So­lu­tions to eco­nomic in­equal­ity are not dif­fi­cult to find

Eco­nomic in­equal­ity is ris­ing. Rea­sons are not dif­fi­cult to find – and so are pos­si­ble so­lu­tions

Governance Now - - FRONT PAGE - DS Sak­sena

Our con­sti­tu­tion prom­ises equal­ity of sta­tus and op­por­tu­nity to all cit­i­zens but sta­tis­ti­cal data sug­gests that in­equal­i­ties in wealth and in­come have in­creased since in­de­pen­dence and are now on an un­con­trolled up­ward spi­ral.

re­cently, Thomas Piketty and lu­cas chan­cel in their aptly ti­tled study, “In­dian In­come In­equal­ity 1922-2014: From Bri­tish raj to Bil­lion­aire raj”, have pointed out that cur­rently the rich­est 1% In­di­ans earn 22% of our to­tal in­come; up from to 6% in the early 1980s and some­what higher than their 21% share in the 1930s. The an­nual global Wealth Data­book pub­lished by credit Suisse high­lights the fact that the rich­est 1% of In­di­ans own 53% of the coun­try’s wealth – up from 36.8% in the year 2000. The rich­est 5% own 68.6% of the coun­try’s wealth, while the top 10% own 76.3%. Sig­nif­i­cantly, the poor­est 50% of our coun­try­men own only 4.1% of the na­tion’s wealth. about 2.5 lakh In­di­ans are in the re­ally big league – fig­ur­ing in the top 1% of the world’s rich­est peo­ple.

In­di­ans be­ing ar­gu­men­ta­tive by na­ture, our in­tel­lec­tu­als have dis­puted both the au­then­tic­ity of data sources ac­cessed by messrs Piketty and chan­cel as also the ul­ti­mate con­clu­sions drawn by them. With due re­spect, it would have been bet­ter if the causes be­hind the ris­ing in­come in­equal­ity in In­dia, the dele­te­ri­ous ef­fects of in­come in­equal­ity and a pos­si­ble recipe for coun­ter­ing in­come in­equal­ity had also re­ceived sim­i­lar at­ten­tion from our economists.

It is not dif­fi­cult to see that the ma­jor rea­son for in­come in­equal­ity in In­dia is the poor state of In­dian agri­cul­ture which em­ploys 45% of our work­force but ac­counts for only 15% of our GDP. The av­er­age farm size is 1.15 hectares, which ex­plains the poor re­turns from agri­cul­ture for most of our farm­ers. Sig­nif­i­cantly, the av­er­age farm size in 1971 was 2.28 hectares which would in­di­cate fall­ing per capita farm­ing in­come and a widen­ing gap be­tween farm­ing in­come and other kinds of in­come. To ad­dress poverty and in­equal­ity, agri­cul­tural re­forms should be the gov­ern­ment’s first pri­or­ity. cur­rently, we have the gov­ern­ment’s prom­ise of dou­bling farm in­come but in the ab­sence of a proper ac­tion plan the gov­ern­ment’s prom­ise can only be taken as an ac­knowl­edge­ment of the prob­lem, not its so­lu­tion.

lib­er­al­i­sa­tion was a wa­ter­shed event in our eco­nomic his­tory, which had a huge pos­i­tive im­pact on the ser­vices, tele­com and fi­nan­cial sec­tors – none of which is labour in­ten­sive. Post lib­er­al­i­sa­tion we opened our markets to global com­pe­ti­tion which forced our busi­nesses to em­ploy the lat­est tech­nolo­gies – which were also not labour in­ten­sive. ac­cord­ing to credit Suisse, the rich­est 1% cor­nered 61% of the ex­tra wealth gen­er­ated be­tween 2000 and 2015, while the top 10% got 81% of the in­crease but 90% of us could get only the re­main­der, i.e., 19%. It would ap­pear that big busi­nesses bloomed in the af­ter­math of lib­er­al­i­sa­tion which brought in fi­nan­cial dereg­u­la­tion, tax

con­ces­sions and a lib­er­alised credit regime but the poorer sec­tions of so­ci­ety did not ben­e­fit pro­por­tion­ately, prob­a­bly be­cause they were out of the for­mal fi­nan­cial sys­tem.

Post lib­er­al­i­sa­tion, grow­ing con­sump­tion by the rich along with in­no­va­tive schemes like mn­rega did lift a sig­nif­i­cant percentage of the poor out of ab­ject poverty but as noted ear­lier, the pace of growth of the rich was much faster than that of the poor. The present gov­ern­ment’s make in In­dia and Skill In­dia ini­tia­tives aim to cor­rect the anoma­lous dis­tri­bu­tion of in­come by ex­pand­ing the man­u­fac­tur­ing sec­tor to gen­er­ate em­ploy­ment and mi­grate labour to more pro­duc­tive jobs; sadly even af­ter three years th­ese well in­ten­tioned schemes are yet to take off.

The so­cial ill ef­fects of in­equal­ity – dishar­mony, in­creased crime and so­cial un­rest – are now play­ing out in our so­ci­ety. con­cen­tra­tion of wealth is not good from the eco­nomic point of view also. Firstly, per­sons with huge wealth do not spend a sig­nif­i­cant part of it. a fam­ily with lim­ited means would spend the ma­jor­ity of its in­come but a re­ally rich fam­ily would need to spend a very small pro­por­tion of its in­come. Thus money would get locked up – away from pro­duc­tive use. more­over, scarce re­sources would get frit­tered away in cater­ing to fan­cies of the rich. The health­care in­dus­try is a glar­ing ex­am­ple of this phe­nom­e­non; we have no dearth of world-class su­per-spe­cial­ity hos­pi­tals but we have very few fa­cil­i­ties of­fer­ing af­ford­able health­care be­cause there is huge money in ad­vanced health­care. Then, con­cen­tra­tion of wealth per­pet­u­ates in­come in­equal­i­ties be­cause re­ally rich peo­ple need only to in­vest a part of their wealth to earn more than what they spend.

of course, many em­i­nent economists like Prof Jagdish Bhag­wati es­pouse the ‘trickle-down the­ory’, which pos­tu­lates that big cor­po­rates with suf­fi­cient funds at their dis­posal cre­ate jobs and the gov­ern­ment needs only to en­sure that big busi­nesses do well to en­sure pros­per­ity for the poor. eval­u­at­ing the suc­cess of the trickle-down the­ory from the time we em­braced it in 1991, we can see that ini­tially the econ­omy had a bull run but af­ter the global melt­down of 2008 we only had job­less growth and grow­ing in­equal­ity.

Th­ese de­vel­op­ments have prompted the gov­ern­ment to have a relook at the di­rec­tion in which the econ­omy is headed. The eco­nomic Sur­vey 201617 pro­poses a dis­cus­sion on uni­ver­sal

Con­cen­tra­tion of wealth is not good from the eco­nomic point of view also. A fam­ily with lim­ited means would spend the ma­jor­ity of its in­come but a re­ally rich fam­ily would need to spend a very small pro­por­tion of its in­come. Thus money would get locked up – away from pro­duc­tive use.

Ba­sic In­come (UBI), with­out iden­ti­fy­ing ris­ing in­equal­ity as the rai­son d’etre for ad­vo­cat­ing it. rather, it por­trayed UBI as a poverty re­duc­tion tool. The Sur­vey noted that UBI would be a per­fect sub­sti­tute for the myr­iad gov­ern­ment schemes with their huge ad­min­is­tra­tive costs and leak­ages but qual­i­fied it with the rider that UBI would be dif­fi­cult to “sell” to the ma­jor­ity of peo­ple. The Sur­vey also said that the time for UBI had not come. With no def­i­nite plan in place, what needs to be done to tackle the prob­lem of poverty and in­equal­ity?

To tackle poverty ef­fec­tively, we have to un­der­stand that like wealth, poverty per­pet­u­ates it­self across gen­er­a­tions. a child born in a re­ally poor house­hold would not have ac­cess to proper nutri­tion, health­care or ed­u­ca­tion which would di­min­ish his chances of break­ing out of the stran­gle­hold of ab­ject poverty. of course, we of­ten read of chil­dren who break out from this trap but such in­stances are few and far be­tween.

If we want to re­duce in­equal­ity in our so­ci­ety in the near fu­ture, we would have to en­sure proper nutri­tion, health­care and ed­u­ca­tion for all our cit­i­zens so that the poor es­cape the worst rigours of poverty and have a chance of com­ing out of the poverty trap. most gov­ern­ment schemes have the ob­jec­tive of pro­vid­ing ei­ther nutri­tion or health­care or ed­u­ca­tion but all such schemes have failed to achieve th­ese ob­jec­tives. Per­haps, the time has come for the gov­ern­ment to strictly mon­i­tor ex­ist­ing schemes rather than for­mu­lat­ing new ones at the drop of a hat.

War­ren Buffet once pointed out that he was pay­ing tax at 18% while his sec­re­tary was pay­ing tax at 37%, which partly ex­plains why the amer­i­can econ­omy is as in­iq­ui­tous as ours. Such anom­alies can be ad­dressed only if the tax­a­tion regime closes all av­enues for earn­ing tax free in­come and ac­cu­mu­lat­ing wealth be­yond a point. Sadly, in our cur­rent dis­pen­sa­tion a suf­fi­ciently rich and tax savvy per­son can achieve both th­ese ob­jec­tives within the four cor­ners of law. This was not the way our tax­a­tion sys­tem was de­signed to work. Prof Ni­cholas Kal­dor, who was an ad­vi­sor to a num­ber of euro­pean gov­ern­ments, was in­vited to In­dia by Jawa­har­lal Nehru in 1956 to pro­pose a sys­tem of tax­a­tion for the nascent repub­lic. He pro­posed two new taxes, wealth tax and gift tax, in ad­di­tion to the ex­ist­ing in­come tax and es­tate duty, in­tend­ing th­ese new taxes to func­tion as in­stru­ments to pre­vent trans­fer and con­cen­tra­tion of wealth rather than as rev­enue col­lec­tion mea­sures.

How­ever, the gov­ern­ment abol­ished es­tate duty and gift tax in 1985 and 1987 re­spec­tively, while wealth tax was dras­ti­cally trun­cated in 1993 and was fi­nally re­pealed in 2016 pre­cisely be­cause there was no sig­nif­i­cant col­lec­tion of rev­enue from th­ese taxes. Sig­nif­i­cantly, the abo­li­tion of th­ese taxes marks the be­gin­ning of the pe­riod of in­creas­ing in­equal­ity pointed out by Piketty and chan­cel.

cur­rently, our econ­omy is fac­ing a slow­down which may fur­ther sharpen the dif­fer­ences be­tween the rich and the poor. There­fore, to pre­vent our so­cial­ist repub­lic from mor­ph­ing in a plu­toc­racy, in­come tax laws have to be amended to in­cor­po­rate the rel­e­vant pro­vi­sions of es­tate duty, gift tax and wealth tax to pre­vent con­cen­tra­tion and trans­fer of in­come and wealth. Piketty and chan­cel have given us a wakeup call; it is for us to heed it or dis­miss it by se­man­tics and nit­pick­ing.

The gov­ern­ment abol­ished es­tate duty and gift tax in 1985 and 1987 re­spec­tively, while wealth tax was dras­ti­cally trun­cated in 1993 and was fi­nally re­pealed in 2016... Sig­nif­i­cantly, the abo­li­tion of th­ese taxes marks the be­gin­ning of the pe­riod of in­creas­ing in­equal­ity pointed out by Piketty and Chan­cel.

Photo Courtesy: his­tory of eco­nomic though (het­web­site.net)

Ni­cholas Kal­dor

Thomas Piketty

Jagdish Bhag­wati

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