India’s Growth Story – Are We Better Off.. Or, Worse Off..??

United Nations Global Compact (UNGC) report, released this week, stating that richest 1% Indians own 53% of the total, second worst in terms of wealth inequality, puts again a question mark over India’s developmental model. As per an IMF paper, Gini coefficient has risen sharply for the nation since 1990 despite significantly higher growth rate. So, is it is impossible to achieve both growth and lower income inequality and are the two mutually exclusive. A brief look..

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The IMF paper states that India’s Gini index has risen from 45 to 51 during 1990-2010 after declining, although marginally during 1960-90. The inequality has come despite an increase in growth rate to over 6% which also helped reduce poverty rate from over 50% to less than 25% during the period.

Interestingly, the results are no different for China too. Growth rate for China during this period had been over 8% helping it reduce the level of poverty from as much as 80% (rural area) to less than 15%. However, despite this sharp reduction in poverty, there is a simultaneous sharp increase in inequality measure by Gini index which rose from 33 in 1990 to 53 in 2013,  an increase sharper than that for India.

This raises an important question as to whether it is possible to raise growth rate without inequality or inequality is an inevitable fallout of growth. Indeed, the IMF paper cites research work which conclude that accumulation of a minimum of assets with entrepreneurs is essential for investment and, thereby, growth. Higher incentives for efficiency, innovation and entrepreneurship is another inevitable factor driving growth and also, inequality. Among the other factors which perpetuate inequality are unequal access to education which restricts the earnings capacity, inadequate access to medical facilities which reduces the productivity and increases the vulnerability of the marginalised sections. Lack of access to capital essential for growth multiplier also acts as a driver for inequality. Clearly, market forces has limited capacity to bridge the gap between have and have-nots.

However, it would be too simplistic to conclude that inequality is inevitable with growth and a proactive government intervention can reverse the trend. Indeed, some of the Asian countries have achieved an equitable growth with Thailand recording reduction in inequality from over 45% to 38%, Malaysia from 46% to 40% (2000-12) and Phillipines from 47% to 43% (1997-2012). Among the measures undertaken are ‘conditional cash transfers’ to reduce the persistent inequality in access to education and medical facilities. The success of the scheme lends more credibility to NITI Aayog’s Universal Basic Income (UBI) proposal. (Read more on that – http://indiaeconomyandbusiness.com/2017/03/03/understanding-universal-basic-income-ubi/).

Yet, these measures are not so easy to execute successfully. As per the paper, barring these three countries, the social spending has actually contributed to higher income inequality in India and many parts of Asia. A reason for this, probably, is weaker targeting and system leakages.

Can JAM (Jan-dhan account, Aadhaar and Mobile) do the wonders for India..??

(Image courtesy of Economic Survey 2015-16)

 

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