Human Development

Growth of inequality

Print edition : August 05, 2016

Despite growth for certains sections, poverty and inequality continue to grow. Photo: Mohammed Yousuf

Inequalities in the distributions of consumption expenditure and household wealth have shown a systematic secular increase. This is true of other human development indicators such as mortality, morbidity, age and literacy.

WHAT has happened to growth in per capita income, to poverty, and to inequality in India in the last 30 or so years of economic liberalisation? There are economists who come close to suggesting that India’s growth performance has been spectacular, that reductions in poverty have been profoundly impressive, that the latter state of affairs is directly attributable to the former one, and that all of this has happened without any serious secular increase in economic inequality. At the other extreme, we have those who claim that the nature of growth has been dangerously non-inclusive and that poverty, over the long haul, has remained either unchanging in magnitude or has actually increased. There is cause to believe that a reasoned assessment of the facts of the case would suggest a more moderate inference than the picture yielded by such “reactionary” constructions at one polar extreme and “radical” constructions at the other extreme. In particular, it seems fair to assert that growth has indeed been impressive; that poverty has declined, but altogether less dramatically than “pro-liberalisation” analysts would claim, and that it exists in intensity and spread on a scale which continues to be a matter of grave concern; and that it is simply nonsense to claim that growth has not been accompanied by an increase in economic inequality.

The 1991 Crisis and the Aftermath

It is customary to date the era of “economic liberalisation” to the sequence of “reform” measures that were initiated by the Congress-led government following the 1991 economic crisis, although the move towards liberalisation had already begun in the 1980s. However, the crisis of 1991 is a helpful starting point. That crisis and the subsequent recovery of the economy are now part of the mythology (in that word’s senses both of legendary status and hyperbolic embellishment) of India’s economic development. From around the mid 1980s, India had been gradually building up to a balance of payments crisis, to the accompaniment of a growing fiscal deficit, depreciation in the real value of the rupee, and erosion of the country’s foreign exchange reserves, until a point was reached in mid 1991 when these reserves amounted to no more than the value of three weeks’ worth of essential imports. Foreign investor confidence in India was also on a downward spiral. Emergency measures were called for to deal with this crisis situation. To this end, India was forced to raise a loan from the International Monetary Fund (IMF) by pledging its gold reserves with the IMF. The main ingredients of the subsequent “liberalisation” programme ushered in by the government are by now well known: trade liberalisation, greater openness to foreign investment, financial deregulation, privatisation, public sector disinvestment, marketisation, and relaxation of the “licence-permit raj” culture which had dominated the relationship of the bureaucracy with private enterprise. It would be churlish to deny some of the positive outcomes of these strategies of “reform”—in particular, the growth in per capita income—although it is another matter whether these outcomes are to be certified as unqualified successes, or have been purchased at a non-negligible cost.

The singular (and impressive) feature of India’s growth performance has often been the only focus of attention of the country’s middle and upper classes and castes, who are happy to herald the arrival of their country at the doorstep of superpower status; and, now that we have won the 2011 Cricket World Cup and the 2016 T-20 Championship, apparently all that is left to achieve perfect bliss is to be allowed a place at the high table of the United Nations Security Council. We do not, when we assume such positions, pause to ask if our poverty statistics are based on reliable conceptual premises (which they are not); whether a more multi-dimensional approach to poverty would reveal a different picture (which it does); whether the sectoral composition of our national income could be excessively weighted in favour of services (which it is) and distressingly biased against agriculture (which also it is); whether the mix of foreign investment (direct and portfolio) is appropriate (which it arguably is not); whether it is either equitable or efficient to privatise services such as banking, insurance and financial intermediation; and whether reducing public spending (especially on capital formation and the social sector), as opposed to mobilising additional tax resources, is the right (and progressive) way of holding the fiscal deficit down. Should the growth story (which is itself now beginning to unravel, despite heroic efforts to salvage it with the assistance of fudged statistics) edge out our concerns about the profoundly more serious moral problems of poverty and inequality? Where do we stand in relation to these problems?

Poverty

Successive expert committees set up by the Indian Planning Commission have gone into the question of how to define the “poverty line” appropriately. It is remarkable that all of them have succeeded in getting the outcome wrong. Bereft of nuances of detail, the official procedure of setting the poverty line has been to identify it with that level of consumption expenditure at which a specified calorific norm of nutritional intake is observed to be actually achieved in some reference year which is certified as the “base” year. (This is done on the basis of data on the distribution of consumption expenditure across consumption and calorie size-classes.) The poverty line in subsequent years is obtained by simply “updating” this base-year poverty line by means of a suitable price index. This procedure takes no account of the fact that the choice of base year is an essentially arbitrary one. The choice of an “early” year as base year yields a pleasing trend of relatively small and declining headcount ratios of poverty. As we shift the base year forward in time, the declining trend (though at less steep inclines) is preserved, but at the cost of embarrassingly higher magnitudes of poverty. If we change the reference year at given intervals of time, then we tend to obtain an up-and-down regime of alternately falling and rising poverty rates. If we treat every year as a reference year, then we actually obtain a trend of increasing poverty rates, as has been established by the economist Utsa Patnaik.

With such shaky conceptual foundations, we are hardly in a position—given these methodologies of poverty assessment—to verify even the direction, leave alone the magnitude, of change in poverty over time. Indeed, as we move forward in time, we find that the observed calorific intake at the official poverty line keeps declining—a phenomenon now called the “calorie drift”. It is plausible that the drift occurs because as we move forward in time, people’s needs, and how these are prioritised, change in such a way that desired expenditures on education, health, clothing, footwear, transport and energy can only be met by tightening the belt. What is worst of all is that official poverty lines are set with apparently little regard for their adequacy in meeting the basic necessities of life.

The protocols governing the official measurement of poverty are, regrettably, frequently endorsed by independent professionals; and the deeply suspect logical and normative bases of these protocols are a poor foundation on which to build complacent theories of rapidly declining money-metric poverty. It is even worse that such dramatic declines in poverty have been attributed to neoliberal economic policies. Exercises aimed at decomposing the decline in poverty into a “growth effect” and a “redistribution effect” find that it is growth that plays an overwhelming role in accounting for the decline. This has led to the misleading commendation, and prescription, of growth as the great alleviator of poverty, when all that the result probably demonstrates is the poor record of redistributive effort undertaken by the state.

That poverty continues, or should continue, to be a major source of concern to us is brought home even more tellingly when we look at non-income dimensions of poverty, such as in respect of access to schools, public health centres, drinking water, toilets, electricity, elementary transport, roads and energy for cooking. Instances of simultaneous multiple deprivation in several dimensions bespeak a condition of an order of severity of poverty which compares badly with both the nation’s untapped potential for escaping poverty and the record of other comparably poor countries such as China, Sri Lanka and Cuba.

Inequality

Questionable measurement protocols have again played a major role in propagating the view that while economic inequality has perhaps increased to some extent in urban India, there is relatively little evidence of such an increase in rural India. A significant source of such findings is that the sorts of inequality measures most commonly in use are “relative” inequality measures—measures which display no variation if every person in a community were to have her income increased by the same proportion. Thus, the two-person income distribution (10, 20) would show the same amount of relative inequality as the distribution (20, 40), obtained by doubling each person’s income. This way of measuring inequality neglects to note that though the poorer person’s relative share in total income is the same, at one-third in both distributions, the gap in the incomes of the two persons has risen from 10 in the distribution (10, 20) to 20 in the distribution (20, 40). An absolute inequality measure would assert that inequality remains unchanged when every person in a community has her income increased by the same absolute amount. It is easy to see that, in the presence of income growth, relative inequality measures would tend to transmit a “rightist” message, and absolute measures a “leftist” message. Away from these extremes is a “centrist” measure which has the property that inequality increases with an equi-proportionate rise in all incomes, and declines with an equal absolute rise in all incomes. An example of such an inequality measure is the so-called Krtscha measure. The Krtscha measure suggests a pronouncedly rising trend of inequality in the distribution of consumption expenditure in India, and an even more dramatic explosion of inequality in the distribution of household wealth.

Thus far, we have spoken only of interpersonal (or “vertical”) inequality, not of inter-group (or “horizontal”) inequality. We have also spoken only of money-metric disparities, not disparities in other dimensions. As it happens, work done by my former colleague D. Jayaraj and myself suggests that there is a well-defined way in which group inequalities in the distributions of both consumption expenditure and household wealth, reckoned in terms of caste, gender and occupational partitions of the population, have shown a systematic secular increase. This, as it happens, is true not only of income and wealth but of other measures of human development such as mortality, morbidity, age, and literacy indicators. Just about the most unhappy conjuncture of circumstances, when it comes to the rights-status of an individual, from the perspectives of both positive and negative freedom, is to be a poor, rural, illiterate, Scheduled Caste woman.

Where are we headed?

When one contemplates the situation of that woman, even as one hears accounts of India’s great leap forward in the era of liberalisation, it is hard for one to resist being overtaken by a sense of both alienation and shame. The environment of rising levels of vertical and horizontal inequality in which we find ourselves is also just the sort of environment in which it is possible to successfully feed the forces of divisiveness between rich and poor, “upper” and “lower” castes, majority and minority religious communities, males and females, and “patriots” and “anti-nationals”. In such an environment, it is becoming increasingly hard to speak of the virtues of affirmative action, communal inclusiveness, gender equality, land reform, and democratic decentralised governance.

In the exclusively economic domain, it is becoming even harder to advance the cause of a universal “minimum inheritance” to all citizens upon the attainment of adulthood; of substantial Child Benefit to all children and its financing out of income-taxation; of a more progressive income-tax schedule; of a more progressive property-tax schedule; of taxes on gifts and inheritances; of an annual tax on wealth; and of a minimum tax for corporations. The experts who have taken monopolistic control of the discussion forums on our television channels would laugh out of court any such counsels as those that have just been catalogued as emanating from a raving radical lunatic living in a world that is out of joint with the reality of “reform”, liberalisation, and globalisation.

As it happens, though, these prescriptions for a less unequal world than the one we live in have come not from some deranged “lefty” but from a deeply principled and brilliantly analytical “mainstream” economist, Sir Anthony Atkinson: the reader is referred to his recent book Inequality: What Can be Done? Atkinson does not stand alone in his recognition of inequality as a great and growing contemporary evil and of what should be done to counter it. It is instructive also to look at the work of other European and American economists such as Thomas Piketty, Branko Milanovich and Joseph Stiglitz.

These economists, it is worth noting, speak from countries in which poverty is nowhere near as large a problem as it is in ours. According to the distributional ethic of “sufficientarianism”, due to the philosopher Harry Frankfurt, inequality (to put it a bit crudely) is problematic in the sense and to the extent that it coexists with a situation in which some people do not have access to sufficient resources for the avoidance of poverty. Objecting to inequality in the presence of “sufficiency” might, therefore, largely be a matter of just resentment and envy. Is that the kind of economy ours is? You would think so, going only by neoliberal celebrations of India’s growth. There are principled moral and political reasons to be deeply worried about both poverty and inequality in India. But to turn one’s back on these problems, as is becoming an increasingly common feature of the response of our elite classes and castes, is also a profoundly unwise reaction from the perspective of enlightened self-interest.

Whether from impulses of “stout denial” or from a certain general culture of insensitivity that seems to flourish in a climate of liberalisation and globalisation, we tend to ignore or minimise the ills of poverty and inequality. But we do so only at our own peril. That sounds portentous, I will admit; but, and perhaps more to the point, I am afraid it is also true.

Sreenivasan Subramanian is a former National Fellow of the Indian Council of Social Science Research and a member of the Commission on Global Poverty appointed by the World Bank.

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