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Breaking the cycle

Shoring-up income inequality and India’s economic resurgence need drastic measures

Breaking the cycle

Let's talk personal income. Or the disparity in the growth thereof, between the rich and the not-so-rich. For 30 years after independence, India's poor and near-poor saw personal earnings grow at a pace greater than that of the opulent few. Income inequality was being reversed. Come 1980, the tables turned. The rich began to get richer again. And the poor again got stunted. The trend continues, with the chasm widening still. The burning question is how do we bring prosperity, peace, security, economic stability and a sense of pride to the country and its citizens.

This phenomenon is not just limited to India. Across the world, skewed distribution of wealth has led to inequality in purchasing power; a trend affirmed by Niti Aayog, that average income inequality increased by 11 per cent in developing countries between 1990 and 2010. Corrado Gini, the noted Italian statistician, demographer and sociologist who developed the 'Gini Coefficient' — a measure of the income inequality in society — wrote that the co-efficient of income inequality in India rose from 33.4 per cent in 2004 to 33.6 per cent in 2011. Don't ignore the decimals; a 0.2 per cent increase is massive.

Income inequality in India has reached historically high levels. In 2014, the share of national income accruing to the top 1 per cent earners in India was 22 per cent, while the share of the top 10 per cent was 56 per cent. Income inequality has grown substantially since the 1980s, following intense transformation in an economy centered on the implementation of deregulation and economic reforms, centric around the early 1990s. With the beginning of deregulation, the top 0.1 per cent saw more growth than all Indians, combined, in the bottom 50 per cent. The remaining middle 40 per cent saw relatively little growth in their personal income. This inequality trend is in stark contrast to the 30 years that immediately followed the country's independence in 1947 when income inequality was widely reduced and the income of the bottom 50 per cent grew at a faster rate than the national average.

A comparison of the total income growth percentile for 1984 to 2014, of four relevant economies — India, China, France and the United States — brings out the seriousness of the personal income conundrum. The ratio of income growth for the top 0.001 per cent, vis a vis that for the full population, is 3.86 times of that in China. In India, it is 14.57 times (see Table 1).

Over the decades, the impact of this inequality in personal income, cutting across geographies, has been devastating, even life-threatening. Children in the poorest 20 per cent of the population are up to three times more likely to die before their 5th birthday than children in the richest quintiles. Women in rural areas are up to three times more likely to die while giving birth than women living in urban centers. Scarier still, this inequality is giving rise to large-scale dissatisfaction, anger, bitterness, resentment and depression — in cases aggravating to violent movements like the regional struggles in the North-East, the Maoist movement in rural India and communalism in its most virulent forms.

As Table 1 shows, it is the average middle-class person who is the worst sufferer of this paradigm, with aspirations inscrutably falling by the wayside over the last four decades. Maryam Aslany of King's College in London estimates that 28 per cent of India's population can be defined as 'middle class'. The World Economic Forum (WEF) designates all those who annually earn between Rs 2.5 and Rs 2.75 lakh as 'middle class'. Further, consulting firm Bain and Co recently opined that the Indian middle class will grow to 500 million by 2030 — from 28 per cent of the population today to around 40 per cent.

Industrialists, CEOs, and others at high echelons in the said economies are comfortable and prosperous, and therefore, their need and passion to catalyse new industries, driving growth and taking risks are getting minimalised, with status quo being the preferred option. A stunning factor which has stemmed economic growth and development is the sectoral mix of the share of many industry sectors, including manufacturing and services, in the Gross Value-Added (GVA). Over-dependence of the Indian economy on tertiary sectors is an element that, while adding to inflationary trends, does not contribute in any significant manner to the GVA. The sectoral mix over the last 3 years is illustrated (see Table 2).

If we look at the secondary sectors, manufacturing by its nature contributes disproportionately high to productivity growth, regardless of location and country. This is primarily because the manufacturing sector offers a modicum of capital accumulation, economies of scale and technological progress, which are directly related to growth in productivity. While a chartered shift from agriculture to manufacturing is crucial for growth and economic development, the sequential change from industry to service does not always contribute to growth and productivity.

Today, the Government's stated policy and priority is to promote the growth of the manufacturing sector and increasing its contribution to the overall economy. But given the global economic deceleration, key initiatives like the 'Make in India' and 'Startup India' have not ameliorated unemployment, which is further plagued by disguised unemployment and under-employment, leading to low productivity and lower motivation — a voracious and vicious cycle.

Another factor stifling economic growth and development is the tendency of large business houses to focus on sectors/products that are low on investment; tried and tested, rather than on research to create tomorrow's products. Even while new global brands continue to enter the Indian market, be it in automobiles, genomics, electronics and fashion, the largest Indian businesses are showing a propensity and philosophy of low-risk — a calculated risk-aversion which is becoming established even amongst top business players, and is directly proportional to their revenues and profitability. Sticking to comfortable and safe zones is leading to lower innovation and lower economic development and growth.

Given this backdrop, income inequality, a growing preponderance of the tertiary sector and the apathy of large business houses have led to a low-risk, low-research, low-investment environment, all of which are toxic to economic growth and development.

Clearly, investments and revitalisation are required for India's economic resurgence. And the only way forward for this is disruption. The Government can step in some more — by revitalising the 'Startup India' initiative, aimed at building a strong eco-system for nurturing innovation and startups, driving economic growth and generating employment. Also, India needs 'Quality Centers' with identified and responsible arbiters and inspectors to ensure and certify 'Quality Processes', embedded in each manufacturing unit. In collaboration with leading institutes like IITs and IIITs, the Government should also create standardised design and engineering processes, equipment design and standardised raw material procurement and usage systems, enabling the average industrialist and entrepreneur to focus only on setting up and running their manufacturing units. Infrastructure development, simplified processes, job creation, skill development and the celebration of innovation in select sectors hold the key.

It is a tough road ahead. But today's transient and malleable India holds out hope — we are still best-placed to create industry, jobs and entrepreneurs; and equality.

Views expressed are strictly personal

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