The recently released World Inequality Report (WIR) 2018 poses challenging questions for the captains of India’s economy.
The report, written by leading economists at the University of California, Berkeley, the University of Oxford and the Paris School of Economics, is especially drastic when comparing India with its fellow large emerging economies.
According to the latest data, India shows the fastest rise in the share of national income going to the richest 10 per cent: from 31 per cent in 1980 to more than 55 per cent in 2015, a 24 percentage point squeeze of the poor and middle class together.
In China, the top 10 per cent appear to be stalling at 42 per cent of national income, while the poor have “higher access to education and health infrastructures than in India”, allowing for “higher growth and less inequality”. Worldwide, the bottom 50 per cent of earners have seen their share of income grow since 1980, with most of the gains in China and Brazil.
Little progress has been made in India, which is struggling to reduce poverty despite boasting the fastest rate of economic growth in the world. Much blame lies with the labour market, the engine with which other economies have lifted people out of poverty and enlarged the middle class. Many observers have long held concerns about job-restrictive regulations — the WIR findings offer a great framework with which to understand them.
The report’s headline finding concerns the global middle class, the mid-40 per cent of earners. From a peak of 31 per cent of global income in the late 1980s, their share has decreased to between 26 and 29 per cent. One of the WIR’s most damning forecasts is that the future of the global middle class is grim, with a decreasing share of earnings likely to reach just 25 per cent in 2050.
It is a widely held assumption that the western middle class is the most endangered, while in emerging economies an ever-burgeoning middle class is on the rise. Alas, this is a myth. A July 2017 paper by Lucas Chancel and Thomas Piketty shows that the share of incomes going to India’s mid-40 per cent fell to 30 per cent in 2010, from as much as 46 per cent in the early 1980s.
India’s government under Narendra Modi has been keen to embrace the new global economy, from trade to foreign direct investment, through digitalisation. The WIR, however, highlights that India cannot simply embrace the global economy to the benefit of its elites — where globalisation has created winners and losers in the west, so it will in India. Thus, Modi must focus on the labour market first and foremost, and on creating sustainable, well-paid jobs for the bottom 50 per cent and those in danger of slipping out of the middle class.
The good news for Modi and his government is that the job market in India is on the cusp of a whole host of new-age revolutions that could yet transform employment and entrepreneurship on the subcontinent. These include closing the gender gap, direct selling and off-grid energy services.
An August 2016 report by McKinsey (India’s ascent: Five opportunities for growth and transformation) notes that women contribute only 17 per cent of India’s GDP, and estimates that India could add $700bn to its GDP in 2025 by closing this gap.
A May 2016 report by KPMG and the Federation of Indian Chambers of Commerce and Industry says the direct selling industry has the potential to grow nine-fold to reach $10bn by 2025 and self-employ 1.45m people, despite a current lack of clear regulation. There is urgent need for reform, given the industry’s exponential growth and impact on self-employment and entrepreneurship. Direct selling entrepreneurs will hope for swift resolution of various legal cases under consideration at India’s supreme court.
Yet another rich avenue for jobs growth is the development of the off-grid energy industry. The Rockefeller Foundation has worked in India on supporting local entrepreneurship in off-grid electricity and battery storage, providing mobile phone recharging services in rural areas, and power for fridges and other devices. This transforms goods into services and generalises access through shared ownership.
Initiatives to curb and reverse the trend towards greater inequality are already under way in India, but full implementation is proving difficult. As with all new forms of non-digital, low skilled entrepreneurship, they face regulations left over from India’s old economy.
With Modi eagerly awaited by the global community at the World Economic Forum in Davos, let us wish for the Indian middle class that Modi, the Indian judiciary and the captains of India’s economy have considered the findings of the WIR. Modi has a clear aptitude for governing. He now must use this aptitude to further unleash India’s economic potential.
Joël Ruet is president of the Bridge Tank and a specialist in emerging economies.
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