In India, inequality bigger challenge than poverty
What if India had just 100 people? How would wealth distribution then look like?
If trends are to be counted, of the 100, about 70 people would hold no more than 25% of all assets and about 29 people would have less than a quarter percent. What about the one person left to be accounted for? That one person alone would be in control of over 50% of the remaining wealth.
That’s how skewed wealth distribution is and, by a wide reckoning, the next big challenge for India isn’t poverty reduction, but inequality.
The world knows this gap between the rich and the poor as the ‘10 percent’ problem, sometimes even as the ‘1 percent’ problem.
Research points to two specific challenges: not only are the rich consolidating a disproportionate amount of wealth and income, but per capita incomes across states — which should converge, by standard economic theory — are actually diverging, pointing to a worrying pattern of some states developing at the expense of others.
Economic theory suggests that when a country grows, less developed regions grow more rapidly than the ones already developed.
According to latest data from Credit Suisse for 2018, the richest 1% in India now controls 53% of the country’s wealth and the richest 5% about 69%. The top decile (or 10%) hogs 76.3% of the nation’s wealth.
To give a better view, in 2015, India had more billionaires than Switzerland, Hong Kong and France put together, according to a billionaire census by Wealth X and Swiss bank UBS.
Policymakers are now waking up to a new problem.
Inequality has meant that, post-liberalisation of the Indian economy, poorer states aren’t simply catching up. And the evidence of this is mounting.
The annual Economic Survey 2017-18, tabled in Parliament, officially acknowledged the problem. Forces of equalisation — whether trade, jobs, welfare programmes and internal migration — aren’t working, it said.
The rich in India have benefited more from policies than the poor, and welfare spending has for the most part been misdirected, according to the survey. Districts that are the poorest suffer from the greatest shortfall of funds.
In 2016, districts accounting for the poorest 40% were found to have received only 29% of the total social funding from the central government.
Evidence from satellite data cited in 2017 Economic Survey showed Bengaluru and Jaipur collected “only between 5% and 20% of their potential property taxes”.
The finance ministry’s research has also shown how the well-off in India are extracting more wealth.
A recent internal study arrived at a cut-off to consider the bottom 30% as poor and the rest as ‘well-off’ to see who benefited more from tax benefits. It concluded that those with lower incomes tend to get a larger proportion of their money deducted because of mandatory tax cuts compared to wealthier individuals.
Former chief economic adviser Arvind Subramanian and his team, too, had calculated that wealthier individuals received subsidies of up to ~1 lakh crore annually — a move that can be better if given to the poor.
“Only more inclusive growth can bridge inequality, along with food security and equitable redistribution of wealth,” said NC Saxena, development economist and former secretary to the Union government.