The Narendra Modi government's economic policies have catered to a wide range of stakeholders in the economy. It's now time for it to focus on the quality of economic growth and the inequality associated with it. A recently published paper by Thomas Piketty and Lucas Chancel offers some insightful information on the inequality issue in India.
The sharp increase in the income share of the top 10% between the years 2000 (40%) and 2010 (55%) indicates a shift in the economic distribution of wealth in India.
The notion that inequality has been widening has been documented by several economists in an intuitive manner. However, the income share of the top 1% in India from 1922-2014 reinforces this spectacularly, as seen from Figure 1 from the above-mentioned paper. The income share of the top 1% was as high as 21% in the 1940s, dropping almost by half post independence in 1950 and further to just 6% by 1980—the lowest level of inequality since independence. Post the economic liberalisation of the 1990s, however, there has been a steady and significant increase in the income share of the top 1%. This has surpassed pre-independence levels and reached 24% as per these findings.
The national income growth from 1951-2014 also shows some interesting trends. As shown in Figure 2, the inflexion point has been the 1980s, when the top 1%, top 10% and the entire population were on similar levels of annual per adult real income. Around the mid part of the 2000-2010 years, the contribution of the top 1% peaked and has since dipped a bit to come to levels similar to the top 10%.
Other commentators on the subject have also argued about increasing inter-state inequality. In a recent column, economist Vivek Deheija, argues about how the 3-3-3 model has created a situation where the top three states in the country have three times the income as the bottom three states.
Figure 2: National income growth, 1951-2014
To me, the most striking feature of the Piketty research is in the graph depicted in Figure 3. The sharp increase in the income share of the top 10% between the years 2000 (40%) and 2010 (55%) indicates a shift in the economic distribution of wealth among the country's inhabitants. This single graph underlines the need to bridge this gap for India to progress. It also shows why it is a very important issue for the Modi government to address in the 2019 re-election campaign.
Figure 3: Top 10% vs. middle 40% income shares in India
The first thing that needs to be is done is to reduce the governance deficit under-performing states. Most of the more prosperous states have better governance mechanisms and as an extension have better welfare delivery mechanisms as well. As such, this governance deficit needs to be addressed. This could be done through reorganisation of states (e.g.: splitting of UP into four smaller states) in order to promote better governance and growth prospects.
The second important factor in this is to boost interstate competition on economic parameters. While there has been a trend of competitive governance between states, there has to be a concerted effort to monitor and cultivate a competitive surge between states towards economic development. The recently released IDFC-NITI Aayog Ease Of Doing Business Index and survey could be a good benchmark for this. The government could use this survey to understand inter-state business governance issues and use this catalyst to promote inter-state competition and reward states with better economic packages. Not only would this enable greater competition, it would also utilise the open markets that a liberalised economy such as ours provides.
It is imperative that mechanisms are in place to meet the challenges of inequality and to address the growing urban-rural difference in opportunities too.
Another key component of meeting the inequality challenge is to address unemployment and the urban-rural inequalities therein. It is imperative that the government steps in and implements central programs that can boost job growth (such as MUDRA). The Smart Cities initiative could be a good bedrock for these opportunities. Most of these cities have job opportunities across the economic spectrum and a linkage between these programs to individual cities could boost employment significantly through the years to come too. In addition, it is also important to strategically capitalise on state potentials to boost growth and employment as well. For example, the eastern states, with low labour costs, could be the next export hub for India and this route could be used to trigger opportunities for that sector.
In conclusion, inequality is a significant issue for India as it tries to forge its way to becoming an economic superpower. It is imperative that mechanisms are in place to meet the challenges of inequality and to address the growing urban-rural difference in opportunities too. While the GDP figures are important, the inequalities at the base level can change the electoral-political dynamic.