Time for India to reduce inequality

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In the recent flurry of writings on the rise of India’s economy, it is often said that economic inequality is far less widespread in India than in most other developing countries. For example, an article in Foreign Affairs on the “India model” claimed it is more “people-friendly” than most other development models, and that “inequality has increased much less in India than in other developing nations”. On the Gini index, a measure of income inequality on a scale of zero to 100, India scores 33, compared with 41 for the US, 45 for China and 59 for Brazil, the article notes.

Such accounts ignore the fact that the Gini index for India is for consumption inequality, not income inequality. For most countries, consumption inequality is lower than income inequality, as the rich save more than the poor. India’s National Sample Survey, a regular national survey of household expenditure, does not usually collect income distribution data, and the occasional alternative sources suggest a significantly higher Gini figure.

The survey does collect data on wealth. The Gini index for asset distribution inequality in 2002 was 63 (out of 100) in rural India, and 66 in urban India; the corresponding figures for China were 39 and 47 respectively. These data do not include ownership of human capital. In India, educational inequality – crudely measured as the Gini index of years of schooling in the adult population – is 56. This is not only much higher than in China (37), it is significantly higher than in most Latin American countries (Brazil is 39), and many African countries, not to speak of the US (which scores 13).

India’s traditional caste system arguably makes it one of the world’s most socially unequal countries. When one combines social and economic factors, India’s inequality is at the higher end of the world scale. Does it matter for economic reform? I believe it does, because social heterogeneity and economic inequality make it difficult to build consensus and organise collective action towards long-term reform and co-operative problem-solving. When groups do not trust each other in sharing costs and benefits of long-run reform, there is the inevitable tendency to go for attainable, short-run subsidies and government handouts.

Reforms have been halting in India. In the National Election Survey for 2004, the largest social-scientific study on Indian elections, three-quarters of respondents with any opinion on the subject said that reforms benefit only the rich. Indeed, over the last decade, even ruling politicians who supported reforms have played them down during election time, and a party that initiated reforms has been quick to oppose them when out of power.

This duplicity is also evident within the left: in states where it is in power, its representatives are often too driven by the inexorable logic of fiscal near-bankruptcy and competition for investment to be pro-reform; but in New Delhi, their leaders regularly indulge in ideological grandstanding. Of course, opposition to reform is not confined to the left. Trade unions of the right as well as leftwing groups are opposed to privatisation and labour reform.

Severe educational inequality, for example, makes it hard for huge numbers of people to absorb shocks in the industrial labour market, since education and training provide some means to adapt to market changes. In China the hardships of restructuring under a more intense process of global integration were mitigated by the fact there was some kind of a minimum rural safety net, largely enabled by egalitarian distribution of land cultivation rights. In most parts of India there is no similar rural safety net for the poor. So resistance to the competitive process that market reform entails is that much stiffer in India.

The discussion in India on economic reform is preoccupied with issues of fiscal and trade policy, financial markets and capital account convertibility. Reform would be more popular if it were equally concerned with the appalling governance of basic social and infrastructure services for the poor and with the need for greater transparency (recent attempts at backtracking on the new Right to Information Act, for example, do not bode well).

Opposition to economic reform thus reflects not just lingering nostalgia for old-style Fabian socialism. Without softening this opposition, Indian growth will remain hobbled in the global economy, contrary to the wishful thinking of the Indian elite and the expectations of the international media, blinded as they are by the triumphs of a part of the corporate sector which is as yet a tiny part of the Indian economy.

The writer is professor of economics at the University of California at Berkeley

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