The persistence of unequal growth will be bad for India (2024)

The state of wealth and income inequality is the worst in 100 years. The top 1% of the country receives nearly 23% of the annual national income and holds a staggering 40% of the wealth. The country now has 271 dollar-billionaires, with 94 being added in 2023 alone. One of the authors of the report is Thomas Piketty, who is the world’s foremost critic of worsening inequality everywhere. Piketty’s research uses data not just from income and expenditure surveys, but also from income-tax filings. The latter tend to be more truthful than survey responses. But using tax data in the Indian context has severe limitations. It does not stretch back for 100 years. The fraction of people who file income tax returns is small; and only a tiny fraction of them account for the bulk of taxes collected. So there is a double skew.

The point is not to quibble with the data sources used in the WIL report. Inequality has worsened in India across dimensions, beyond income and wealth. It is reflected in access to good-quality education and healthcare, in basic amenities like drinking water, and in securing jobs and livelihoods. The latest unemployment report published jointly by the International Labour Organization and Institute for Human Development paints a grim picture on youth unemployment, especially of those with college degrees, and of wage stagnation. That this is happening while India is among the fastest-growing economies in the world makes the inequality phenomenon worrying.

The more contentious debate is on growth versus inequality. One view, echoed by the chief economic advisor, is that India must focus on promoting high growth and ignore inequality for now. It is the growth process that will generate the dividends required for a more generous redistribution policy. India’s free-food scheme, covering 813 million people for the next five years, provides basic food security. The government can afford it only if high growth leads to high tax revenues, direct or indirect.

The opposing view is that inequality has reached unacceptable levels, and that the growth process itself is causing inequality to worsen. In 1990, China and India had roughly the same economic size, population, per capita income and global rank. Today, China is the world’s second-largest economy and its rank by per capita income is 68. India is the fifth-largest economy with a per capita rank of 141. The difference in growth rates over three decades is about 3 percentage points. But China’s growth has delivered benefits that are more widely diffused in its population, whereas the lion’s share of India’s growth went to people at the very top. That’s why India’s per capita rank is stuck. The income growth rate of the bottom half has stayed below the average growth rate of national income over that long period. Everyone’s income was rising, but at the top, it was galloping.

Aided by liberalization, the growth process unleashes innovation and animal spirits, which helps higher-productivity sectors surge ahead while others lag. In the early stages of such growth, income inequality tends to increase due to urbanization and industrialization, and then decreases as a threshold level of development is reached. The decline is attributed to increased access to education, technology and more inclusive social and economic policies. This is the famous Kuznets hypothesis and the inverted U-curve of inequality versus growth. But in India’s history of the past three decades, the evidence is ambiguous or contradictory. There is a ‘winner takes all’ element, and then the winner stays permanently ahead. Social and financial capital enjoys an inter-generational advantage. The chances of churn, wherein someone from the bottom deciles is thrown into the top-most decile within one generation, are slim.

Persistent inequality might be acceptable so long as there is sufficient social and economic mobility and churn. But a growth process that leads to rising inequality and more rigidities is ultimately detrimental.

We must consider the possibility that reducing some inequality could be growth-enhancing for India. We can do this not merely by means of more welfare spending, but by increasing public spending on education and enhancing human capital.