Why Inclusive Growth Needs Lower Inequality
“Why does sustained economic growth or development require inequality to be lower than what it is?” started Dr. Ajit Ranade in casual yet fascinating manner. And as aptly introduced by PP Shailesh Haribhakti, Dr. Ranade did afford us with his immense knowledge of economics and practical insights on a subject that is critically important to the whole world as it is to India.
He began by explaining the difference between poverty and inequality, which are most often used interchangeably, even though they mean differently. “Poverty”, he said, “is related to one’s income, consumption, and spending power. In a rigorous scientific way, it can even be defined in terms of the nutrition or calories one gets from what he eats, or in terms of attainment of health and education. In an absolute way, the thumb rule set by the World Bank defines poverty as somebody who earns about 1.5-2 USD a day.”
He mentioned that India’s record in reducing poverty has been pretty good. In fact, between the years 2004-2012, the country has had the most rapid reduction in poverty in our entire 70-year history. “Of course, we have a long way to go, but it is a commendable thing, and we ought to be proud of it”.
“In some societies like Canada, access to electricity is almost on par with a fundamental right, though not as a part of their constitution but almost on par. So if you don’t have access to electricity, it is like denying yourself of freedom of speech. Also in Sweden, you may have committed murder but as a prisoner, you have a right to access Internet! Therefore, the standards of what societies believe are its entitlements or basic entitlements keeps going up and the definition of poverty keeps changing”, said Dr. Ranade.
“Inequality, on the other hand, means comparison, comparing rich vs. poor or the haves and the have-nots. It focuses on distribution. Strictly speaking, you can have a country where there is no poverty but high inequality. And conversely, you can have a society that has high poverty but almost no inequality, for example Cuba. Therefore, poverty and inequality are different concepts.”
Elaborating further he said, “Unfortunately today, inequality has been going up considerably the world over. It is most well documented in a country like USA where despite the rising GDP and rise in the total national income, the median income or the average wages have been stagnating for the past 40 years.”
“So what does that mean?”, questions Dr. Ranade. “It means that the gains from the increase in national income are going to a smaller and smaller section of the society. And this phenomenon is well documented by French economist, Thomas Piketti, across America and in Europe.”
“In terms of wealth, it’s even worse. Wealth is nothing but accumulated income. So if the income is always accruing to the well off, then you can imagine how worse the inequality ratio of wealth is!”
According to the Oxfam (an international confederation of 18 NGOs working in over 90 countries to end the injustices that cause poverty) report, about 62 Billionaires in the world have as much wealth as the bottom half of humanity. “It is just a mind-boggling statistic, which is very stark. This is because, in a free market process that most economies operate under, there is nothing inherent which ensures a fair distribution of income.”
“Also the definition of fairness is a very personal and subjective thing. What I think is fair or unfair; you may not consider it that way. The fairness concept is so personal that it can be expanded to the society as well. So when we talk about inequality, it is also about fairness from a moral point of view. And when that subjectivity changes to an economic point of view, that is when inequality becomes bad for growth”, asserts Dr. Ranade.
So when does inequality ultimately hurt growth? And why? “Take BRICS countries for example, in terms of inequality, Brazil and Russia are worse than the other countries. Brazil has been growing at -5% for the last two years, and Russia too, has been moving between -3 and -5%.”
Explaining his belief, he says, “I’m not linking the negative growth in these economies to inequality, but if you take the top 10 economies in the world, in terms of sustained growth rates, they have relatively low inequality. That’s because, when inequality becomes large, society starts spending its resources and money on things like security systems, builds up gated communities, system to segregate people or to control riots.”
“What is happening in Gujarat with the Patel agitation or earlier in the case of Gurjarat agitation? You may think of it as resistance for reservations, but somewhere in my mind, it is triggered by the rising inequality. Inequality in access, not to wealth, but to opportunities, access to education, access to jobs. So at some point unequal societies have to start combating things like agitations, unrest, distrust, and decline in social trust, and therefore breakdown of commerce”, continues Dr. Ajit Ranade.
“To me, all these are manifestations against economic deprivation, or more importantly about inequality. Even an affluent society like America is facing the Trump phenomenon, and so is UK with its sharp division at BREXIT. Therefore, it clearly shows that these happenings are not anti-poverty, but against inequality, and that inequality is now at a breaking point.”
Shifting focus to India, Dr. Ranade exclaimed, “Shall we have to wait for our own BREXIT moment to come or our own Trump phenomenon to happen? Are we convinced that Indian inequality too is getting out of hand? Well, let me give you some figures – as per the economic survey of 2016, India has the lowest tax to GDP ratio in the world. So here we are trying to give some basic stuff to our countrymen, basics like education, health, drinking water or nutrition to kids. What do you need for this? You need some tax resources or public funds, and with our tax to GDP ratio being a mere 10-11%, it seems difficult”.
“Not just that, what is this tax made up of? It is made up of direct tax and indirect tax. Meaning direct tax i.e. income tax, and indirect tax which comes from sales tax, excise duties and now GST. So when people fail to contribute to direct tax (only 4% Indians pay their income tax, while 96% don’t!), guess what, all kinds of indirect taxes start increasing! So when you talk about the Swachh Bharat Cess, or about the Krishi Kalyan Cess, or the frequent increase in the excise duties of petrol and diesel, these are all indirect taxes and are applicable to all. However, indirect taxes impinge more on the poor compared to the rich, meaning that it is unequal form of taxation. I’m not saying that we go back on GST, but we need to be aware of these tendencies in our tax system”, he added.
“Unless we have a balance between direct and indirect taxes, like in most countries of the world, where 65% comes from direct taxes and 35% from indirect taxes, we are soon going to reach a breaking point. Let’s not wait for that breaking point, instead be aware that inequality is harmful for growth. Inequality is bad for its own sake because of moral judgment, but I’m not going to impose my morals on you. But as a society we need to take a moral stand. However, even before that there is an economic utilitarian view that beyond a certain point inequality starts hurting growth, will be counter productive, and will jeopardize our bright economic prospects. We need to be aware and readily cooperate and agree to measures that will reduce inequality.”
Dr Ranade concluded his speech with these profound words, “In politics we have equality, but in social and economic life we have inequality. In politics we recognize one-man, one vote; but in social and economic life, we continue to deny the principles of equality. How long shall we continue this life of contradictions? How long shall we continue to deny social and economic life to all people in India? If you continue to deny it for too long, we will do so by putting our great democracy in political peril. We must address this contradiction at the earliest possible, or those who suffer from inequality in our society will blow up this democracy.” – Dr. Babasaheb Ambedkar, November 26th, 1949.
So if we want inclusive sustainable growth, we have to address this problem on inequality head on – this has to be priority #1. Also, we have to set an example for the rest of the economies that India can be inclusive and yet have sustainable growth.