SOARING WEALTH GAP

The global welfare economics has got exacerbated due to rising income inequalities. Gini coefficient which is a globally accepted index for measuring income distribution highlights the plutocracy and nepotism existing worldwide especially in developing and underdeveloped economies. A January 2014 report by Oxfam claims that the 85 wealthiest individuals in the world have a combined wealth equal to that of the bottom 50% of the world’s population, or about 3.5 billion people Such soaring inequalities have challenged the economists to reconsider the welfare policies.

The widening wealth gap between rich and poor has brought globalization and economic liberalization under attack. Economists have argued that trade liberalization has exerted downward pressure on wage structure of low skilled laborers in advanced economies as this laborers of underdeveloped countries are ready to work at lower wages resulting in reduction of bargaining power of trade unions in advanced economies and widened the wealth gap.

Many sociologists and mavens    around the world have blamed intergenerational social immobility as one of the significant reasons for mounting unequal wealth distribution. Chile, Brazil and China are socially immobile and which is the reason why Gini Coefficient has worsened in these countries while Scandinavian countries having high mobility has fared well in all types of social indicators. In Canada, Denmark and Finland less than 20% of advantages of having a high income parent is passed on to their children indicating high social mobility.

The preachers of socialism have often criticized job automation and capital deepening within capitalistic society for creating unemployment and exerting downward pressure on wages. Stowe Boyd, Lead Researcher at Gigaom Research quoted “ The central question of 2025 will be: What are people for in the world that does not need their labor, and where only a minority are needed to guide the bot based economy”.

India is one of the world’s fastest growing countries and has successfully set an example for other nations in terms of output. It has fared very well across all indices barring the social indices. There is famous Chinese proverb “Wealth does not pass three generations”, suggesting that the nepotism of elitists eventually will be replaced by those lower down the hierarchy. However Sanskritization is lacking in our society which pulls down the growth and widens the wealth gap. There is lots of resistance when people belonging to lower caste hierarchy seek upward mobility. Spending and consumption by the richest 5% zoomed up by over 60% between 2000 and 2012 in rural areas while the poorest 5% saw an increase of just 30%. In urban areas, the richest segments spending increased by 63% while the poorest saw an increase of 33%. Individual income inequality measured by the Gini index has also consistently risen from 0.45 in 1990 to 0.51 in 2013. The Indian growth-inequality paradox is easy to pin down—the wealth that India creates is not evenly redistributed. India is following similar pattern of inequality as highlighted by Simon Kuznets, American Economist in his research papers describing rising inequalities. As India is in its developing phase, lots of rural people are shifting to urban areas in search of a job. Such oversupply in labor market exerts downward pressure on wages. The inequality will rise until economy attains certain level of development and as soon as it attains that level of development then inequality will start falling. In the past many countries have proved this theory wrong by diverting the increased revenue received during the developing stage into social infrastructure like hospitals, schools, public halls, community halls and other public utilities which had enhanced their social well-being and such social policies helped in improving the Gini Coefficient of their country.

worlds-largest-slum

The current government of India has come up with several measures such as Jan Dhan Yojna, Demonetization which shall facilitate in redistribution of income and wealth.

JAN DHAN YOJNA

This program was launched by government in August, 2014 with an aim to promote financial inclusion in the country. The Prime Minister said on this occasion- “Let us celebrate today as the day of financial freedom.”  Financial inclusion is imperative step as the success of any intended monetary policy will depend upon the number of people who are covered under the banking system. The program was an instant success as by the year 2016 more than 220 million accounts have been opened and in total US$ 5.7 billion dollars have been deposited. Such program helps the rural people to have a seamless access to the banking system and will fulfill the government objectives of priority sector lending and micro credit financing. Normally, poor people do not get the advantage of organized banking sector. They have to rely upon unorganized sector such as money lenders for their financial needs. Microfinance will link poor people to organized banking sector and will reduce exploitation of poor people by money lenders and landlords. The government is considering depositing 10000 rupees to Jan Dhan accounts especially the zero balance accounts before the U.P, Goa, Punjab elections. Such deposits are expected to cost the government 580000 million rupees which will be financed by gains made by government from demonetization scheme. The move will serve as a perfect example of redistribution of income and wealth. However there are certain moral hazards associated with directly depositing the money into the bank account as it is contradictory to the law of consideration. This whole scheme by government has undoubtedly impacted the wealth gap.

DEMONETISATION: WILL IT WEED OUT INEQUALITY?

NDA has used both conventional and unconventional methods to combat income inequality, counterfeit currency, black money, poverty. The unprecedented step taken by government will not completely weed out the black money as the unaccounted wealth is not restricted only to the cash but will surely put an end to the parallel economy. Only 20% of black money is in form of cash possession and rest all is parked in bullion and land. Demonetization is the most populist step ever taken by any government ever in history. In a society where 59 per cent of the national wealth is in the hands of just one per cent rich people and the poorest 10 per cent of the population’s share in the national wealth is only 0.2 per cent and the gap between the rich and the poor rose from 1480 times to 2450 times between 2004 and 2014, according to a recent study, Narendra Modi acted as a great leveler. This unacceptable level of inequality in the society has to be redressed, and this is a concrete step in that direction. With this, the Prime Minister has proclaimed his commitment to what Dr. B R Ambedkar called “social and economic equality” along with political equality enshrined in the constitution. The bank is seeing large deposits which will necessarily clean their balance sheets and their power of credit creation will rise significantly. Soon the lending rates will come down which will give major boost to the government objective of lending to priority sector which includes small businesses, artisans, farmers. Reduction in lending rates will help to boost rural economy in long term and increase the rate of investment. Increasing investment will lead to lower unemployment and higher generation of income. The drive on black money will bring more revenue to government’s kitty making it possible to spend more on social infrastructure and public utilities. The days of capitation fees are over. The land prices are expected to hit by 30% and overall inflation is expected to dip by 1% which is surely going to increase the purchasing power and standard of living of middle income persons. The government dream of house for all and 50 million free gas connections to BPL families would not have been possible with the existing levels of inflated prices. In the short term economic participants of this country will face affliction and rural consumption will also be hit by some proportion which may demote the private sector to take up an investment project in near future but as I said before, the lower interest rates should incentivize them and hopefully they envisage the long term gains. Many mavens have feared that liquidity crunch will worsen the financial conditions of rural people who do not have access to organized banking. Many labor surplus sectors such as realty can start laying off workers due to slump in consumer demand. However agony shall sooner recede as there are opportunists sitting in the market who tend to invest during slump in the hope of price to rise sooner or later. Dr. Manmohan Singh was very critical on demonetization during his speech at Rajya Sabha. He termed demonetization as “organized loot and legalized plunder”. Demonetization marks beginning of “Achhe Din” as cited by Narendra Modi and puts end to vulgar extravaganza of few at cost of others.

UPA’S SOCIAL PERFORMACE SCORECARD

UPA had used all the conventional methods to combat wealth gap. UPA is known for the success of MNREGA scheme, NRHM (National Rural Health Mission) and Sarva Shiksha Abhiyan. Gross Enrolment Ratio increased from 98.3% in 2003-04 to 116% in 2010-11. Infant Mortality Rate (per 1000 live births) also came down to 44 which was 58 in 2004. Few other social indicators have also performed well. However according to United Nations there was far more potential for an improvement in social performance charts as almost all the other developing nations have fared well than India. Inequality in access to education is so glaring, that in HDR 2013, India’s education index loses more than 40 per cent of its value once adjusted for inequality. These have to do with misplaced policy priorities of the government that are only aimed at short-term benefits with an eye towards political gain.  From 1990-2013, it has been noticed that change in net Gini Index of India has only been 6.18 while China has seen the drastic change in the index which has been 17.61. If we even talk about NDA regime then till now we haven’t seen any drastic change in expenditure on social welfare. However all the hopes are on demonetization scheme which is expected to bring lots of unaccounted wealth into light and will boost the government treasury.

poverty-reduction-1990-2012

WHAT IS THE ISSUE?

India being a developing economy bears the burden of huge current account deficits (CAD). The widening gaps are financed by government borrowings and currency printing. Considerable share of government budget is spent on interest payments. Border issues with Pakistan and China makes Indian states like Jammu and Kashmir, Arunachal Pradesh vulnerable to terrorist attacks. Therefore budget allocation for defense sector is considerably high. Both defense expenditure and interest payments are unproductive expenditure. Therefore the allocation to productive sector has never been sufficient in India. Since majority of population resides in rural areas having agricultural income only 3% of 1.3 billion people pays tax thereby making our budget cash starved. A large proportion of population works for informal sector wherein books of accounts are not kept so plenty of income goes unaccounted. Integration of parallel economy with mainstream economy will hopefully enable the government to have larger budgetary provision which could be utilized for developing social infrastructure. India at present spends only 2.5% of GDP as social expenditure which is lower than the most of other developing nation.

1420803582-329_social-welfare-expenditure-in-brics-2010-as-percent-ofgdp-percentage-chartbuilder

SOLUTION

The government should allocate sufficient budget towards social welfare and should try to make it par with other developing countries. Allocating budget is not sufficient but implementing successfully is also important along with transparency and accountability. Such social incentive packages should be well planned as sometimes it can create moral hazards. For instance if too many free incentives are given to poor laborers then they may avoid putting extra efforts in their work and productivity of labor will come down. So the government has to take vigilant steps for ensuring that economy is not being caught into poverty trap. Progressive tax structure can help in redistribution of income and wealth. Higher taxes reduce income and it can motivate worker to work harder and earn higher income so that he has got more money to spend on consumption. However many economists have challenged this structure as they have argued that higher taxes causes disincentive for worker to work. More number of reforms is needed in education sector as influx of skilled laborers in economy will help in reducing the wage inequality. India should acknowledge the relevance of quality of human labor. The whole idea that somehow you could separate out process of economic growth from quality of labor force is a mistake against which Adam Smith warned in 1776. Kerala’s model of development should be emulated by all the other states of India as its policies on universal education and healthcare have helped it in achieving high quality of living and equity. The consumer expenditure of the poorest in rural Kerala (Rs 832) is about 60% more than that of the poorest in Bihar (Rs 525) and almost doubles that of the poorest in rural Chhattisgarh (Rs 426). The poor in Kerala can afford to spend more because they earn more. Many policymakers have advocated high minimum wage policy as an effective solution for reducing the wealth gap. Wages are designed to compensate the workers for productivity and when they are distorted they affect the profit-maximizing decisions that business make. The hit on profit compels them to go for lay off as we have seen in case of Larsen and Toubro wherein 14000 employees have been laid off in last 8 months. When companies are forced to pay higher wages they may offset the cost by reducing how much they invest in workers. The policy will soon have its purpose defeated. Stanford economist John Cochrane has remarked, instead of addressing the short-term problem of low wages, governments and companies can address the more structural problem: a lack of skills. Investing in worker skills will lead to increased employee productivity and creativity which will then translate into sustained higher wages thereby narrowing gap between richest and poorest. Neoliberalism and Globalization has often come under attack after the financial crisis of 2007-09 and has been blamed for escalating inequalities. However it cannot be completely eliminated as has various positives but government intervention and certain extent of trade protectionism is strongly recommended to protect the interest of economic participants of this country especially the poor and middle income persons. Amartya Sen has quoted “Globalization can be very unjust and unfair and unequal, but these are matters under our control. It’s not that we don’t need the market economy. We need it. But the market economy should not have priority or dominance over other institutions.”

THE ARTICLE HAS BEEN PUBLISHED IN MILLENIAL MAGAZINE, A DEPARTMENT OF MEDIA STUDIES INITIATIVE BY CHRIST UNIVERSITY, BANGALORE

 BY: CHINTAN  MATALIA

 12 DECEMBER, 2016

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One Comment Add yours

  1. Harbans says:

    Thanks sharing a very incisive write-up on economic health of India in the light of multifarious problems being faced by India. Despite all the economic ills including the burden of black money and servicing of interest on amount already taken to meet the budgetary shortfall, yet the silver lining is that all the fundamentals of economic engines are in good health; as we compare with global economic scenario.

    Liked by 1 person

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