Paradoxical progression

The debate between growth and equity is an age-old one that has occupied the minds of economists for decades. Ever since I began studying economics nearly 50 years ago as an economics honours student at Delhi University, I recall that we used to discuss and hold divergent opinions on whether growth should be the objective of economic development for countries or whether the focus should be on redistributing resources to achieve equity. In those days, the balance was in favour of a socialist economy, and thus, the emphasis was on measures to redistribute resources within the economy to reduce inequality and usher in a better quality of life for all. Progressive taxation was suggested by many as one of the major means of achieving economic development with equity for all citizens. However, the 1970s and 80s demonstrated that economic growth itself is of great importance because if the size of the pie is not large enough, there will be nothing to redistribute.

The Indian economy, because of its License Permit Raj and restrictive industrial and trade policies, had reached a stage by 1991 where, if it did not reform itself, it would have become one of the poorest performers among the world's economies. India was in the throes of a serious economic crisis. The 1991 reforms are perhaps one of the most important policy decisions in contemporary Indian economic history because they opened up the Indian economy, and the vast number of changes we see in the economy today are due to this opening up. I recall that before this, there were only Fiat and Ambassador cars in the country, and Maruti had just made an appearance. However, after 1991, with the opening up of the economy, we could see a huge number of cars and carmakers around, so much so that customers now face a problem of choice. This is the story in any sector of the economy if one looks around; therefore, one can say that the 1991 reforms set India on the path of progress and development. Today in 2024, as the fifth-largest economy in the world, we can attribute much of that success to the reforms of 1991, which set in motion a certain economic momentum.

While it is good to exult about the growth in the Indian economy, which at about 7 per cent today is one of the fastest-growing economies in the world, we should also be concerned about the rising inequalities. According to a study by the World Inequality Lab, income inequality in India is high and continuously increasing. Their data shows that in 2022-23, 22.6 per cent of India’s national income went to just 1 per cent of the country, which is the highest in the last 100 years. Furthermore, the top 0.1 per cent of the population earned nearly 10 per cent of the national income.

In terms of wealth inequality, the report states that the top 1 per cent holds a 40.1 per cent share of the country's wealth, the highest level since 1961. The share of wealth among the top 10 per cent increased from 45 per cent in 1961 to 65 per cent in 2022-23, while conversely, the share of the bottom 50 per cent declined. The scenario is clear: the rich have become richer, and the poor relatively poorer. Although India’s wealth inequality is not as extreme as that of Brazil and South Africa, its income inequality is among the highest in the world and could ultimately lead to greater wealth inequality.

Paradoxically, between 1960 and 1980, when the growth rate in India was very low, inequality was dropping. It began increasing with the liberalisation of the economy after 1991. It is also interesting to note that the growth in China has been much more broad-based than in India, with the share of the top 1 per cent in income in India being nearly 50 per cent higher than that of China in 2022.

Some people have argued against the data and analysis of the World Inequality Lab. Others, like the renowned economist Thomas Piketty, have argued that increasing the level of taxes could be the answer. The preliminary data from the latest household consumption survey for 2022-23 shows a decline in consumption inequality compared to the 2011-12 survey, though this needs to be verified once the final data is released. My reaction is that while we may quibble over the data, there is no denying that India is facing significant income and wealth inequality, which is not something to be content about. It is also true that we can look around and see the display of wealth by the "nouveau riche," a visible indicator of inequality as pointed out by Ajay Chhibber in his article "An agenda for next Government" in the Business Standard.

Inequality leads to social tensions and makes a large number of people in the country unhappy. Providing a good quality of life to its citizens and thereby making them feel happy must be the avowed goal of public policy in India. Therefore, it is essential to take policy measures to reduce inequality without sacrificing growth. However, I do not believe that increasing the level of taxation is the answer, because countless times in the past, both in India and in other countries, it has been shown that high levels of taxation act as a disincentive for wealth creation and growth.

The Human Development Report (HDR) 2023-24 paints a dismal picture for India by ranking it 134 out of 193 countries. The HDR ranks countries on the parameters of health, education, and quality of life. Santosh Mehrotra, an eminent economist, has calculated that India’s score in HDR is reduced by 31.1 per cent solely on account of economic inequality. He is clearly of the view that the poor cannot wait for the benefits of economic growth to trickle down. The solution lies in focusing on health, nutrition, and education to develop the capacity of our human capital and ensure that India reaps the benefits of its demographic advantage. If we do so, then we will be able to provide equality of opportunity to our youth and ensure gainful and productive employment for them. It is only growth with employment that will pave the way for India to move forward on the development path without having to face the ordeal of increasing inequality leading to general dissatisfaction among the people. India needs inclusive and sustainable growth.

The writer is an ex-Chief Secretary, Govt of Uttar Pradesh. Views expressed are personal