Subir Gokarn: Thoughts on inequality

The solution is private participation in education with a regulatory mechanism.

The Prime Minister's remarks at the annual meeting of the Confederation of Indian Industry (CII) on May 24 have provoked a wide-ranging debate on the question of whether corporate salary levels are too high. I had an opportunity to air my views on this in the BS Debate published in this newspaper on May 30. My view was that, while the debate on the broader causes and consequences of inequality is legitimate, placing the issue of corporate salaries in this context was unwarranted. The public debate on Dr Singh's remarks is already widening to encompass the broader dimensions of inequality. In this article, I would like to express some initial thoughts on the subject.

To begin with, we must distinguish between inequality in outcomes and inequality in access. Every country has to make a collective decision as to which form they put priority on. The entire economic and social policy framework depends on this decision. On this, historical experience suggests two generalisations. One, the sustainability of a system that attempts to suppress inequality in economic outcomes is doubtful. Two, a system that emphasises the former can accommodate a fair degree of inequality of outcomes without any threat to its survival.

Clearly, once a country has made a choice, by whatever means, a set of institutions and mechanisms that are consistent with that choice need to emerge. These have to play three critical roles. One is to build the capabilities to take advantage of equal access. Education, healthcare and so on fall into this category. The second is to ensure that what is intended in theory is implemented in practice. Enforcing all channels of equal access is the responsibility of these mechanisms. The third is to keep the degree of effective inequality under control. Tax regimes, targeted subsidies and an efficient provision of public goods perform this role.

I think we made a choice to move from the former to the latter, in the process, accepting the trade-offs involved. However, the imperatives arising from that choice in terms of the mechanisms needed to both build capabilities and enforce access have simply not kept pace. A number of factors are responsible for this, but, whatever the reasons, the mismatch seems to have brought us to a point in our political discourse where that fundamental choice itself is being questioned.

In the light of the generalisations from history suggested above, it would be extremely unfortunate if the pendulum were to swing back to a forced equality of outcomes. The only enduring solution is to build the mechanisms that, in performing the three key roles, sustain the long-run performance of the system.

While the overall picture may seem quite bleak in this regard, there are many examples of successful equal access to be found in the Indian experience. These examples provide useful insights into how the process works within our socio-economic context and where we might want to focus or efforts in strengthening the virtuous circle that genuine and widespread equality of access sets in motion.

Let's take the corporate sector, the epicentre of the current debate. Between the late 1980s and today, the characteristics of the top tier of companies in the country have fundamentally changed. A large number of companies that were set up by first-generation entrepreneurs are now on the list, displacing "old money" companies, which had risen to prominence in the previous regime. Yes, a significant proportion of these is in IT, but other sectors are represented as well. It is an exclusive club alright, but as long as entry is based on capability, good business strategy and effective execution, anyone can aspire to it.

There is little question that "ascribed" status in the corporate environment has made way to "achieved" status. Granted, there hasn't been total displacement, but then, the record of mature economies indicates that there never will be. What matters is that membership of the club is a realistic aspiration for everybody, which, in turn, is an incentive for many more people to make the effort than otherwise would be the case. Therefore, even if one agreed that salaries were too high, at least one could draw some comfort from the fact that genuine merit was an increasingly important reason for people to get into situations in which they could command such salaries.

Our higher education system simultaneously demonstrates both the positives of equal access and the dangers of unsustainability. Heavily subsidising elite institutions certainly made them accessible to less affluent students and, to that extent, there were a great equalising force. However, the financial burden that this imposed restricted supply to a point where it is abysmally inadequate to meet the demand.

Weakly regulated private institutions, driven as they are by financial viability, will inevitably cater to the affluent and cannot, therefore, play an effective equalising role. The solution is obvious""private participation with a strong regulatory mechanism, which guarantees quality and tailors financial arrangements for each student in accordance with current affordability and future income potential.

The final example may appear paradoxical. I believe that the public sector, maligned as it may seem today, played a very significant role in the origins of the country's middle class. A large proportion of the "beneficiaries" of today's economic environment were born to parents employed in the public sector, mostly not in the elite echelons. Statistically speaking, that is due to the predominance of public sector employment amongst the previous few generations, but from a socio-economic perspective, the long-term guarantee of lifetime income incentivised progressively higher investment in the education of successive generations, which are paying off handsomely in today's environment.

I am not for a moment arguing that the way to greater equality of access is to increase employment in the public sector. Its role as a mode of entry into the middle class does not offset the several burdens it imposes on the system. But, we should not lose sight of the importance of a reliable income over the life cycle individuals as an inducement to the "right" kinds of economic decisions, both for themselves and their offspring. Rather than worry about a few people earning too much, the emphasis is better placed on as many people as possible earning enough, for which they need both capabilities and the assurance of equal access.

The author is chief economist, Crisil. The views here are personal