Blunting inequality

India needs reforms that increase opportunities for the poor

A new research paper by Lucas Chancel and Thomas Piketty, titled “Income inequality, 1922-2014: From British Raj to Billionaire Raj?”, says that the share of national income accruing to the top 1 per cent income earners is now at its highest level since the creation of the Indian income tax in 1922. In other words, the current income inequality in the country is worse than what it was before Independence. But the trend of inequality has not been consistent. As the paper found, the top 1 per cent of earners accounted for less than 21 per cent of total income in the late 1930s. This share fell sharply to just 6 per cent in the early 1980s. However, since then, it started rising again and was pegged at 22 per cent in 2014. 

In a clear contrast to the fortunes of the top 1 per cent, the bottom 50 per cent group accounted for 28 per cent of total growth between 1951 and 1980. During this period, the incomes of this bottom half grew faster than the national average, even as the share of the uber rich (the top 0.1 per cent) declined. But, since 1980, the tables were turned with the uber rich capturing a higher share (12 per cent) of total growth than the bottom 50 per cent (11 per cent). More broadly, during this last phase (1980 to 2014), the top 1 per cent cornered a higher share (29 per cent) of total growth than the middle 40 per cent group, which accounted for just 23 per cent.

There are several points to note in these findings. First, rising inequality does not necessarily result in rising poverty. It is quite possible for inequality to rise even as more and more people are coming out of poverty. For instance, in India’s case, the proportion of the population living below the official poverty line of an income of $1.90 a day came down from almost 46 per cent in 1993 — when India was opening up its markets — to just above 21 per cent in 2011. Nor would it be correct to infer that since inequality came down during a phase when India had modest growth rates (1951-1980) and rose during the higher growth phase (1980-2014), economic growth per se is anything less than critical for removing poverty. 

However, there is reason still for policymakers in India to take these findings seriously. That is because while most other countries experienced similar unequal growth dynamics, India’s case was striking. When compared to countries such as the US, France and China, India had the highest gap between the growth of the top 1 per cent and growth of the full population. This shows that even though higher growth and rising tax revenues were alleviating poverty, the gap between the top and the bottom in the country was more than any other country. Such a high level of inequality is an invitation to social unrest at the best of times. It becomes worse when growth falters for any reason, as it seems to be doing now. What the government must do is to aggressively pursue reforms that improve the quality of opportunities available to the economically weaker sections of society.