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Kuch ka saath aur Cronies ka Vikas

Economic gaps continue to grow as the very richest amass unprecedented levels of wealth

A Concerned Indian 28 Dec 2021

capitalism

"The rich get richer and the poor get poorer" is an aphorism due to Percy Bysshe Shelley. “The rich have become richer, and the poor have become poorer; and the vessel of the State is driven between the Scylla and Charybdis of anarchy and despotism." According to Zanny Minton Beddoes, Economics editor for the Economist magazine, “Growing inequality is one of the biggest social, political, and economic challenges we face. However, it is not inevitable.”

Inequality has been on the rise across the globe for several decades. Some countries have reduced the numbers of people living in extreme poverty. But economic gaps have continued to grow as the very richest amass unprecedented levels of wealth. The phenomenon of the rich becoming richer and the poor becoming poorer is not just evident in India; it is prevalent in every country. Globalisation has resulted in the widening of the gap between haves and have nots. The educated catches up with technological advancements while the uneducated are unable to keep pace with the rapid pace in science and technology. This has resulted in the educated getting better jobs in the city, while the poor are left behind in the society.

Poor people end up being trapped in the vicious cycle of poverty. To gain a higher standing in the society, it is important to get quality education. However, with the cost of education increasing at an exponential rate, lower income families are unable to send their children to good schools, forcing them to work at a young age for a living. The cost of living in urban areas in India has increased over the past few years, forcing many children to quit schools and join the workforce. Between 2013 and 2017, 71 per cent wealth in the country was appropriated by 21 per cent of the population, leaving 71 per cent of the population with just 29 per cent of the wealth. On one hand, development has increased, but on the other, so has conflict and disparities between the haves and have nots. This has resulted in the widening of the gap between haves and have nots.

Although the gap between the rich and the poor is increasing, a new group has emerged in between these classes, the great Indian middle-class changing the dynamics of the labor market. So, it is in our hands to reduce the gap between haves and have nots by ensuring the poor acquire good education, have access to health facilities, jobs, skills that are in demand in the market. Another major factor that further the rich poor divide in India in the recent times is demonitisation which had sent the entire country in a whirlpool of confusion & chaos. It mandated the creation of immediate interruption in daily lives. It shocked all as it was declared without any prior intimation. The chaos was created in every stratum of the society whether upper, middle or lower. Banking system was caught unawares as their ATMs were not calibrated for the new denomination notes. The introduction of the 2000-rupee denomination currency note has simplified the task of hoarding cash. Due to demonetisation, gross domestic product of India declined. 

A cursory review of the microeconomic effects has somewhat proved to be beneficial: first, the uncollected revenue at various corporations increased and second it was also a political move as it was a surgical strike on terror financing, forged notes circulation & black money. However, on the macroeconomic level large number of populations is considering this move as unfair due to the problems faced by them. Where some welcomed the move as it was seen for curbing black money, many suffered by this movement. But the supreme sufferers of this move were the informal sector of Indian economy, where cashless transactions are minimal. Informal sectors of Indian Economy include 106 activities like agriculture, workers in construction, local transport, community services and small workshops like shoe makes and garment makers, rural population and the urban poor and middle class. In a report by Azim Premji University, around 50 lakh people lost their jobs post demonetization.

The Goods Service Tax (GST)- reform, touted as a “game changer” and the “reform of the century”, was deemed worthy of a launch on the midnight of June 30, 2017 in the Central Hall of the Parliament. The enormous publicity that it received and the great gains spoken about the ‘one nation, one market, one tax’ by both the government and the captains of industry had raised high expectations. The over-optimism on its favourable consequences-built expectations which could not be fulfilled & has led to the second attack on the already fragile economy. It must be noted that petroleum products are excluded-they contribute over 35-40% of revenue from indirect taxes. It would be useful to simultaneously include petroleum products within the ambit of the GST, for the expanded base could offset the revenue loss due to the prevailing high rates on petroleum products. With multiple rates, it is not a simple tax and robbed much of the benefits from lower administrative, compliance and distortion costs. Having multiple rates was a sure recipe for disaster. Many small & medium businesses had to hire CA to file the GST returns. Many cottage industries went bankrupt. This also puts additional burden on administration, increases the compliance cost and the load-bearing capacity of technology needed for providing input tax credit with multiple rates by matching every invoice. Requiring the regular GST dealers to file 37 returns in a year raises anxiety on an unchartered territory. 

The coronavirus pandemic has dealt a huge blow to India's middle and low-income groups. This is likely to further widen the wealth gap between India's rich and poor. Taken together, these factors make it all but certain that if overall consumption has stagnated over the past five years, it must have declined in the lower-income reaches. This is of course the story of greater inequality, widely debated amidst the turbulence of the previous last five years post demonetization. The economic recovery is K-shaped, i.e., the better off are getting even better off, while the poor have got destitute. A Pew survey’s findings, reported that the numbers in India’s middle class have shrunk by as much as a third, with 3.2 crore slipping into the lower-income category while 3.5 crore have slipped from that category to join the ranks of the poor, whose numbers have therefore swelled. The economic recovery since, if it has not been accompanied by a recovery in employment and consumption, is almost certain therefore to be K-shaped. Hence the distribution of income and therefore the pattern of economic growth have become a matter of even greater than usual concern, and not just because of obvious humanitarian concern about those being left behind.

n 2014, for instance, the wealth possessed by the top 0.1% of India’s earning population grew at a faster pace compared to that held by 50% of the remaining population, according to the World Inequality Report 2018. “This rising inequality trend is in contrast to the 30 years that followed the country’s independence in 1947, when income inequality was widely reduced and the incomes of the bottom 50% grew at a faster rate than the national average,” the report said. However, led by privatisation, liberalisation, and disinvestment of the public sector over the years, the situation has changed dramatically, said the report based on a study by the economists Facundo Alvaredo, Thomas Piketty, Lucas Chancel, Emmanuel Saez and Gabriel Zucman. In fact, inequality in India may be at its highest since 1922, when the country introduced the income tax. The report noted that the structural changes to the economy, with changes in tax regulation, appeared to have had significant impact on income inequality in India since the 1980s. This income divide continued through the 2000s, with the richest 10% of the adult population in the country controlling most of the national income by 2014. The bottom 50%, meanwhile, had control over only 16% of the country’s income. The rise and rise of a small pool of India’s uber rich population has worsened this divide. The ultra-wealthy alone, comprising 1% of the country’s population, controlled about 23% of India’s total wealth in 2014. That’s almost four times the 6% of the riches they controlled in 1982-83. Income inequality has been on the rise across the world, but the situation is particularly startling in regions such as the Middle East and in countries such as Brazil and India. India’s per capital gross domestic product increased five times between the years 2000 to 2019. This does not mean the income of the entire population has increased. The income has been concentrated with a few individuals only. The top one percent in India earned 21 per cent of the total country’s income in 2019.  The top 10 per cent earned 56 per cent of the country’s total income in 2019 & the bottom 10 percent earned only 3.5 per cent in India.  

Image

Unemployment, poverty & debts in the Indian scenario

The pandemic-led economic crisis has exacerbated the rising indebtedness among India's poor households, and could push more families into a debt trap. Even before the pandemic, debts had soared by 84% in rural & 42% in urban India. The latest All India Debt & Investment Survey (AIDIS) reported that household indebtedness and vulnerabilities have since increased substantially due to the ongoing Covid-19 pandemic. Household debt's share of GDP has risen from 32.5% in 2019-20 to 37.3% in 2020-21. A further rise is being predicted for 2021-22 because of depleting bank deposits as families struggle with the burden of health expenses incurred during the second Covid-19 wave. The pandemic-led economic crisis has increased indebtedness among small entrepreneurs, farmers, domestic workers and marginalised communities. Between 2012 and 2018, the incidence of indebtedness increased by four percentage points in rural areas while the average outstanding debt grew significantly in both rural and urban areas by 84% and 42%, respectively. Rampant unemployment with many poor left with no means of earning.

What is stunning is that for the first time in India’s history of estimating poverty, there is a rise in the incidence of poverty since 2011-12. Since the majority of India’s population (certainly over 65%) is rural, poverty in India is also predominantly rural. Remarkably, by 2019-20, poverty had increased significantly in both the rural and urban areas, but much more so in rural areas (from 25% to 30%). Poverty has increased in the last eight years with the nation seeing the largest increase in the number of poor. The monumental blunder of demonetisation followed by a poorly planned and hurriedly introduced Goods and Services Tax, both delivered body blows to the unorganised sector and Micro, Small and Medium Enterprises. The economic slowdown followed. Consumption stagnated and household savings rates fell. Joblessness increased to a 45-year high by 2017-18 (by the usual status), and youth (15-29 years of age) saw unemployment triple from 6% to 18% between 2012 and 2018. Real wages did not increase for casual or regular workers over the same period, hardly surprising when job seekers were increasing but jobs were not at anywhere close to that rate. Hence, consumer expenditure fell, and poverty increased. There is widespread economic distress. There is crippling inflation in the country coupled with the historic high of all essential commodities. The common citizen & the poor find it difficult to get two meals a day. India’s share of the world’s extreme poor is higher than its share of the world population.

The Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) scheme, the flagship programme of the previous UPA regime did help during the pandemic crisis. As many as 21 States/UTs have utilized by end of October over 100% of their allocated funds for the current financial year is not a surprise. The utility of MGNREGA as a scheme that alleviates distress has never been in question. It is an extremely important scheme specially to ensure economic stability of rural India. It has been acting as a life saver in aiding poor farm households, helping to provide wages during agrarian crises, to being an avenue for employment during the economic crisis induced by the pandemic.

Conclusion

The thrust of the development policy initiatives must focus on how to handle the inequality of opportunity. There are many indicators of inequality & our track record in each of them is a cause for concern. Given the glaring gulf of wealth inequality, higher rate of income tax & wealth taxes such as inheritance tax, gift tax, net wealth taxation for the billionaires can fund the welfare schemes for the poor & the needy. This will allow revenue generation to be invested in health, education, infrastructure which could create equality of opportunity. The disinvestment of Central Public Sector Undertakings (CPSUs), public sector banks, railways, cannot be a permanent solution in an economy where there is a sharp spike in inequality. Policy makers need to track the poverty pockets of India. Periodic studies may help them think seriously about the issue & they can come up with out of box ideas to reduce inequalities.

*Views expressed are the author’s own.

Related:

World Inequality Report paints stark picture of lives of “haves” and “have-nots” in India

India ranks 71 on Global Food Security Index

GOI rejects Global Health Index after India’s worst ranking ever

 

Kuch ka saath aur Cronies ka Vikas

Economic gaps continue to grow as the very richest amass unprecedented levels of wealth

capitalism

"The rich get richer and the poor get poorer" is an aphorism due to Percy Bysshe Shelley. “The rich have become richer, and the poor have become poorer; and the vessel of the State is driven between the Scylla and Charybdis of anarchy and despotism." According to Zanny Minton Beddoes, Economics editor for the Economist magazine, “Growing inequality is one of the biggest social, political, and economic challenges we face. However, it is not inevitable.”

Inequality has been on the rise across the globe for several decades. Some countries have reduced the numbers of people living in extreme poverty. But economic gaps have continued to grow as the very richest amass unprecedented levels of wealth. The phenomenon of the rich becoming richer and the poor becoming poorer is not just evident in India; it is prevalent in every country. Globalisation has resulted in the widening of the gap between haves and have nots. The educated catches up with technological advancements while the uneducated are unable to keep pace with the rapid pace in science and technology. This has resulted in the educated getting better jobs in the city, while the poor are left behind in the society.

Poor people end up being trapped in the vicious cycle of poverty. To gain a higher standing in the society, it is important to get quality education. However, with the cost of education increasing at an exponential rate, lower income families are unable to send their children to good schools, forcing them to work at a young age for a living. The cost of living in urban areas in India has increased over the past few years, forcing many children to quit schools and join the workforce. Between 2013 and 2017, 71 per cent wealth in the country was appropriated by 21 per cent of the population, leaving 71 per cent of the population with just 29 per cent of the wealth. On one hand, development has increased, but on the other, so has conflict and disparities between the haves and have nots. This has resulted in the widening of the gap between haves and have nots.

Although the gap between the rich and the poor is increasing, a new group has emerged in between these classes, the great Indian middle-class changing the dynamics of the labor market. So, it is in our hands to reduce the gap between haves and have nots by ensuring the poor acquire good education, have access to health facilities, jobs, skills that are in demand in the market. Another major factor that further the rich poor divide in India in the recent times is demonitisation which had sent the entire country in a whirlpool of confusion & chaos. It mandated the creation of immediate interruption in daily lives. It shocked all as it was declared without any prior intimation. The chaos was created in every stratum of the society whether upper, middle or lower. Banking system was caught unawares as their ATMs were not calibrated for the new denomination notes. The introduction of the 2000-rupee denomination currency note has simplified the task of hoarding cash. Due to demonetisation, gross domestic product of India declined. 

A cursory review of the microeconomic effects has somewhat proved to be beneficial: first, the uncollected revenue at various corporations increased and second it was also a political move as it was a surgical strike on terror financing, forged notes circulation & black money. However, on the macroeconomic level large number of populations is considering this move as unfair due to the problems faced by them. Where some welcomed the move as it was seen for curbing black money, many suffered by this movement. But the supreme sufferers of this move were the informal sector of Indian economy, where cashless transactions are minimal. Informal sectors of Indian Economy include 106 activities like agriculture, workers in construction, local transport, community services and small workshops like shoe makes and garment makers, rural population and the urban poor and middle class. In a report by Azim Premji University, around 50 lakh people lost their jobs post demonetization.

The Goods Service Tax (GST)- reform, touted as a “game changer” and the “reform of the century”, was deemed worthy of a launch on the midnight of June 30, 2017 in the Central Hall of the Parliament. The enormous publicity that it received and the great gains spoken about the ‘one nation, one market, one tax’ by both the government and the captains of industry had raised high expectations. The over-optimism on its favourable consequences-built expectations which could not be fulfilled & has led to the second attack on the already fragile economy. It must be noted that petroleum products are excluded-they contribute over 35-40% of revenue from indirect taxes. It would be useful to simultaneously include petroleum products within the ambit of the GST, for the expanded base could offset the revenue loss due to the prevailing high rates on petroleum products. With multiple rates, it is not a simple tax and robbed much of the benefits from lower administrative, compliance and distortion costs. Having multiple rates was a sure recipe for disaster. Many small & medium businesses had to hire CA to file the GST returns. Many cottage industries went bankrupt. This also puts additional burden on administration, increases the compliance cost and the load-bearing capacity of technology needed for providing input tax credit with multiple rates by matching every invoice. Requiring the regular GST dealers to file 37 returns in a year raises anxiety on an unchartered territory. 

The coronavirus pandemic has dealt a huge blow to India's middle and low-income groups. This is likely to further widen the wealth gap between India's rich and poor. Taken together, these factors make it all but certain that if overall consumption has stagnated over the past five years, it must have declined in the lower-income reaches. This is of course the story of greater inequality, widely debated amidst the turbulence of the previous last five years post demonetization. The economic recovery is K-shaped, i.e., the better off are getting even better off, while the poor have got destitute. A Pew survey’s findings, reported that the numbers in India’s middle class have shrunk by as much as a third, with 3.2 crore slipping into the lower-income category while 3.5 crore have slipped from that category to join the ranks of the poor, whose numbers have therefore swelled. The economic recovery since, if it has not been accompanied by a recovery in employment and consumption, is almost certain therefore to be K-shaped. Hence the distribution of income and therefore the pattern of economic growth have become a matter of even greater than usual concern, and not just because of obvious humanitarian concern about those being left behind.

n 2014, for instance, the wealth possessed by the top 0.1% of India’s earning population grew at a faster pace compared to that held by 50% of the remaining population, according to the World Inequality Report 2018. “This rising inequality trend is in contrast to the 30 years that followed the country’s independence in 1947, when income inequality was widely reduced and the incomes of the bottom 50% grew at a faster rate than the national average,” the report said. However, led by privatisation, liberalisation, and disinvestment of the public sector over the years, the situation has changed dramatically, said the report based on a study by the economists Facundo Alvaredo, Thomas Piketty, Lucas Chancel, Emmanuel Saez and Gabriel Zucman. In fact, inequality in India may be at its highest since 1922, when the country introduced the income tax. The report noted that the structural changes to the economy, with changes in tax regulation, appeared to have had significant impact on income inequality in India since the 1980s. This income divide continued through the 2000s, with the richest 10% of the adult population in the country controlling most of the national income by 2014. The bottom 50%, meanwhile, had control over only 16% of the country’s income. The rise and rise of a small pool of India’s uber rich population has worsened this divide. The ultra-wealthy alone, comprising 1% of the country’s population, controlled about 23% of India’s total wealth in 2014. That’s almost four times the 6% of the riches they controlled in 1982-83. Income inequality has been on the rise across the world, but the situation is particularly startling in regions such as the Middle East and in countries such as Brazil and India. India’s per capital gross domestic product increased five times between the years 2000 to 2019. This does not mean the income of the entire population has increased. The income has been concentrated with a few individuals only. The top one percent in India earned 21 per cent of the total country’s income in 2019.  The top 10 per cent earned 56 per cent of the country’s total income in 2019 & the bottom 10 percent earned only 3.5 per cent in India.  

Image

Unemployment, poverty & debts in the Indian scenario

The pandemic-led economic crisis has exacerbated the rising indebtedness among India's poor households, and could push more families into a debt trap. Even before the pandemic, debts had soared by 84% in rural & 42% in urban India. The latest All India Debt & Investment Survey (AIDIS) reported that household indebtedness and vulnerabilities have since increased substantially due to the ongoing Covid-19 pandemic. Household debt's share of GDP has risen from 32.5% in 2019-20 to 37.3% in 2020-21. A further rise is being predicted for 2021-22 because of depleting bank deposits as families struggle with the burden of health expenses incurred during the second Covid-19 wave. The pandemic-led economic crisis has increased indebtedness among small entrepreneurs, farmers, domestic workers and marginalised communities. Between 2012 and 2018, the incidence of indebtedness increased by four percentage points in rural areas while the average outstanding debt grew significantly in both rural and urban areas by 84% and 42%, respectively. Rampant unemployment with many poor left with no means of earning.

What is stunning is that for the first time in India’s history of estimating poverty, there is a rise in the incidence of poverty since 2011-12. Since the majority of India’s population (certainly over 65%) is rural, poverty in India is also predominantly rural. Remarkably, by 2019-20, poverty had increased significantly in both the rural and urban areas, but much more so in rural areas (from 25% to 30%). Poverty has increased in the last eight years with the nation seeing the largest increase in the number of poor. The monumental blunder of demonetisation followed by a poorly planned and hurriedly introduced Goods and Services Tax, both delivered body blows to the unorganised sector and Micro, Small and Medium Enterprises. The economic slowdown followed. Consumption stagnated and household savings rates fell. Joblessness increased to a 45-year high by 2017-18 (by the usual status), and youth (15-29 years of age) saw unemployment triple from 6% to 18% between 2012 and 2018. Real wages did not increase for casual or regular workers over the same period, hardly surprising when job seekers were increasing but jobs were not at anywhere close to that rate. Hence, consumer expenditure fell, and poverty increased. There is widespread economic distress. There is crippling inflation in the country coupled with the historic high of all essential commodities. The common citizen & the poor find it difficult to get two meals a day. India’s share of the world’s extreme poor is higher than its share of the world population.

The Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) scheme, the flagship programme of the previous UPA regime did help during the pandemic crisis. As many as 21 States/UTs have utilized by end of October over 100% of their allocated funds for the current financial year is not a surprise. The utility of MGNREGA as a scheme that alleviates distress has never been in question. It is an extremely important scheme specially to ensure economic stability of rural India. It has been acting as a life saver in aiding poor farm households, helping to provide wages during agrarian crises, to being an avenue for employment during the economic crisis induced by the pandemic.

Conclusion

The thrust of the development policy initiatives must focus on how to handle the inequality of opportunity. There are many indicators of inequality & our track record in each of them is a cause for concern. Given the glaring gulf of wealth inequality, higher rate of income tax & wealth taxes such as inheritance tax, gift tax, net wealth taxation for the billionaires can fund the welfare schemes for the poor & the needy. This will allow revenue generation to be invested in health, education, infrastructure which could create equality of opportunity. The disinvestment of Central Public Sector Undertakings (CPSUs), public sector banks, railways, cannot be a permanent solution in an economy where there is a sharp spike in inequality. Policy makers need to track the poverty pockets of India. Periodic studies may help them think seriously about the issue & they can come up with out of box ideas to reduce inequalities.

*Views expressed are the author’s own.

Related:

World Inequality Report paints stark picture of lives of “haves” and “have-nots” in India

India ranks 71 on Global Food Security Index

GOI rejects Global Health Index after India’s worst ranking ever

 

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