poor and the rich, there is bound to be higher crime. OECD's
2013 How's Life report also noted that “socio-economic
inequality seems to play a central role in the occurrence of criminal
victimization as disadvantaged people are more likely to perpetrate and to be
victims of crimes.”
Those in the lower-income bracket become vulnerable in that they are
unable to access the resources that are abundantly available to those with
money. This vulnerability manifests in two ways: they may either take to crime
in order to meet their needs, or become victims of criminal activity because
they do not have the means to protect themselves.
According to Martin Daly, professor
emeritus of psychology and neuroscience at McMaster University, inequality
predicts homicide rates “better than any other variable.”
Health
In countries where the burden of paying for health care rests with individuals,
an unforeseen expense can spell disaster for a low-income household. This could
lead to compromises being made on the safety assured by an established medical
practice that is expensive, in favor of one that is cheaper.
Aside from the issue of affordability, a 2017 World Health Organization
and OECD report shows that
in countries where the income gap between the 10th and the 90th percentile of
the populace is very wide have higher rates of infant mortality.
Mental health also suffers as a consequence of inequality. It was found
that with an increase of 0.2 of a country's Gini coefficient, there were eight
more incidences of schizophrenia per 100,000 people.
Caste
According to the 2018 World Inequality Report by the World Inequality
Lab at the Paris School of Economics, the top 10% in India control 55% of
India's total wealth. In light of this undeniable problem, we may not, however,
conclude that caste can no longer be a basis for identifying inequality. Caste
has been and continues to be a basis for discrimination and ill-treatment in
India. The ill-effects of negative discrimination based on caste and those of
income inequality are similar. The effects include being denied social
mobility, occupational mobility and access to basic resources.
The intrinsic link between income inequality and the caste hierarchy can
be seen in the table.
|
|
Scheduled Caste
|
Scheduled
Tribe
|
Other
Backward Castes
|
Forward
Caste
(Brahmin)
|
Forward
Caste
(Non-Brahmin)
|
Muslim
|
Average
|
|
Annual
Consumption of households in Rupees
|
89,356
|
75,216
|
104,099
|
167,013
|
164,633
|
105,538
|
113,222
|
Source: The Economic Times
It is evident that those who belong to the backward classes spend
(consumption as a proxy for income here) far less than those belonging to the
forward caste categories, as well as the average. It is also interesting to
note that religious minorities such as Muslims also earn less than the average.
There exists a simplistic notion that taxing the rich and handing money
to the poor is an effective solution for income inequality. It is erroneous.
Income inequality is a result of problems and prejudices that are far more
deeply rooted, such as the torment inflicted by the caste system. Both must be
tackled simultaneously, since continued discrimination based on caste will only
impede progress made on the income equality front.
Lack of Reliable Data
Most studies in India, such as those of the National Sample Survey
Office (NSSO), focus on consumption or wealth rather than on income. Official
estimates of inequality present a picture that doesn't seem alarming, while
other surveys, like those of the India Human Development Survey (IHDS), present
a high number.
To add to the confusion, People's Research on India's Economy (PRICE)
found that the number may be lower than what the IHDS suggested. The different
methods by which studies gather data on income are bound to suggest varying
figures for inequality. Some studies rely on tax filings, some on survey data
and others on national statistics. The paucity of accurate data implies that
the policies implemented may not yield optimal results.
Conclusion
Income inequality is today's reality. Considering how important parity
is for the development of the country, the issue must be continuously addressed
in order to be mitigated.
In the past, the Indian government has dealt with income inequality by
providing employment opportunities and direct benefits, while private players
have managed to contribute to the shrinking of this chasm through corporate
social responsibility (CSR) activities. The evidence suggests however, that the
government schemes could be better implemented and thought out.
The NDA government showed intent to overcome this issue in their
previous tenure, and Modi's speech has inspired confidence that they intend to
carry out their promises in the next five years. All that is left now is for
them to act decisively and show lasting results, because although the private
sector has a role to play, the ultimate responsibility of dealing with income
inequality must lie with the government.
