Inclusive growth

Inequality can affect economic prospects

The issue of inequality has attracted significant public attention in the recent period, particularly in the aftermath of the pandemic. One of the popular views among economists and commentators is that the recovery from the pandemic has been led by corporate profits, and those dependent on wages, especially at the lower levels of the income pyramid, suffered disproportionately. Since there has been a visible formalisation of the economy, production seems to have moved from the unorganised sector, which tends to be more labour- intensive, to large firms. The argument is supported by the performance of different sectors. Sales of big cars and premium real estate, for instance, seem to be doing well, but growth in fast-moving consumer goods has been weak. In this context, finance ministry economists have done well to include this issue in their collection of essays released last week.

Inequality has been a matter of debate in economic literature globally, in part because of its persistence over the years in most countries. As the essay highlights, according to the World Inequality Database, the share of global income going to the top 10 per cent has been 50-60 per cent over the past 200 years. Meanwhile, the share of income flowing to the bottom 50 per cent has been around 10 per cent or lower. There have been various explanations for inequality. Economist W Arthur Lewis, for example, argued that economic dualism at the early stages of development — traditional and modern industrial sectors — contributed to inequality. Economist Simon Kuznets argued that inequality tended to follow an inverted U-shaped pattern. Inequality goes up as industrialisation increases and starts decreasing at a later point.
 

In the Indian context, according to one study, consumption inequality witnessed a decline between 1983 and 1993-94, but increased in the decade following the 1991 reforms. This should not be surprising as growth increased after reforms, with the increasing role of the private sector and its incentive structures. Since India has not had the results of a household consumption expenditure survey over the last decade, several recent studies have relied on different sets of numbers to arrive at different conclusions. However, the broader policy question in the Indian context is: Should it focus on growth, or redistribution and equality? The essay favours the former and notes: “…for a developing country such as India, where the growth potential is high and the scope for poverty reduction is also significant, the focus needs to continue to be on growing the size of the economic pie rapidly, at least for the foreseeable future”.
 

To be fair, India needs high economic growth to lift people out of poverty and improve living standards. However, what is worth pondering is whether it can sustain high growth in the medium to long run if a large proportion of the population is unable to participate in the growth process. In this regard, it would also be worthwhile to gauge if the current and potential growth rates would be sufficient to increase the pie fairly rapidly. The state of the Indian labour market, in a way, reflects the real challenge. India has not been able to shift enough people out of agriculture, which is affecting growth and incomes. In fact, a desirable shift in labour-market conditions could help improve growth prospects, reduce poverty, and address inequality.