Impact of Government Policies on Income and Wealth Distribution in India

Abstract

This paper aims to discern the intentions behind government policies and their impact on wealth distribution in India. The paper focuses on policy implementations after the economic liberalization and establishes a link between government policies and increasing income and wealth inequality. India recorded tremendous economic growth after liberalization but unfortunately, the fruits of growth were not distributed equitably. Government policies are enormously responsible for the steady increase in inequality which is now leading to social alienation, public dissatisfaction, volatile political situation and uncertain economic environment in India.

Problem Statement

Why do we need to talk about Inequality?

- Political Ramifications of wealth inequality

Wealth concentration that occurs due to increased inequality has a tendency to capture the political system to further its own interests which thereby leads to further inequality. This control of the political process then serves the purpose of undermining the democracy.

- Inequality is getting worse around the world and requires urgent attention.

Reduction in income and wealth inequality has become an important problem to solve because increasing inequality leads to social alienation, public dissatisfaction, volatile political situations and uncertain economic environment.

- Impact of govt. policies on Income and wealth inequality.

The direction of government policies determines wealth redistribution in the country. This is mainly done through taxation and monetary policy. Sometimes, governments Policy change leads to an increase in inequality. For e.g. the intervening economic policies by the Indian government, on one hand, tends to relax business restrictive laws and, on the other, fails to address the majority of the population which has minimum resources.

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There is an inverse relationship between growth and inequality. With the realization of this fact, the reduction in wealth inequality has become an important problem to solve. Radical policy interventions such as progressive taxation, focusing policies from bottom-up, pay codes and income controls on the top, minimum inheritance distribution and Universal Basic Income can play a vital role in reducing persistent inequality.

Wealth and consumption inequality in India have been increasing constantly for a while now. Today, we are at a point where the top 10% control almost 70% of the national wealth and yet the government policies continue to favour the powerful. That said, income is not the only factor that drives inequality - wealth becomes a more important factor as the rich do not live off wages. Their economic power comes mostly from inheritance and rent-seeking activities which they then use to control the resources that the general population is dependent on. According to Oxfam India, the richest 1% of Indians hold 58% of the country's total wealth. Economic policies of the Indian government have led to a vicious cycle of wealth inequality wherein poverty is perpetuated by the execution of state policy.

The intended result of liberalization was an increase in economic growth and hence huge investments were made in telecom, FMCG, airlines and financial services sectors but these sectors have minimum employment capacities as they require specialized and skilled human resources. Practical and implementable policy reforms have been minimal in agriculture and other labour-intensive sectors. These sectors have the potential to create humongous low-skilled employment opportunities. Policy focus on these sectors would have led to more equitable wealth distribution. Health and education sectors have been at the receiving end of broken and unimplementable policy interventions. This has led to a situation where the poor do not have the capacity and resources to actualize the benefits of the created opportunities.

Now, is this a failure of implementation or rather the expected outcome of economic policies?

Context

Globalization had already gained momentum in the western world. After the Cold War, the American stagflation in the 70s gave way to the corporations from the Western European countries, Japan and China to establish their control over the world trade. America eventually bounced back with its major corporations dominating the globe again. This was especially because of the 1994 North American Free Trade Agreement - which essentially created a free-trade bloc between the United States, Canada, and Mexico. Capital for the first time had astonishing mobility. The world opened up and national borders blurred. This happened at a time when technology, communication, and transportation were taking humongous leaps forward and were making production and distribution of products and access to cheap labour tremendously easy. Supply-side economics became central in most of the western world. IMF (International Monetary Fund) assumed the role of injecting industries with more capital. Most of the western world had blossomed due to unlimited growth but the developing world - India for example, was facing constant deterioration in its standards of living. The Indian economy was opened up because it was in need of financial assistance from the west. As a result, the capital was to have cheap and free access to Indian labour. As Neoliberalism trumped over any sort of alternative politico-economic system in the 90s, India started leaning towards the supply- side economy. The argument generally made in favour of economic liberalization is on the basis of 'Comparative Advantage' - that a producer will produce more of and consume less of the good that gives him a comparative advantage. That a good will be produced where it is cheapest to manufacture it. This then ensures a win-win situation for everybody. As a result, this warranted unlimited exploitation of labour in India.

Economic liberalization in India led to deregulation - of tax laws, labour laws and financial capital, etc. The government policies were aimed at tax reduction for business and loosening the existing labour laws which contributed to the steady increase in inequality.

- Difference between Income and Wealth Inequality

Income is not the only factor that drives inequality - wealth becomes a more important factor as the rich are not dependent on wages. Their economic power comes mostly from inheritance and rent-seeking activities. Which is then used to control the resources that the general population is dependent on. According to Oxfam India, the richest 1% of Indians hold 58% of the country's total wealth. Economic policies of the Indian government have led to a vicious cycle of wealth inequality wherein poverty is perpetuated by the execution of state policy.

Wealth and consumption inequality in India have been increasing constantly for a while now. Today, we are at a point where the top 10% control almost 70% of the national wealth and yet the government policies continue to favour the powerful.

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- Policy focus after the Economic Liberalization and Impacts

The intended result of liberalization was an increase in economic growth and hence huge investments were made in telecom, FMCG, airline and financial services sectors but these sectors have minimum employment capacities as they require specialized and skilled human resources. Practical and implementable policy reforms were minimal in agriculture and other labour-intensive sectors. These sectors have the potential to create humongous low-skilled employment opportunities. Policy focus on these sectors would have led to more equitable wealth distribution. Health and education sectors have been at the receiving end of broken and unimplementable policy interventions. This has led to a situation where the poor do not have the capacity and resources to actualize the benefits of the created opportunities.

Household Debt and Assets

According to the Global Wealth Report 2018, "Personal wealth in India is dominated by property and other real assets, which make up 91% of estimated household assets. This is typical for developing countries. Personal debts are estimated to be only USD 840, or just 11% of gross assets, even when adjustments are made for under-reporting. Thus, although indebtedness is a severe problem for many poor people in India, overall household debt as a proportion of assets in India is lower than in most developed countries."

This clearly tells that first, the personal wealth in India is dominated by property and real assets which brings us back to the point of 'inheritance' - the rich are not ready to redistribute wealth which is transferred generation after generation. Yet, the intervening economic policies by the Indian government, on one hand, tend to relax business restrictive laws and, on the other, fail to address the majority of the population which has minimum resources.

Second, even though the overall household debt as a proportion of assets is less in India, the problem of extreme rural indebtedness cannot be ignored. This debt which is accumulated because of various reasons such as - not enough grants, unequal distribution of land, poor financing services in the rural areas, etc. are passed on generation after generation. A paper called "Rural Indebtedness in India and its Consequences" gives the statistics on state-wise indebtedness of households in rural India from 1971 to 2012. The table is attached below-

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Source: www.indiastal.com

It is clear from the table that even though household indebtedness has decreased for most of the states since the 70s, the difference is minimal. What is more interesting to note is the fact that after the liberalization, the indebtedness is low in the 2000s but has steadily increased during the following decade.

It is to be noted that wealth has been rising in India but that does not mean that the rise has been equitable. Global Wealth Report 2018 further states that "There is still considerable wealth poverty, reflected in the fact that 91% of the adult population has wealth below USD 10,000. At the other extreme, a small fraction of the population (0.6% of adults) has a net worth over USD 100,000."

Literature Review

Inequality a Reality

To really measure the impact of economic liberalization in terms of growth it generated and the impact of this growth (in terms of distribution) on the majority of the population has been tricky for the lack of proper data. However, some broad outlines are clear such that the top 10% of the population controls most of the country's wealth. That, the lower half of the population has almost no control of the available resources and has significantly fewer opportunities.

A recent report by the World Inequality lab states, "results show that incomes of the bottom 50% and next 40% of the population grew at about 2% per year (and per adult) since 2000, while the average growth rate was about 4.7% per year. In fact, a disproportionate share of post-deregulation growth was captured by the economic elite, which resulted in the strong rise of inequality. This rise in income inequality has no precedent in recent history. The top 1% of earners captured less than 21% of total income in the late 1930s, before dropping to 6% in the early 1980s and rising to 22% in the recent period. Since 1980, growth has been highly unequal: the top 0.1% of earners captured a higher share of total growth than the entire bottom half of the Indian population (12% vs. 11%), while the top 1% received a higher share of total growth than the middle 40% (29% vs. 23%) of the population." From this, it is clear that the accelerated rise in income inequality was a direct result of the deregulation policies of the government after the 80s. These policies aimed at a steep reduction in taxation for big businesses and low social sector spending and/or investment.

The report further states that "In 2012, the top 10% of the population owned at least 63% of total wealth. There is a high level of concentration even within this top decile population: the top 1% itself captures 30% of total wealth (i.e. about half of the wealth detained by the top 10%)."

A Look at some Sectors

A paper called, "Inequality in India: A survey of recent trends" by Parthapratim Pal and Jayati Ghosh states, "The decline in rural employment can be directly attributed to the stagnation of agricultural employment during the 1990s. NSSO data indicated that total employment in the agriculture sector increased from 190.72 million in 1993- 1994 to 190.94 million in 1999-2000, registering an annual growth rate of only 0.02 per cent during this period. This was much lower than the population growth rate over the same period."

"Along with the stagnation of employment generation in the agricultural sector, the real wage growth rate of agricultural labourers also stagnated during the 1990s. As Deaton and Dreze (2002) showed, if one compared the growth rate of real wages for agricultural labourers with that of public sector salaries, real agricultural wages grew at about 2.5 per cent per year during the 1990s, whereas public sector salaries grew at about 5 per cent per year during the same period. Th is partly explained the increased rural-urban inequality of the 1990s in India."

Minimum Support Price (MSP)

The Indian government has the policy of "Minimum support Prices" which is a price support policy introduced during the 1960s by the Government of India (GoI). MSP primarily aims to protect farmers (the producers) from the uncertain price fluctuations under dynamic market conditions. The Indian government sets definitive price bars on different products and if the price of a product in the market plunges below the declared MSP, the GoI guarantees full purchase at MSP. In this manner, MSP is supposed to shield the crop growers from sudden price diminutions. The Commission for Agricultural

Costs and Prices (CACP) is the primary body responsible for minimum price recommendation of different products based on their cost of production. Twenty - two crops in total are delegated under MSP. The GoI announces MSP for various products in the annual budget or before the sowing season.

Why is MSP Not Working for Farmers?

One of the most important reports on farmers crisis in India is by Prof. MS Swaminathan, who headed the National Commission on Farmers which submitted its final recommendations in 2006. The commission recommended that "MSP should be at least 50 percent more than the weighted average cost of production". The commission took both A2 and FL costs (A2 costs: actual paid-out expenses incurred by farmers - both in cash and in kind - on seeds, fertilisers, pesticides, hired labour, fuel, irrigation, etc. A2+FL: A2 plus an imputed value of unpaid family labour) under consideration while defining what 'cost of production' should entail.

The current government recently announced that they have increased the MSP to provide at least 50 per cent returns on production costs. This however doesn't hold true if we compare the cost of production calculation by the government to the one recommended by the commission. The government only considered A2 cost, which means that unpaid family labour is unaccounted for. Furthermore, the government also did not factor in rentals, interest foregone on owned land and fixed capital assets. This undoubtedly points towards the fact that the government's so-called hike in MSP is not actually in line with the recommendations of the Swaminathan Commission.

MSP also has a lot of implementation and procurement complications. Data shows that a majority of marginal farmers are incapable of availing MSP benefits because of an inefficient procurement process. The procurement process also disproportionately focuses on wheat, rice and sugarcane and not on pulses, oilseeds and other crops. This means disproportionate production which leads to buffer stocks and price hikes in non-paddy crops. That said, only 12% of 33.6 million wheat growing farmers could avail MSP benefits in 2018-19 (Mint report) despite the fact that wheat is disproportionately focused on. Various government agencies involved in the procurement process under MSP are failing miserably.

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A Look at the Informal Sector

The decades that followed economic liberalization in India led to the growth of the informal sector. Informal sector grows when the jobs existing in the formal job sector cannot cater to most of the population. The informal sector includes jobs that are on contract basis, freelancing and vending. The Indian government has some policies in place for the protection of the informal workforce but these policies have a lot of implementation and intention problems. One such policy is the 'Street Venders Act 2014'. The policy aims at the protection of livelihoods of street venders in India. It also focuses on providing these venders with legal licences which translates to permanent shop set up. That said, the policy has huge loopholes. The first being the total exclusion on the vendors from the policy decisions. Moreover, the bureaucratic red tape and lack of knowledge about the act among the vendors translates to harassment of the vendors at the hands of local authority (which has the power to remove them from their workplace).

The same paper ("Increasing Economic Inequality in India and Policy Suggestion" by Prafulla Kumar Nath) states, "the wage of skilled workforce has increased rapidly for the growing global demand of their skill, but the unskilled section of the workforce is bound to taker lower wage as there is less demand for the unskilled workers. For example, we may take the job of IT sector, where workers get higher wages for higher demand (both national and international) of their skill. But a worker without IT skill will never be able to get better wage."

Regional Inequality in India

Another evidence of inequality in India is evident from the table below which was provided in a paper called, "Increasing Economic Inequality in India and Policy Suggestion" by Prafulla Kumar Nath.

"Income and wealth inequalities are extremely of the Indian states. A paper by S.Mahendra Dev called "Inequality, Employment and Public Policy" states, "Income inequality is the highest in Gujarat followed by Chhattisgarh (0.60), West Bengal (0.57), Haryana (0.57) and Madhya Pradesh (0.56) in 2011-12. It is the lowest in Jammu Kashmir (0.46) followed by Tamil Nadu (0.47), Kerala (0.47). Income inequality increased significantly between 2004-05 and 2011-12 in Chhattisgarh, West Bengal, Himachal Pradesh and Punjab. On the other hand, it declined in Southern states (Kerala, Tamil Nadu, Karnataka) and Jammu& Kashmir. Inequality in wealth is very high across all the major states ranging from Gini coefficient of 0.80 in Maharashtra to 0.55 in Jammu Kashmir in 2012."

Table 3: Income Inequality (Rural+Urban) based on India Human Development Survey: 2004-05 and 2011-12

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Source: Estimated from the data of India Human Development Surveys 2004-05 and 2011-1214.

A paper called, "Inequality in India: A survey of recent trends" by Parthapratim Pal and Jayati Ghosh states, "There was a sharp increase in regional inequality in India during the 1990s. In 2002-2003, the per capita Net State Domestic Product (NSDP) of the richest state, Punjab, was about 4.7 times that of Bihar, the poorest state. This ratio had increased from 4.2 in 1993-1994. A time-series graph of this ratio shows that the disparity between the richest and poorest state shot up remarkably during the 1990s. This has been highlighted by Ghosh and Chandrasekhar (2003), who showed that inter-state inequality increased sharply in India during the reform period. As the authors pointed out, based on per capita SDP, the basic hierarchy of the Indian states remained the same during the reform period, with Punjab, Haryana and Maharashtra at the top, and Bihar and Orissa at the bottom. They also noted that the gap between the richest and poorest states opened up considerably after 1990-1991. To illustrate this, the authors benchmarked the average per capita net SDP of the three richest states (Punjab, Haryana and Maharashtra against the average per capita net SDP of the two poorest states (Bihar and Orissa)"

Tabic 3: Income Inequality < Rural+Urban) based on India Human Development Survey: 2004-05 and 2Q11-12

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Source: Estimated from the data of India Human Development Surveys 2004-05 and 2011-1214.

It pertinent to note that the state inequality in India is a hard reality because of the lack of the required policies.

Analysis

As we have seen, the government policies in India play a huge role in the persistent income and wealth inequality that India faces. There is almost no spending and investment on the healthcare, education and the social sector. Which means there are negligible policies in place and if there are policies available, they do not address the target population as intended. Assuming obviously, that the intentions are right and in place. Moreover, the Indian government liberally reduces the intensity of pressure (taxes and lax laws) on private business on the pretext of increasing economic growth. Tax laws in India are still restrictive if we consider the view of the businesses and the government for a long time has been bowing to their demands.

Recommendations

To solve the problem of income and wealth inequality one has to deconstruct the very agreement for globalisation. One has to understand how the forces of Internationalization and liberalization contribute to a steady rise in inequality. In India the problem has translate low effective policy interventions.

- Progressive taxation
- Cap on executive compensation
- Increasing Govt. expenditure in education and healthcare
- Inclusion of all stakeholders in the decision-making process - empowering the workers
- Collective bargaining minimum wage

Maskin in his paper, "Why Haven't Global Markets Reduced Inequality in Emerging Economies?" states, "If the unskilled workers are given education and training for skill development, they will be able to sell their labour in a globalized market for better wage. The empirical evidence shows that higher is the education better is the income flow. The majority of the poor people in India are either having no education or a minimum level (1-4 std.) of education. It is evident from the table-3 that people with no education and minimum level of education (1-4std.) constitutes 75% of total poor in India. The reason is that due to low level of education or no education they have not been able to add any such skill which can enhance their income from the present globalized economy. The mean income of the people with no education or minimum education is quite lower than the people having degree and diploma; they earn as many as five times than the people with no education. This difference in income brings difference in consumption, which is also evident from table-3. Low consumption means less expenditure not only on goods of daily consumption but also on health, education and skill development. The natural corollary that we can draw from it is that the people with low income are left with little option to enhance their education and skill so that they can sell their labour at a higher price. The corporate sector as the potential employer of labour (semi-skilled and unskilled) will not do it, because the amount of investment for skill development will reduce its profit."

The Indian government has to focus on the very basic sectors of education and healthcare; agriculture and skill development to salvage most of its population from the dire state that it is in.

Table 3: Mean and Median Household Incomes, Consumption and Poverty

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Https://wid.world/document/india2019/. 2019. 2019 <https://wid.world/document/india2019/>.

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Pal, Parthapratim, and Jayati Ghosh. "Inequality in India: A survey of recent trends." Un.org. 2007. 2019 <https://www.un.org/esa/desa/papers/2007/wp45 2007.pdf>.

"Global Wealth Report 2018." Www.credit-suisse.com. 2018. 2019 <https://www.credit- suisse.com/corporate/en/research/research-institute/global-wealth-report.html>. "Rural Indebtedness in India and its Consequences." File:///C:/Users/Akshita/Downloads/ruralindebtedness

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http://www.igidr.ac.in/pdf/publication/WP-2018-003.pdf - Inequality, Employment and Public Policy