In praise of growth that lifts all the boats

The argument that India’s growth is at the cost of equality is heard across the world in the plush rooms of the elite. It is also heard in coffee shops, social gatherings, parks — wherever people gather and discuss the state of the country. That India is growing cannot be doubted, but is it really at the cost of increasing inequality?

The tricolour atop the new Parliament building. (Sanjeev Verma/HT Photo)

First, is inequality bad in totality or are we able to live with some inequality and, if yes, what is that level? If any inequality is bad, then your cup of flat white that costs more than the threshold for an extremely poor person who lives on less than $1.9 a day should be frowned upon. This should extend to your 3 BHK, your new SUV compact or the Bali trip you just returned from. In a perfectly equal country, these should either be available for all or none. I think we can agree that since the great Communist and socialist experiments have grandly failed, most countries have decided to live with some inequality.

How much is too much? One measure of inequality is called the Gini coefficient, which is not perfect but gives us a handle to approach the problem. This is a number that ranges from zero to 100. A Gini coefficient of zero means there is perfect equality of income and that of 100 means there is one person with all the income (also used for wealth) and the rest have nothing. A Gini coefficient of 40 is usually taken to be the threshold, beyond which inequality becomes a problem.

How does India measure on this? According to the latest World Bank data (2019), India is at 35.7, worse than Germany and the United Kingdom but better than the United States (US), Indonesia and Brazil. Maybe growth is lifting all boats and possibly the lowest ones are just getting out of poverty, with those on top geared to take advantage of a growing economy. In fact, an NBER paper by Arpit Gupta, Anup Malani and Bartosz Woda finds that outside of the lockdown, income inequality in India sharply decreased during the Covid period.

Another way to examine the issue is to look at starvation deaths in the country. This has declined, according to data from Statista, from a high of 217 deaths by starvation due to extreme natural events in 2012 to zero starting 2016 till now. Next, we must look at the number of the extremely poor who live on less than $1.9 per day per person. This has dramatically shrunk from 50% of the population being extremely poor in 1987 to a more recent 0.8% according to an International Monetary Fund (IMF) paper, or 5.7% according to an Asian Development Bank (ADB) paper.

Inequality is a problem when growth results in all gains going to a small population segment with the rest stagnating, as we see in the US where real wages for the bottom three quintiles have remained stagnant for 50 years. However, the projections for the Indian economy see growth lifting all boats rather than just a few. A PRICE report — “The Rise of India’s Middle Class” — forecasts the number of households who earn 30 lakh or more annually to grow by 36% by 2047 and those below 5 lakh a year to decline by 11.2% in the same period.

As we debate growth and inequality, we have to wrap our heads around the fact that some of the rich will get richer as a country grows out of poverty. That is not necessarily a bad thing. But given the concentration of economic power in the hands of big tech in the US, which has worse inequality than India, there is a cry globally for taking away the wealth of the billionaires over a certain threshold. The tax-the-billionaires argument wants a world where market-linked wealth (not realised in hard cash, but the value of their investments in assets) over a certain threshold is taxed. The argument and its passionate kind-hearted well-meaning proponents do not complete this cycle of thought. What should be taxed and who should this tax money go to? If you want to tax the wealth of the rich then the rich will have to liquidate assets to pay the tax because the wealth is tied up in assets. If we extend this argument and consider a threshold of 1 crore as super wealth in India — this would mean most readers of this column have to sell one bathroom of their 3 BHK to pay the wealth tax. Be careful of what you argue passionately about other people’s wealth — the logic might soon extend to yours.

The other issue that the tax-the-billionaire argument has not considered is this: Where will the tax dollars or rupees go and how will it solve inequality? The tax money goes to the government, of course, which the world over has not covered itself in glory with right-spending: The US military-industrial complex is surely not the right outcome of taxpayers’ money. To take notional money away from entrepreneurs and wealth creators and hand it over to a largely inefficient spending machine is an argument that does not work for the reduction of inequality. Other than handing it over to well-fed NGOs (which sometimes fund the tax-the-billionaire research), the world is still waiting for an answer to the questions: What to do with the tax money should billionaires be taxed and who will do it?

One way for individuals, who do not understand economic concepts and jargon, to figure out if India is doing better than before is to look at their own ecosystem — from peer groups to friends and relatives to service providers. Are we all better off relative to where we were 30 years ago? Then decide this debate for yourself.

Monika Halan is the author of the best-selling book Let’s Talk Money. The views expressed are personal

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