Widening Inequality: India's Struggle to Share the Wealth
India's rapid economic growth has been accompanied by a worrying rise in income inequality, jeopardizing its path to becoming an economic powerhouse like China.
The Story:
India's economic growth has been impressive in recent years, mirroring the historic boom experienced by China. However, a closer examination reveals a concerning trend - the widening income inequality in the country. According to the findings of the World Inequality Lab, the income share of the top 1% in India stood at a staggering 22.6% in 2022, one of the highest levels in the world and significantly higher than China's 15.7%. The top 10% in India controlled a remarkable 57.7% of the country's wealth, far surpassing China's 43.4%. This stark inequality poses a significant challenge to India's aspirations of becoming an economic powerhouse akin to its neighbor.
India's rising income inequality can be attributed, in part, to its struggle in transitioning more workers from agriculture to higher-paying employment. Despite efforts to shift the economy away from farming and toward manufacturing, challenges persist, including political resistance to necessary agricultural and labor reforms. As of fiscal 2022, 45.5% of the workforce was employed in agriculture, while only 11.6% were in the manufacturing sector, with the rest in services. During the pandemic, India's informal economy suffered more than the corporate sector, exacerbating inequality. The government's policy choices, including fiscal restraint except for the free food program, disproportionately benefited the formal economy and capital markets. Lower interest rates boosted the formal sector but reduced returns on bank savings for the masses. Additionally, the pandemic reversed India's shift toward nonfarm employment, despite agriculture remaining one of the poorest-performing sectors.
Notably, the period of rising inequality coincides with Prime Minister Narendra Modi's ascension to power. The study by economists, including renowned inequality expert Thomas Piketty, found that the "Billionaire Raj" headed by India's "modern bourgeoisie" is now more unequal than the colonial era with the top 1% (about 9.2 million people) earn 22.6% of total income, the highest share since data going back to the 1920s. The growth in wealth concentration mainly came at the expense of the middle class.
The country's determination to emulate China's success by expanding its manufacturing sector and productively employing its massive youth population rests on ensuring that the gains from this growth are not limited to a small segment of the population. If India fails to address this issue, the majority of its citizens may not see a substantial rise in their incomes despite impressive GDP growth as a closer examination of the numbers reveals over several quarters, growth has been imbalanced, with strong investment demand compensating for weak consumption demand. For instance, in the last quarter of 2023, India's GDP surged to 8.4%, surpassing expectations. This growth was primarily driven by robust public capital investment. However, private consumption growth remained lackluster, inching up to 3.5%. Given that household consumption constitutes approximately 60% of India's GDP, this skewed pattern warrants attention.
The inequality gap is likely to not close on its own without policy intervention. Further divergence in inequality may fuel social unrest in the country. Allowing more of the economic bounty to trickle down to the poor would be in the best interests of both the masses and elite.
The View:
The stark rise in income inequality in India under Prime Minister Narendra Modi’s leadership is a troubling development that threatens the country’s economic progress and social stability. The government’s failure to address this issue and ensure a more equitable distribution of the fruits of growth is a glaring failure of its policies. The concentration of wealth in the hands of a small elite, with the top 1% owning a staggering 40% of the country’s wealth, is a damning indictment of the Modi government’s economic policies. The researchers’ scathing assessment of the “Billionaire Raj” that has emerged under Modi’s watch is a clear indication that the government has prioritized the interests of the wealthy over the needs of the vast majority of Indians.
The inability to effectively transition the workforce away from the agricultural sector and toward more productive and better-paying employment opportunities is a systemic failure that must be addressed urgently. The government’s policy responses during the pandemic, which favored the formal economy and capital markets over the informal sector, have only exacerbated the inequality, further entrenching the divide between the haves and the have-nots.
The Indian government must take immediate and decisive action to address this pressing issue. Implementing a “super tax” on billionaires and multimillionaires, as suggested by the researchers, and using the proceeds to invest in education, healthcare, and other critical public infrastructure, could be a crucial first step. Transparency and improved access to official data are also essential for evidence-based policymaking and public discourse on this crucial matter. Failure to address the widening income inequality will not only undermine India’s economic growth potential but also risk fueling social unrest and political instability. The government must demonstrate a genuine commitment to creating a more equitable and inclusive society or risk the consequences of a divided and disgruntled populace
TLDR:
India's income inequality is among the highest in the world, with the top 1% owning 40% of the country's wealth.
The inequality gap has widened sharply under Prime Minister Narendra Modi's tenure, fueled by the growth of India's billionaire class.
The middle class has lost out significantly, as the share of wealth held by the top 10% has pulled ahead while the middle 40% has consistently fallen.
Inequality has worsened during the pandemic, as the informal economy that employees the majority of the work force faced greater losses than the organized sector, and the government's policies favored the formal economy
India's inability to create enough productive and well-paying jobs outside of agriculture, coupled with educational inequality and the unequal effects of its services-led growth, have contributed to the widening inequality.
The continued divergence in inequality may fuel social unrest and call for immediate policy interventions, such as a "super tax" on billionaires and multimillionaires, to finance investments in education, health, and public infrastructure.
Insights From:
India’s Boom Faces a Pitfall: Sharing the Wealth - Wall Street Journal
Richest 1% of Indians Own 40% of Wealth in Extreme Inequality Under PM Modi - Bloomberg