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What is driving inequality in India?

, January 28, 2016, 0 Comments

inequality-in-india-marketexpress-inIndia is home to the fourth largest number of millionaires in Asia, with the country hosting 236,000 individuals with assets of over $1 million by the end of 2015, according to a recent report published by South Africa-based New World Wealth.

The South Asian nation also boasts more multi-millionaires than any other country in the region after China and Japan – a reflection of the enormous wealth created in India over the past two decades following the liberalization of its economy.

At the same time, this trend seems to have widened the gap between those at the top and the bottom of the wealth distribution, despite India’s impressive economic growth rates.

The Gini coefficient is the standard measure of inequality, with zero representing total equality, and 100 indicating complete inequality. In India, the index rose from 30.8 in 1993 to 33.9 in 2009, the year for which latest World Bank data is available.

Growth and inequality

This development suggests that the policies implemented to boost growth and eradicate impoverishment have also contributed to exacerbating social inequality.

In the early 1990s, India unleashed a set of historic measures – including the deregulation of markets, a cut in import tariffs and an opening up of certain sectors for foreign investment – aimed at boosting the economy.

While many Indians live on less than a dollar a day, the country boasts a relatively high number of millionaires. DW takes a look at the factors behind this gap between the rich and the poor.

While market-friendly reforms have succeeded in pulling millions of Indians out of poverty, economists say a significant proportion of the population is not reaping the benefits of economic growth. This, in turn, has led to a small elite owning a high share of the nation’s wealth.

For instance, Credit Suisse estimated in a 2014 report that the richest one percent of India’s population controls about 53 percent of the country’s wealth. Even central bank governor Raghuram Rajan has criticized the rise in inequality – an issue that has gained prominence not only in India, but also across the world.

Globalization and the advent of new technologies have been blamed for much of the rise, with some experts claiming these have eroded the power of labor unions, among other things. Moreover, a host of international organizations and think tanks have pointed to the adverse effects a lopsided distribution of income and wealth can have on any economy.

Is the market economy to blame?

In India’s case, experts say a combination of factors have been driving inequality. Vamsi Vakulabharanam, an associate professor of economics at the University of Massachusetts Amherst, argues that it is largely caused by the market-oriented and business-friendly economic model that has been implemented in India over the past thirty years.

According to the economist, the model has tended to neglect the millions of small farmers, landless agricultural workers, rural non-agricultural workers, and urban informal workers, while benefiting a small enclave in the Indian economy.

This “enclave,” consisting of urban capitalists, managers, and professional workers, has created a space in which investments, consumption and exports come out of relatively luxury-oriented sectors, while a large part of the economy plays the role of providing cheap labor that feeds into the strengthening of this enclave.

“Small producers have been displaced from their lands or other means of production to be thrown into the labor markets without too much security, while urban elites (or foreign capital) have utilized mineral resources, land and other assets,” said Vakulabharanam, who believes that such policies have come out of a strong nexus between politicians and business people.

A weakening of welfare measures

In this context, the India expert told DW that the economic measures introduced by the government of PM Narendra Modi are unlikely to reduce inequality. In fact, in a recent op-ed published by Al Jazeera, Vakulabharanam writes that Modi has “substantially weakened” the welfare measures introduced by the previous government.

For instance, he points to New Delhi’s attempts to introduce a bill that will make acquiring agricultural land easier for investors in the name of simplifying rules for doing business. “Such a bill would also displace and further impoverish the poorest Indians, agricultural workers, who would join the ranks of urban informal labor,” he said.

In addition, Vakulabharanam argues that Modi’s “Make in India” strategy designed to attract foreign and domestic capital to make the country an important manufacturing hub of the world “may not succeed and will not reduce inequality.”

Given the emphasis of this strategy on attracting foreign and domestic urban elites, the kinds of jobs that will be created “will not come with labor protections and decent wages. These will only further increase the income gap between urban elites and the rest of the population,” he wrote.

A different view

But not everyone agrees with the view that market-friendly policies are benefiting only India’s elite. On the contrary, some cite the country’s consistently falling poverty rates to justify why market-oriented policies are working.

“The poverty ratio – the fraction of people living below the poverty line – was around 40 percent in the late 1990s and is about 20 percent now,” said Pravin Krishna, Professor of International Economics and Business at Johns Hopkins University, adding that this large reduction in poverty rates is observed in both rural and urban areas, across all religious groups and among the socially disadvantaged.

Furthermore, since the 1990s, there has been a remarkable increase in the size of the middle class, the expert told DW, underlining that taken together, these changes “suggest that income dynamics in India have largely been positive in recent years.”

When asked about growing concerns over the widening rural-urban wealth divide, Krishna said the gap hasn’t actually increased over time but rather remained steady. He also believes that most inequality in the country is experienced within and not between rural and urban areas. “In both urban and rural areas the wealthy and the poor reside side by side,” he said.

What to do

Experts have different views as to how best to reduce inequality. Vakulabharana says the Indian government first needs to set up strong agriculture-friendly policies that benefit both small farmers and landless workers, in order to curb distressed migration from rural areas.

He also emphasizes that urban growth has to be based on labor-intensive industrialization, so that enough jobs exist for both people who leave rural areas and the millions working in the informal sector.

Krishna, on the other hand, stresses the Indian government’s primary focus should be to provide a framework in which rapid economic growth can be achieved. “Furthering market reforms and ensuring increases in the productivity of the system is India’s best chance of lowering poverty and providing opportunities for the millions who join the workforce each year,” he said.

The Modi-led government has proposed several economic policy reforms and rolled out some schemes aimed at addressing the concerns of the poor. “I expect that these will yield benefits in the short to medium run,” said Krishna.