Spectacular economic growth over the past three decades has made India a global economic powerhouse and the third largest economy by purchasing power parity after China and the United States. .
However, the country has attracted negative attention in recent years as the second most unequal country in the world, after Russia. What this means is, despite living in one of the richest countries today, the average Indian is still relatively poor due to a highly-skewed income distribution.
While the surging economic growth has improved overall incomes and living conditions in the country, the gains have not been uniformly distributed; as the resulting income and wealth gap grows even wider, it will lead to unintended and adverse effects on society and on the economy itself.
Growing problem: Inequality is increasing in India and elsewhere around the globe
(Source: Manas Chakravarty and IMFA shrinking piece of a growing pieSince 1990, India’s GDP per capita has increased almost six times – but the upper classes have been the main beneficiaries.
According to the Credit Suisse Research Institute, the top 1% of India’s population owns nearly 60% of its wealth, trailing Russia, where the top 1% owns 74%.
The richest 10% of Indians currently own 80% of the country’s wealth. At the other end, the poorer half jostles for a mere 4.1% of national wealth.
Like the Gini index, which measures income/wealth distribution in society, the Credit Suisse Index estimates concentration of wealth among top wealth and income holders. The factors affecting wealth/income concentration include economic growth rate, demographic trends, savings rates, globalisation, inheritance, and government policies.
Although in terms of non-income indicators of well-being like life expectancy, infant and maternal mortality, sanitation, mean years of schooling, and female literacy India fared better than neighbouring Bangladesh and Pakistan, around 360 million Indians – or 28% of the population -- are still living in conditions of severe poverty.
Increasing wealth concentration is also reflected in income growth. Between 1988 and 2011, the incomes of the poorest 10% of Indians rose by $29, at an increase of 1% per year. In the same period, the income of the richest 10% increased by almost $615, at the rate of 25% per year.
Economic test: Compared with other emerging economies in Asia, India struggles to build a middle class
(Source: Manas Chakravarty and IMF)Cause and effectThe reasons for inequality include crony capitalism and corporations that exploit employees at the lower rungs to maximise salaries and dividends for executives and shareholders.
As the French economist Thomas Piketty shows in his seminal book, Capital in the Twenty-First Century, the surest way to grow wealth is to possess it.
The super-rich can avoid taxes by using innovative schemes to shelter their wealth and manipulate the political system without repercussions.
This impedes the government’s ability to raise revenues and thereby limits social spending on health, education, and employment.
Economic inequality has been shown to ignite and exacerbate various social ills such as violent crime and inter-group conflict
India already fairs poorly in this area. Currently, 3% of GDP goes towards education and only 1.3% towards health. By comparison, the corresponding statistics in China are 4.3% and 5.4%, respectively.
Higher income inequality also impedes class formation, which further slows down poverty reduction.
In particular, the growth of the middle class plays a significant role in strengthening democratic structures and cultures. But rising income inequality in India is hampering the formation and growth of the middle class.
If one were to take an income of $10-20 per day in 2011 purchasing power parity as an indicator of the middle class, then India has not done as well as Malaysia, Indonesia, and China in growing its middle class.
According to the International Monetary Fund (IMF), the higher income inequality has lowered the effectiveness of growth to combat poverty and significantly slowed the building of a sizeable middle class in India.
The aftermathEconomic inequality has been shown to ignite and exacerbate various social ills such as violent crime and inter-group conflict.
If rising income inequality is allowed to continue unchecked, it will create a host of problems and general public discontent -- ultimately undermining the country’s long-term development, economic and national stability, and socio-economic well-being of its citizens.
Inequality, therefore, not only hurts the poor but everyone who lives in the country.
Riaz Hassan is visiting research professor at the Institute of South Asian Studies at the National University of Singapore and director of the International Centre for Muslim and Non-Muslim Understanding at the University of South Australia and Emeritus Professor of Sociology at Flinders University. This article previously appeared on YaleGlobal Online and has been reprinted with special permission
