Income Inequality: An increasing pain in the neck
Fahid Fayaz Darangay
Income in its true economic sense means the remuneration (money or value) received for providing a good or service or through investing capital, both human capital and financial. For individuals, income is received in the form of wages or salary and business income can refer to a company’s remaining revenues after paying all expenses and taxes.
For the smooth functioning of an economy every individual needs to earn income that too in approximately equal amounts. The inequality in income is a matter of discussion among policy makers, thinkers, economists and governments of the countries. India along with almost the whole world is suffering from this economic problem.
How it hurts? A little degree of inequality acts as a positive influence on economic growth in the short term. Some economists has found empirical evidence of a negative correlation of about 0.5-0.8 percentage points between long-term growth rates and sustained economic inequality. Thus higher rates of inequalities stifles growth rate.
A theory explains, growth gets suppressed in economically unequal societies. After a phase of increased growth, by the decreasing availability of investments for human capital. Physical capital becomes increasingly scarce, as fewer individuals have funds to invest in training and education.
Many studies have showed a positive relationship between income inequality and crime. A conducted between 1968 and 2000, most researchers found evidences that economically unequal societies have higher crime rates. That survey concludes that inequality is “the single factor most closely and consistently related to crime.” A wide gap between rich and poor tends to increase crime by reducing law enforcement spending in low-income areas. Wealthy members of a society tend to concentrate in secluded communities, especially as the disparity between the rich and poor increase.
When wealth comes in a small number of hands, political power tends to become skewed in favor of that small wealthy group. High-income groups are able to manipulate government in their favor through both legal processes and through corrupt practices. Hence, income inequality promotes political inequality and disparity.
Some facts and numbers about India:
India is one of the most unequal income distribution countries. This can be felt from the fact that India in the rural parts of 35 states and UTs of India is having 25.7 per cent of population is living below the poverty line. In the urban areas, the situation is a bit better with 13.7 per cent of the population living below the poverty line. Concluding around 22 percent of the Indian population is carrying out its livelihood, while being below the poverty line as reported by Reserve Bank of India but also according to Credit Suisse report in 2018 India had 3.43 lakh dollar-millionaires, out of which 1,500 had wealth in excess of $100 million. This report also projected that by 2023 the total number of dollar-millionaire Indians is expected to go past 5.26. The top 10% of the Indian population holds 77% of the total national wealth. 73% of the wealth generated in 2017 went to the richest 1%, while 67 million Indians who comprise the poorest half of the population saw only a 1% increase in their wealth.
Billionaires’ fortunes increased by almost 10 times over a decade and their total wealth is higher than the entire Union budget of India for the fiscal year 2018-19, which was at INR 24422 billion.
Many ordinary Indians are not able to access the health care they need. 63 million of them are pushed into poverty because of healthcare costs every year – almost two people every second.
It would take 941 years for a minimum wage worker in rural India to earn what the top paid executive at a leading Indian garment company earns in a year.
The following figure clears the above facts:
The source of the graph is Economic survey of India.
By investing in agriculture and increasing the tax rate of high income population, income inequality can be reduced to a significant extent. As per the World Bank, agriculture can help reduce poverty for 80 per cent of the world’s poor who live in rural areas and work mainly in farming. When this population earn more income, this will straight forwardly decrease the income inequality.
In 2018 International Monetary Fund Chief Christine Lagarde said, if women’s participation in the workforce matched men’s, Japan could grow at 9 per cent per annum and India at 27 per cent. Therefore investing in women’s education can also will be of great help.
Controlling Monopolies and implementing Restrictive Trade Practices and minimum wage policies will decrease the income inequalities.
(The author is pursuing Masters in Financial Economics from Madras School of Economics, Chennai)