Tag: income inequality

The Dark Underbelly of India’s Rising Income Inequality

A key feature of the rising income inequality is due to the growing importance of capital income derived from interest, dividends, retained earnings and rents.

On a recent vacation to Sint Maarten, a small Caribbean island of some 50,000 people, I asked the Sindhi owner of one of its many jewellery stores how business was going. He smiled and said business has been great. Just the other day, a rich businessman from India had flown in with his friends and family on a private jet and the ladies had gone on a shopping spree. Sales have been brisk given his well-heeled clientele in India and elsewhere. 

According to the IMF, India is now the fastest-growing major economy. Yet, many of its cities are pockmarked by slums sprawling right next to expensive real estate. Dharavi in Mumbai happens to be Asia’s largest. This booming India and broken India is a tale of two cities where people live entirely different lives. In the first, money is often no object while in the second, want and deprivation keep constant company. 

There is a reason why India’s economic growth has been so lop-sided. Nobel prize winning economist Amartya Sen noted that since independence, India’s income inequality has been mainly driven by low investment in good-quality education and healthcare. So, while the educated and healthy workers in upper-income groups take advantage of new opportunities to make more money in a growing economy, poorly educated and unproductive workers in low-income groups struggle to make ends meet.

Today, India is one of the most unequal countries in the world where the top 1% income group captures a larger share of the pie than it does in South Africa, Brazil, or the United States (World Inequality Report 2022). Inequality within this group is also increasing, outpacing the rest of the affluent. 

Meanwhile, media reports hyping India’s rise often obscure the underlying issues. For instance, a recent article touted the fact that more Indians are travelling abroad. While this sounds as if growth is bringing about shared prosperity, the converse has been true. Consider the fact that even if the middle class was to expand by 1% in a population of more than 1.4 billion people, that development alone would enable at least a million more to travel internationally. However, a small increase in the middle class can also be accompanied by a large decline in the share of incomes going to the relatively poor.

Another case in point is the United States. More Americans have been travelling by air even as U.S. income inequality steadily increased to become an outlier among developed countries. In other words, an increasing number of people travelling abroad does not necessarily mean that the country’s income distribution is improving. 

India’s Income Inequality: 1950-2020

Income inequality is widely measured by the Gini coefficient – an index between zero and one, where the former represents perfect equality, or that everyone has the same income, and one represents perfect inequality where only one person makes all the money. In other words, the Gini measures the extent to which the distribution of a country’s pre-tax income is skewed. 

The following graph tracks Gini based on income data stored in two global databases – the United Nations University (UNU) WIDER and the World Inequality Lab (World Inequality Database, WID). While the UNU WIDER GINI (yellow) is based on incomes reported in household surveys, the WID GINI (blue) reflects inequality based on a more comprehensive source of data on incomes. The latter combines survey-based income information with those using secondary sources such as administrative data, list of rich citizens, fiscal and national accounts sources. Thus, the WID captures inequality due to incomes not reported in household surveys. We call this “actual” income inequality. 

Piketty and others have noted that inequality estimates based on household surveys rely almost wholly on self-reported incomes which are typically understated for the top 10% and 1% income groups. Hence, they also make an adjustment to the incomes of the rich based on their unreported incomes from foreign sources. The total unreported income or black money is the most important reason why actual inequality is worse than reported inequality. 

The widening gap between the two also reflects the following major trends: 

  • Income inequality declined significantly from 1950 to 1990, barring a few years between the late 70s and early 80s when the two GINIs somewhat diverged. The downward trend in inequality was largely due to a number of “socialist” policies such as the integration of the princely states under a democratic Constitution, ending of royalties and privy purses, agricultural land ceilings and redistribution, nationalisations, government control over prices, etc. In general, the two indices tracked each other quite well during this pre-reform period. 
  • India’s income inequality started widening after the economic liberalisation policies began in 1991. A number of economists have noted these trends. As economic growth accelerated from the “Hindu-rate” of growth, the rich became richer while the share of national income going to others declined. The gap between the two GINIs reached the highest level after the BJP came to power in 2014. The worsening of inequality is consistent with observations regarding crony capitalism and the rise of the billionaire raj. 

There is a parallel between the significant increase in unreported (and hence, untaxed) incomes and the rise of an opaque global financial system which afford greater anonymity and ease in the transfer of black money from developing countries like India. In other words, the income and wealth of those who are effectively connected to the global financial system increased much faster than the rest of the population who do not have the necessary financial capacity or knowledge.  

  • The change in inequality in recent years is not actually flat as shown in the chart. The flat lines simply reflect the fact that the government has not released detailed income and tax data since 2015, compelling researchers to simply extrapolate the last reported data. 

A key feature of the rising income inequality within countries is due to the growing importance of capital income derived from interest, dividends, retained earnings and rents. This has been observed in India too, where increasing share of capital incomes of the rich has been one of the key drivers of rising income inequality in the post-liberalisation period. Meanwhile, data shows that the incomes of people in the middle 50% of the distribution are shrinking.

The unreported incomes of the rich, from black money stashed tax havens and developed country banks (DCBs), is likely to be much higher than incomes derived from domestic investments. This is because the uber-rich typically prefer to accumulate a larger portion of their black money holdings abroad rather than domestically in order to avoid the risk of confiscation by regulatory agencies like the income tax department and the enforcement directorate. They easily avoid that risk by depositing the money in tax havens and DCBs using shell companies, anonymous trusts and financial derivatives. 

The Panama Papers was a one-of-a-kind information leak by the International Consortium of Investigative Journalists (ICIJ) in 2013. The consortium exposed the holdings of the rich and famous in Panama, a nondescript tax haven. While the names of several Indian celebrities came up, ultimately none of them could be convicted given the difficult and protracted nature of transnational litigation involved. Generally speaking, national tax and investigative agencies have no clue about the actual owners of offshore accounts thanks to the loopholes in global financial regulations. For instance, tax havens are seldom signatories to financial disclosure agreements between nations nor are their financial institutions subject to the reporting requirements of onshore banks. 

Small wonder then that the World Bank’s Stolen Asset Recovery (StAR) initiative, which was officially launched on September 17, 2007, and endorsed by its near-universal membership, has only managed to recover a miniscule portion of the tens of billions of dollars stolen from developing countries each year (Few and Far: The Hard Facts on Stolen Asset Recovery). In fact, India’s own experience with the recovery of stolen money has been rather dismal – it has yet to recover a dime from fugitives like Nirav Modi and Vijay Mallaya. 

Meanwhile, the volume of black money transfers from the country has been copious and growing. According to research at Global Financial Integrity (GFI), a think-tank based in Washington DC, a total of US$ 213.2 billion was shifted out of India over the period 1948-2008 through deliberate trade mis-invoicing alone. This was one of the earliest studies pointing out the counterintuitive – outflow of black money from India increased after the economic reforms of 1991. 

Revenue performance and income inequality

Normally, as an economy grows, it should generate more revenue from tax and non-tax sources. As businesses make more profits, they pay more corporate tax, increasing employment generates more income tax, and GST collection increases as people spend more. But, if rapid growth does not generate enough formal sector jobs – forcing most to eke out a living working in the informal sector where incomes are not taxed – revenue performance, defined as total government revenue to GDP, will be sluggish even if the economy expands at a healthy clip. 

The relatively poor revenue performance may also reflect tax evasion, resulting from tax fatigue, as a small number of taxpayers are forced to carry the tax burden of the nonpaying majority. In fact, India’s average revenue performance over the past 25 years (2000-2024) not only lags behind China’s but also that of developing countries, whether in Asia or otherwise. Over the period 2000 to 2022 (excluding estimated data for the last two years), India’s revenue performance increased by just 2.1% of the GDP while China’s nearly doubled from 13.4 to 26% of its GDP. At the same time, developing countries as a group improved revenue collections by 4.5% of GDP.

Given the need to spend more on health, education, defence, infrastructure and other areas in the coming years, any expansion of social benefits will place further strain on government finances. Meanwhile, various government initiatives to help the poor, such as cash transfers, housing, subsidies and health care for the poor often do not reach many eligible beneficiaries due to corruption and weaknesses in the administrative machinery. For example, access to good quality healthcare is not just unequal and inadequate. 

Concluding observations

Research at the IMF shows that when rapid rates of economic growth largely benefit the rich, growth itself may be derailed. While many poor countries have been able to achieve impressive rates of economic growth, they face the far more serious challenge of sustaining them rather than to simply get growth going. One way inequality short-circuits economic growth is by limiting the increase in personal consumption, which is often a major driver. After all, there are limits to how much more the rich can consume out of a rising income. They cannot make up for the decline or stagnation in the consumption of the vast majority whose inflation-adjusted incomes are stagnant or eroding. 

Countries with a highly unequal distribution of wealth and income also tend to face a much greater risk of democratic backsliding. While there is strong public confidence and respect for institutions and media freedom in inclusive societies, governments of unequal societies tend to weaken institutions and co-opt the media for propaganda purposes. There has been an unmistakable link between the sharply rising income inequality and democratic backsliding since the Bharatiya Janata Party came to power in 2014.

Inclusive economic policies aimed at reducing income inequality take time to work, just like we cannot expect today’s investment in high quality primary education to start producing skilful workers tomorrow. Meanwhile, the increasing government handouts and subsidies to support the poor have not only failed to stem income inequality, but also failed to garner enough electoral support for Prime Minister Modi. Despite this, politicians would rather play vote-bank politics than set out for widespread human development. 

Dev Kar, a fellow at the Global Justice Program, Yale University, is chief economist emeritus at Global Financial Integrity, a think tank based in Washington DC. Prior to joining GFI, he was a senior economist at the International Monetary Fund. His book, India: Still A Shackled Giant, was published by Penguin Random House India in October 2019.

Top 1% Grow Wealth by $42 Trillion in Past Decade, 36 Times More Than Bottom 50%: Oxfam

The report also pointed out that billionaires around the world have been paying a tax rate equivalent to less than 0.5% of their wealth. 

New Delhi: The top 1% increased their wealth by $42 trillion in the past decade, 34 times more than the bottom 50% of the global population, Oxfam said in a report released ahead of the G20 Finance Ministers and Central Bank Governors meeting in Brazil.

“The average wealth per person in the top 1% rose by nearly $400,000 in real terms over the last decade compared to just $335 – an equivalent increase of less than nine cents a day – for a person in the bottom half,” Oxfam said.

The report also pointed out that billionaires around the world have been paying a tax rate equivalent to less than 0.5% of their wealth. 

The G20 Finance Ministers meeting is expected to deliberate on a global deal to increase taxes on the super-rich, with Brazilian Finance Minister Fernando Haddad identifying the global tax on billionaires as a key deliverable at the summit.

The proposal is backed by countries like South Africa, Spain and France.

“Inequality has reached obscene levels, and until now governments have failed to protect people and the planet from its catastrophic effects,” said Oxfam International’s Head of Inequality Policy, Max Lawson. “The richest one percent of humanity continues to fill their pockets while the rest are left to scrap for crumbs,” he added.

According to Oxfam’s research, the share of income of the top 1% of earners in G20 countries rose by 45% in the last four decades while top tax rates on their incomes were cut by roughly a third. 

Wealth tax

Oxfam said an annual net wealth tax of at least 8% would be needed to reduce billionaires’ extreme wealth. G20 countries are home to nearly four out of five of the world’s billionaires.

The wealth tax in India was abolished in 2015 and replaced by an additional 2% surcharge, on top of the existing 10%, on those earning more than Rs 1 crore a year. 

Until 2015,  an individual, a Hindu Undivided Family or a company had to pay 1% as wealth tax on net wealth of value over Rs 30 lakhs. For the financial year 2013-14, total wealth tax collection was Rs 1,008 crore, Mint had reported.

Key Modi-Appointee Arvind Panagariya Defends Income Inequality

Recently appointed chairman of the Finance Commission, Arvind Panagariya terms those concerned about sharply rising inequality as “inequality alarmists” and says “this form of inequality elicits little opprobrium from the masses”

New Delhi: Economist Arvind Panagariya, recently appointed chairman of the 16th Finance Commission and closely associated with the Modi regime, has stepped up to defend stark income inequalities in India, suggesting that we “Don’t lose sleep over Inequality” in The Times of India on April 2, 2024.

A recent report by the World Inequality Lab rang alarm bells after its data-driven conclusion that income and wealth inequality in India today was worse than under colonial rule. Using “billionaire raj” for the present times, research has found that inequality declined post-independence till the 1980s, rose afterwards and is “skyrocketing now”.

The report concluded that Between 2014-15 and 2022-23, the rise of top-end inequality has been particularly pronounced in terms of wealth concentration. By 2022-23, top 1% income and wealth shares (22.6% and 40.1%) are at their highest historical levels and India’s top 1% income share is among the very highest in the world, higher than even South Africa, Brazil and US. It only capped what was already being reported in surveys and estimates for some time now.

Earlier, Oxfam had found a yawning gap growing between the top and the large majority, the bottom 99%. It found that “73% of the wealth generated in 2017 went to the richest 1%,” while 670 million Indians who comprise the poorest half of the population saw only a 1% increase in their wealth. The top 10% of the Indian population, it said, holds 77% of the total national wealth.

Now, Panagariya has come out and said it be treated like a necessary side-effect of ‘wealth generation’. He wrote, “Poverty reduction requires wealth creation which is rarely possibly without an increase in inequality between those who create wealth and the rest. While some love to sound an alarm over such inequality, people at large rarely resent wealth creators.”

Panagariya reflects an archaic thinking, which after the notorious ‘trickle down theory’ has been widely discredited. Also, for someone, as Chairman of the Finance Commission, mandated to try and even out inequities in the system, think through allocation of resources between states, not appearing to be committed even to the principle of equality is of grave concern.

He cites the “common man” as not being concerned, having “little knowledge or concern with what the national Gini is.” The Gini coefficient is a measure of income inequalities. Panagariya argues that inequality is a necessary outcome on the road to prosperity. In November, India pledged to feed over 80 crore of its population survival rations, as mandated by the National Food Security Act, 2013, extending the scheme of extra rations too for five more years. 

Also read: India’s Inequality at Historic High; Wealth Concentration Shot Up Sharpest Between 2014-5 and 2022-3

 

The defence of crony billionaires, whose speedy rise is apiece with those falling off survival levels, he writes of “a villager in India” who would hardly be concerned “if Mukesh Ambani added another five billion to his wealth in a given year, but would be worried if “her neighbour’s wealth rises sharply while she struggles.”

Terming those concerned about sharply rising inequality as “inequality alarmists” and being out of touch as “this form of inequality elicits little opprobrium from the masses”, Panagariya’s case rests on neighbourhood inequality pinching those left behind, not those living away. 

Panagariya may wish to look at photographic imagery locating Mukesh Ambani’s residence in the middle of Mumbai, providing a glimpse of Ambani’s neighbours. 

There has been extensive pictographic work citing how bad inequality looks and feels, precisely mapping neighbourhoods reflecting it. Johnny Miller has been particulary noted for its ability to sharply draw focus to it.

A drone image which shows the Bandra Kurla Complex standing in sharp contrast to the dense conglomeration of shanties. Photo: Instagram/johnny_miller_photography

Some time ago, the chief economic advisor, V Ananth Nageswaran had shrugged his shoulders about rising unemployment among the youth and said there was little that the Modi government could do about it.

A Knotty Affair: India’s Burgeoning Population and Stagnating Middle-Income

The middle class in India is feeling the squeeze because real wages have not risen, but costs are rising.

As per the State of World Population Report published by the United Nations Population Fund, India will soon become the most populous country in the world. At this point, India also has a relatively ‘younger’ working-age population compared to China. Depending upon how one reads the data, this can be a boon or bane, as labour is an important component of growth in national income or gross domestic product (GDP).

If labourers are productive, then their income and the economy grow. Much of the GDP growth that occurred among the emerging Asian economies during the second half of the last century was through increased labour force participation. These countries, for example, China, South Korea, Singapore, Taiwan, and Vietnam, were able to absorb labour from the low-productive agricultural sector to the high-productive manufacturing sectors. Much of the supply of white goods like mobile phones, air conditioners, refrigerators, computers, etc. are manufactured in these countries, thereby making their economy transition from low to middle and high-income economies.

This is why there is a flourishing middle class in these economies. According to Pew Research, the share of Chinese who are in the middle-income group jumped from 3% to 18% during this century, however, the share of Indians middle-income group remain unchanged for the most part. Although, thanks to reforms and the consequential high growth rates in GDP, India was able to reduce poverty – from 40% in 2004 to 10% in 2019 – however, the drop in poverty merely resulted in an increase in the low-income population. Data from the recently published India Consumer Economy 360 survey points towards a fall in income growth for the poor and middle-income households, whereas that of the high-income households surged.

Source: India’s Consumer Economy (ICE) 360 survey

Ergo, although in India the poor are becoming richer, the society is also becoming more unequal, that is, the rich are becoming richer much faster. New World Wealth, a Johannesburg-based company, published a report claiming that India is the second-most unequal country in the world, with millionaires controlling 54% of the wealth. In Japan, the most equal country in the world, millionaires control only 22% of the national wealth. In India, the number of ultra-high-net-worth individuals (with net assets of $30 million or more) has grown by 11% year-on-year in 2021, the highest percentage growth in the Asia-Pacific. 

A reason for unequal income distribution is that most of our labourers are stuck in low-productive sectors. According to the Periodic Labour Force Survey (PLFS) 2021-22, agriculture still remains the largest source of employment, employing 45.5% of the workforce. Construction is at a distant second, employing 12.4%, closely followed by trade, hotel and restaurant, employing 12.1% of the workforce. Now all these sectors require low/semi-skilled labourers, with low productivity. 

India’s labour productivity – economic output per hour of work – is just 12% of the US levels. In purchasing parity terms, GDP per hour worked is $70.68 for the US, in comparison to India’s $8.47, and this cannot be explained by differences in the working population alone. Types of employment, and access to finance and technology matter. For a long time, output per hectare, a common measure of agriculture productivity, remained low in India. For example, in potato farming, the productivity of an Indian farmer is less than half of that of the US, Germany, and the Netherlands. In the case of rice, it is less than half of that of the US and Egypt, and for wheat, it is less than half of that of the UK and Egypt.

India leapfrogged into services without being able to create enough jobs in the manufacturing sector. Even the success stories of the manufacturing sector – Reliance, Godrej, Tata Group, etc – employ a capital-intensive mode of production. For a long, everyone thought labour market reforms such as giving more power to the companies to hire and fire workers will bring in the required change. That did not happen in spite of the Central labour law reforms in 2020.

Instead, over the last five years, there has been an increase in self-employment in low-productive agriculture and the urban informal sector. There are not enough jobs getting created and according to PLFS 2021-22, on the basis of current weekly status unemployment level remained stagnant at 8.8%, without declining much since 2017. High skilled-services sectors such as banks, Information Technology, etc., are not able to absorb workers. In India, according to PLFS 2021-22, only 1.3 % have technical education and only 0.7% have diploma/certificate graduate level in vocational education. Technical knowledge and education are a must for getting a job in the manufacturing or service sectors. On the other hand, a concomitant rise in income inequality is leading to the creation of low-paid and low-productive jobs such as housekeeping, security services, and other gig-type jobs such as Zomato delivery workers. 

A photo of Swiggy and Zomato delivery workers. Photo: PTI

Rising costs, wages stagnant

A low productive workforce means a lower income, in particular when the informal labour markets are monopsonistic (a higher number of labourers looking for jobs as opposed to employers or aggregators). There has been no significant growth in real wages at the all-India level over the past eight years.

On the contrary, the cost of healthcare and education is rising, most of which has to be borne privately. As per the latest household social consumption data (NSS 75th Round), only 4% of the rural population and 19% of the urban population reported that they had health expenditure coverage. According to the Economic Survey 2022-23, almost half of all medical expense is still borne by the patient themselves. 70% of India’s population who still reside in rural areas has to borrow more (25%) in comparison to their urban counterparts (18%) to meet their healthcare needs, driving an estimated 6 crore Indians into poverty, every year.

The government’s insurance coverage programme Ayushman Bharat, does not cover primary healthcare such as prenatal care, and other common diseases such as influenza and diarrhoea, which form a major part of household expenses on health. Even for the tertiary sector, and if one is lucky to get covered under government insurance coverage, new medicines for terminal illness diseases and surgical procedures remain outside the budget of a majority of the Indian household. For example, each round of chemotherapy and radiation costs more than Rs 1 lakh, whereas a vital organ transplant (liver and kidney) can cost anywhere between Rs 20 and 30 lakh. 

The same applies to quality education. At a time when public spending (Central and state governments taken together) is only 4.5% of GDP, it is not surprising that for a majority of the population, education is delivered by the private sector. Because of the failures of government schools to provide a decent education, studies show even the poor income households prefer sending their kids to private schools. The learning outcomes in government schools deteriorated post-pandemic. The ASER 2022 report flags widening learning gaps. Basic literacy levels of children have taken a big hit, with their reading ability compared with their numerical skills worsening sharply and dropping to pre-2012 level. However, sending kids to private schools cost money. As per a survey conducted by ET Online research, educating a child between the age of three to 17 years costs around Rs 30 lakh; a 4-year BTech or a 3-year BSc costs around Rs 4-20 lakh; and a five-and-half-year MBBS degree can cost up to Rs 1 crore.

No wonder in India, the middle class is getting squeezed.  

Nilanjan Banik is professor, School of Management, Mahindra University. He tweets @banik_nilanjan.

Earn Rs 25,000 or Higher? Your Wage Ranks in the Top 10% in India 

A new report by the Economic Advisory Council to the Prime Minister throws up sobering figures on the inequity levels in India.

Mumbai: If you earn a salary of Rs 25,000 or higher, then your pay ranks in the top 10% of the total wages earned in India. The State of Inequality in India report released by the Economic Advisory Council to the Prime Minister earlier this week sheds light on the economic polarities of income profiles in the country.

The EAC-PM report has recommended that the government should consider formulating an urban equivalent of the Mahatma Gandhi National Rural Employment Guarantee Scheme that would offer guaranteed employment to the urban workforce.

It has also asked the government to consider raising the minimum income level and introducing a universal basic income.

Extrapolating from the Periodic Labour Force Survey, the report stated that the top 1% in India earns thrice as much as the bottom 10%.

As per the PLFS survey of 2019-20, the annual cumulative wages came to be around Rs 1,869 crore, out of which the top 1% earned nearly Rs 127 crore, and the bottom 10% accounted for a measly Rs 32.10 crore. This indicates that the top 1% earns almost thrice as much as the bottom 10%.

What is more sobering is the fact that this trend in income is not an aberration.

In fact, in 2017-18, from the total approximate earning of Rs 1,784 crore, the top 1% earned about Rs 110 crore while the bottom 10% accounted for close to Rs 32.41 crore. This resulted in the top 1% earning more than thrice as much as the bottom 10%.

‘The top 10% have pocketed more than 30% of the total income’. Photo: Reuters

What’s more, this trend is entrenching itself – with the top 1% earners accounting for a total of 6-7% of the total income earned. In 2018-19, their share shot up to 6.84% compared to 6.14% in 2017-2018. In 2019-20, the top 1% earners saw a slight moderation as their total income cooled down to 6.82% of the total income earned.

Also read: Poor Country With Affluent Elite, India Is Going Nowhere

Meanwhile, the top 10% pocketed more than 30% of the total income.

Continuing in the same vein of displaying disproportionate income levels, the growth rate of the bottom 50% has been at 3.9% from 2017-18 to 2019-20, while the top 10% has grown by 8.1%. Additionally, the top 1% grew by almost 15% between 2017-18 to 2019-20, whereas the bottom 10% registered a fall of close to 1%. In 2018-19, a fall of almost 7% among the total salaried incomes in the bottom 10% and an approximately 2% fall in the bottom 50% was observed, which is to say that while the rich got richer, the poor became poorer.

As per the PLFS data for 2018-19 and 2019-20, nearly 15% of the entire workforce earned less than Rs 50,000 a year, which comes down to Rs 4,166 per month or less. What further compounds the situation is that the PLFS data for the two years mentioned reported negative and zero incomes, indicating that several households have no disposable income or their debts and borrowings exceed their earnings.

The PLFS data cleaves the working force into regularly employed, self-employed and casual labourers.

For the self-employed workforce, the average earnings were Rs 9,661 for males and Rs 4,558 for females in rural India. In the urban region, the average salaries for July-September 2019 period came to Rs 17,166 for males. Females earned an average of Rs 7,141. Likewise, the average monthly income for self-employed workers was Rs 9,945, which increased to Rs 10,538 in 2019.

Also read: Digital Models and Catchphrases Cannot Dissolve Inequality

The rural-urban divide

The report by the EAC-PM also points towards the massive gap in terms of household wealth between rural and urban spaces in India.

A 44.4% wealth concentration in the highest quintile in urban areas is contrasted against a meagre 7.1% concentration in the highest quintile in rural India. Similarly, 28.4 % of households fall in the lowest quintile in the rural landscape, while only 3.1% of households in the urban regions. Notably, more than 50% of the households fall in the bottom two quintiles of wealth concentration (approx. 54.9%).

Among states and Union Territories, Chandigarh, Delhi, Punjab, and Goa have accounted for more than 50% of households in the highest quintile.

At the same time, states like Bihar and Jharkhand have recorded the highest concentration in the bottom-most quintile (with Bihar capturing nearly 51% of households in the lowest quintile).

Both states happen to have less than 10% of the concentration in the topmost quintile as well (Bihar at a mere 3.3% and Jharkhand at 8.8%).

What We Could Hope For – But Should Not Expect – in Budget 2022-23

Faced with a Union government that puts its own image-building ahead of the good of the people, let us imagine a scenario where Budget 2022-23 is, instead, drafted by a government which is willing to cooperate with the states and respond to the needs of the people.

No matter where we look, bad news on the economy just keeps pouring in.

Despite all the official and unofficial media attempts to talk up the Indian economy and pretend that it is on the cusp of a spectacular recovery, the reality just doesn’t hold up. Falling domestic consumption and employment, sluggish private investment, inadequate public spending – all point to a macroeconomic morass.

This needs also to be seen in the context of massively increased inequality in India, especially in the recent period. Both the World Inequality Report, 2022 and the Oxfam Inequality Report, 2022 point to India as being one of the countries with the greatest inequality in terms of incomes and assets as well as the fastest increase in economic inequality in recent years.

A few billionaires and a few large companies with close ties to the establishment have benefited greatly, multiplying their profitability and assets many times over, even as health and livelihood crises in India have devastated the lives of hundreds of millions. The Oxfam report reveals that while 84% of households in the country suffered a decline in their incomes in a year marked by tremendous loss of life and livelihoods, the number of Indian billionaires grew from 102 to 142.

Sales of luxury cars and other signs of affluent living by the rich in India increased by many multiples in the year when job loss, falling incomes and growing hunger became the norm for the vast majority of Indians.

Also read: ‘Pakoda’ Employment Has Increased Poverty Over the Last Eight Years

This inequality has been one of the reasons why the pandemic years have been particularly brutal for the Indian people. Aggregate or per capita income levels and growth rates conceal the extent to which most people’s lives have worsened, in absolute terms, over these two years, with hundreds of millions facing job losses, wage income declines, increased hunger, loss of education and skilling and even a loss of hope.

What’s more, the Union government has responded to this widespread calamity with one of the stingiest fiscal packages in the world – so limited and so small that, according to the government’s own report to the IMF, its total spending actually declined in the pandemic fiscal year 2020-21 and has barely increased in the months since. 

This suggests that it may be a waste of time to request or expect major progressive changes in fiscal policy in the coming Union Budget announcements. But hey – a woman can dream. So, let’s do a thought experiment.

Let’s try to imagine that, through some miraculous process, we suddenly have a Union government that is concerned, first and foremost, with the good of the Indian people, rather than with bolstering its own image at any cost. Let’s also imagine that this government seeks to cooperate and consult with state governments and is responsive and accountable to the people, as it mobilises and shares public resources for the common good. What kind of Budget 2022-23 could we hope for from such a government? 

Consider the main areas of concern today: growing hunger and insufficient nutrition; falling employment generation with even worse labour conditions than before; an inadequate and poorly resourced public health system under major strain from recent shocks; collapsing education systems at all levels; growing amounts of unpaid labour being performed (mainly by women) in homes and local communities; and all of this occurring in a context of sluggish economic activity in which any rewards are very unequally distributed to those who are already rich and powerful. 

Also read: By Putting the Onus of Registration on Workers, E-Shram Ignores Responsibility of Employers

Employment has become possibly the most critical and pressing issue, as jobs have been lost across sectors in both urban and rural areas and new jobs are worse-paying, with wage and self-employed incomes falling even in monetary terms in the context of rising inflation. Young people increasingly face a bleak and hopeless future without more job creation. These concerns already tell us what needs to be done by our fantasy government, where public spending needs to be dramatically increased and how it could be financed.  

Obviously, public food provision needs to be strengthened, expanded and made universally accessible to all without requiring biometric identification, which has proved to be extremely exclusionary. The system of crop procurement must be reorganised to ensure that farmers get the remunerative process they have been demanding, are able to cope with climate change and other ecological constraints and are encouraged to shift to more sustainable cultivation practices in harmony with nature. This will, naturally, involve significantly more public expenditure, at the very least a doubling of the current food and agriculture allocations. 

One of the key demands of the year-long farmers’ protest was for a legally-recognised Minimum Support Price for crop procurement. Photo: Reuters/Danish Siddiqui

Direct employment creation by the state – through significant expansion of the rural employment programme and the creation of an urban employment programme at the national level – has become an even more urgent necessity than before. In addition to other impacts, it puts incomes into the hands of those who are likely to spend all or most of it, and thereby has very strong positive multiplier effects, leading to secondary employment increases and a possible revival of micro and small enterprises that have been languishing or dying for lack of demand.

The MNREGA has been a lifeline for the already destitute and the newly poor in both urban and rural India. By law, it is a demand-driven programme under which the government is legally obliged to provide 100 days of employment per year to all households that demand such work. Yet the Union government has tended to starve it of funds and thereby reduced its potential effectiveness, so that the average days of work offered by the programme nationally is still less than 50 days. It is essential to make budgetary provision for the full 100 days (and ideally expand it to 150 days of work, given the prevailing dire labour market conditions).

Also read: High Demand for MGNREGA Is a Ringing Fire Alarm

If our idealised government begins even with the number of households that sought work under the scheme in the current year, it will need to triple the current allocation for the rural programme. It should combine this with the initiation of a national urban employment programme, buttressing the efforts of several state governments that have tried to begin such schemes. 

The need to increase public health spending dramatically is so obvious that it needs no elaboration; so our imaginary government would do this without requiring any further justification. It would begin by tripling current levels of health spending to provide proper public health care services (not insurance schemes that subsidise private providers and insurance companies).

Even this would not be enough to bring government health spending in India to the levels seen in many other developing countries, but it would be an important start to improving health conditions. It would provide the funds to fill all vacancies in the health sector, regularise all frontline health workers, including scheme workers in the ICDS and elsewhere and expand infrastructure and facilities, especially in rural and far-flung areas. 

The pandemic exposed the lack of social protection in the country, so this imaginary government would bring in a proper universal pension at half the minimum wage, to be paid to all those who cannot work for reasons of age or disability or other constraints. Once again, this would have massive multiplier effects that would create positive ripple effects on other activities. 

Education in India has been dealt a body blow by prolonged school closures and the impact on a generation of children and young people is so terrible that it cannot even be properly gauged. Reviving the process of learning and undoing the damage will require significant new investments and a considerable increase in pupil-directed activities that take account of individual constraints. Many other countries are already doing this and have increased their education spending accordingly. This ideal government would also do so, seeking at last to bring public education spending to the promised 6% of GDP.

Also read: Millions of Indian Children Affected by COVID-Related School Closures, Digital Divide

What a pipedream, people will say; where is the money for all this to come from? It’s interesting that this question never gets asked when around 2% of the GDP is blithely given away at one stroke through tax cuts to large corporates, or when spending by the Union home ministry keeps increasing.

It’s also interesting that these expenditures are always seen as “costs” rather than essential parts of the social contract whereby governments must ensure the basic human rights of citizens. Apparently public spending has to be justified and ways to finance it have to be found only when it is directed towards improving the lives of the masses. 

But if we do have to look at new sources of financing, some are staring us in the face because of the inequality increases noted earlier. A relatively small wealth tax (say 3-4%) on the known assets of super-rich (just the dollar billionaires, for example, or the top 0.001% of the population) would fetch significant amounts that could cover at least a doubling of health spending and expansion of the rural employment programme for example. Since our imaginary government would have repealed the electoral bonds law and would not be beholden to large capitalists for funding, it could take on vested interests to impose such taxes. 

This is the point at which the dream ends because, while all these measures are eminently possible, they are so far from our current political reality that they are not just unlikely, but simply not going to happen.

So we can hope for all of these measures – and we can be sure that the Budget will not contain them.

Jayati Ghosh is a development economist.

To Best Utilise its Demographic Dividend, India Must Aim For Equitable Growth

Trickle-down economics does not work in a stratified country like ours. In order to make the most of our demographic dividend, we must get money into the hands of the poor and focus on equitable, inclusive growth.

In the 1990s, India liberalised its economy, paving the way for more private investment. For the next two decades, India grew at a rapid pace, lifting millions out of poverty. Many in the 2000s considered India the next ‘Asian miracle’.

However, India in 2021 is a shadow of its former self. Even before COVID-19, the Indian economy was in shambles, with growth and investments plummeting since 2016. According to the Centre for Monitoring Indian Economy (CMIE), as of March, 2019, India’s unemployment had hit a 45-year high; car sales had hit a contraction for the first time in decades and the total industrial production went from worse to worst.

The onset of COVID has only exacerbated existing troubles and the economy has reached a point of nadir. In 2021 alone, more than 20 million Indians lost their jobs and, according to Grant Thornton, about 40% of the white collar workers experienced a pay cut. Lest these issues appear transient, it is worth noting that the economy also suffers from serious structural issues such as reduction in aggregate demand, rising inequality and plunging investment.

Also read: Here’s What We Know About COVID’s Impact on India’s Workers – and What We Can Do About it

The dangerous vicious cycle

Everything that has been wrong with the Indian economy has been on the aggregate demand side. However, instead of undertaking efforts to boost demand, the government has taken been trying  to address the supply side (by improving productive capacities). The reliance on indirect taxes such as the regressive GST –  which taxes all citizens, both poor and rich equally – as a source of income is hurting the poor badly, thus suppressing demand. 

Until recently, the strategy appeared to be dramatically reducing corporate taxes –  from 35% to 22% – and drastically increasing the price of fuel and other essentials. 

Indians on an average spent 17% of their income on fuel, by far the highest in the world. Only in recent times have the Union government and various state governments taken some steps to reduce this burden. Citizens of countries such as China and the US spend on an average 2% and 0.5% of their income on fuel respectively. 

As per Laffer’s curve, the reduction in corporate taxes can increase revenue for the state significantly, under the assumption that corporations significantly ramp up their production capacity by incurring additional capital expenditure. But for the production to ramp up, there has to be demand and since aggregate demand in India was low even before governments’ intervention to ramp up capacity, the additional capital did not result in additional expenditure.

Manufacturing firms, due to the lack of aggregate demand, sent the gain in profits abroad or stored them as deposits instead of investing. This is very similar to what happened in Japan in the 80s, where, when demands dried up due to an ageing population, firms, instead of investing the excess profits, simply stored them as savings.  

The reduction in corporate taxes cost India somewhere between Rs 2 lakh crore and Rs 6 lakh crore. But in order to offset loss of revenue witnessed due to reduced corporate taxes and other factors, such as loss of demand and COVID, the government further increased indirect taxes on essentials, such as fuel, significantly, again hindering demand.

This mindless increase of taxes on essentials, coupled with the lack of demand, has resulted in the risk of an artificially created “stagflation” – a dangerous situation where inflation is coupled with the lack of growth.  The threat of stagflation is aggravated by the COVID-related global supply chain crisis. Now with omicron, demand is likely to fall further and prices might significantly rise due global supply chain bottlenecks, raising the risk of stagflation significantly. Stagflation, in economic circles, is considered much worse than economic depression. 

Also read: Why Do the ‘Nationalist’ Poor Speak in Defence of Price Rise?

Concentration of wealth

In the recent past, there has been a massive concentration of wealth in the hands of the top 0.001% of the population. According to the World Inequality Database, developed by scholars at the Paris School of Economics, the share in the national income of the middle 40% of the Indian population fell from 41% in 1998 to 30% in 2019. More worryingly, the percentage of profits earned by the top 20 companies in the country increased from 40% (of total corporate profits) in 2014 to about 60% by 2019. Such a grotesque concentration of wealth has increased India’s Gini coefficient and has made capital’s contribution to the economy more profound than that of labour. 

The farmers protest also recognised the growing corporate-political nexus, as seen by this ‘dharna’ outside the Adani Logistics Park, Kila Raipur. Photo by Aranya Rai Singh

Most academic studies point to the rise in inequality and the Gini index as a hindrance to economic growth; An Organisation for Economic Co-operation and Development (OECD) study published in 2014 highlighted that high inequality can impede economic growth by as much as 10% of the total GDP. When inequality increases, it transfers income from low-income households – which have virtually zero savings – to high-income households – with high levels of savings. When income moves in this direction, demand naturally falls.

Furthermore, when the concentration of wealth increases, the influence of the super rich in politics and on the policies of the government increases significantly, thereby widening the income cleavages further and resulting in a ‘vicious cycle’. The rise in inequality is also be associated with a lack of social trust, rise in crime rates and social unrest – all of which are attributes of growth inhibitors. 

A paradigm shift

India will have to reform as a priority. Trickle-down economics does not work in a stratified country like India. In the short term, the first thing the government needs to do is put money in the hands of the poor. The current reduction in fuel price is a move in the right direction, but one that has come too little, too late. Money in the hands of the poor is worth two to three times more than the expenditure the government would incur, thanks to the multiplier effect.

Universal basic income (UBI), as proposed by economists such as Thomas Piketty, should be explored. The idea of offering Rs 1,000 per month to every citizen (with an opt-out option) is definitely feasible and would cost the country about Rs 14 lakh crore per annum. India currently spends about Rs 9 lakh crores on various Union government schemes; before factoring in the leakages and expenditures involved in implementing these welfare programs.

All the existing Union government welfare schemes, apart from sub-national governmental schemes, could be dovetailed into one single UBI. State and local governments could be made partners in such a UBI scheme to ensure its effective implementation. More importantly, a UBI would play a profound role in rekindling aggregate demand, apart from partly eliminating the corrupt, expensive and highly inefficient process of identifying participants for the current targeted social interventions. 

Workers protesting in Manika. Credit: Jean Dreze

NREGA workers protesting against low pay in Manika. Photo: Jean Dreze

Introduction of Inheritance and Wealth taxes on ultra-rich individuals would, apart from partly funding the UBI, play a major role in reducing inequality.  

Further, in real terms, the Union government’s expenditure on new projects has fallen by 42%, though relative revenue receiptshave increased. Increased expenditure on capital spending will have to be coupled with radical reforms to remove red-tapism. When the BJP came to power in 2014, there was talk of shaking up red-tape regime, but nothing much has actually happened. More than 60% of the state-sponsored schemes have experienced delays and overrun costs.

In the medium term, India must embrace transformational change instead of taking incremental steps to shape an economic policy that supports rapid growth. This will require a continued commitment to wide-ranging and systemic sectoral reforms, with strong measures to restore fiscal balance and reform the banking system. As per the Solow model of economic growth, capital, human capital and sustained innovation are very important for sustained economic growth. 

Therefore, apart from taking efforts to ramp up infrastructure development, efforts have to be taken to improve the quality of education and healthcare. Since health is a state subject and education is on the concurrent list, no progress in these areas can happen without empowering the states and embracing fiscal federalism. However, the Union government could assist the state  governments in capacity building, as in Kerala or Tamil Nadu. 

No country can sustain growth for a prolonged period of time without innovation. Innovation increases productivity. In order to increase innovation, we will have to start focusing on research  and development. Currently, India’s R&D budget of 0.65% of its GDP – compared to China’s 3% and 4.5% of Israel’s 4.5% – is one of the lowest in the world. We may boast of IITs, IIMs, IIITs and NITs but none of these are hardcore research universities.

In the long term, instead of focusing too heavily on GDP growth – a metric that does not capture societal cleavages, environmental degradation the wellbeing of citizens – the growth philosophy should tilt towards providing equitable growth that fosters social cohesion and trust. From classical economists such as Adam Smith to behavioural economists such as Daniel Kanneman, all have emphasised the role of social trust in providing equitable growth.

A 2020 study by the Victoria University of Wellington cited by Deloitte shows that a ten percentage point increase in the share of trusting people within a country should raise annual per capita real GDP growth by about 0.5 percentage points. Social trust and institutional stability have a direct correlation. For social trust to improve, India will have to improve its institutions and foster cohesion between different groups. 

Over the years, as with institutional degradation, social cohesion between different groups has been at an all time low. More importantly, the institutions of India should work in a transparent and inclusive manner; no investor would want to operate in a country where its institutions such as the judiciary, police or tax office work in an arbitrary manner. The law of the land has to be same for all, irrespective of religion, social status or political inclination. 

Therefore, to achieve growth for a sustained period of time, India would have to undertake a completely new path which focuses on equitable growth; where people from all walks of life are able to grow together and coexist happily. A mere reduction of corporate taxes will not make India a developed nation; no divided or highly unequal country has achieved the status of a developed nation. If we do not act fast, we risk losing (along with the economy) our biggest advantage: our demographic dividend. 

Salem Dharanidharan is an alumnus of the University of Oxford and the Paris Institute of Political Studies (Sciences Po, Paris). He is an executive coordinator at Dravidian Professionals Forum and co-founder of the Oxford Policy Advisory Group. He tweets at @dharanisalem.

Puhazl Gandhi is an Advocate and executive coordinator at Dravidian Professionals Forum. He is also the joint secretary of DMKs NRI Wing. 

COVID-19 Pandemic: An Opportunity to Restructure India and the World’s Political Economy?

The crisis has created an opportunity to rewrite the structure of the production-consumption systems that shape the world.

COVID-19 has sent pollution levels plummeting in cities and regions across the world. This must count as mischievous relief, given the fact that before this pandemic, the World Health Organization (WHO) estimated that 4.2 million people died every year from exposure to outdoor polluted air. This is a revealing and humbling reality. It tells us that even today, in the twenty-first century, a pandemic induced, catastrophic economic recession that is decimating the lives of thousands and the livelihoods of hundreds of millions living on the margins, is a more effective check on pollution, than normal, business-as-usual economic and environmental policy.

Business-as-usual economic and environmental policy have no doubt alleviated some environmental harms, but these have been marginal and incremental.

Air pollution related mortality is not evenly distributed. Relatively poorer industrialising countries in Asia like India and China fare worse than wealthier, industrialised or “post-industrial” economies in Europe and North America. This tells us that marginal improvements do add up. But they add up only so far. While India and China had about 80 deaths (per 100,000 population) attributable to air pollution in 2016, the corresponding number for Germany and Japan, two of the most economically, technologically and institutionally mature societies hovered around 45. This suggests that even the wealthiest countries, with their advantages of wealth, technology and more sophisticated environmental bureaucracies, have not eliminated the scourge of mortality due to outdoor air pollution.

Unsurprisingly then, even as air pollution levels in India and China have fallen due to the pandemic induced economic recession, the European Environmental Agency also reported significant reductions in air pollution in Europe for the same reason. Environmental regulations that depend on technology and wealth are helpful, but we need to look beyond them as well. Ultimately air pollution, and environmental degradation more broadly, is a function of the scale and speed of the production-consumption system that has now been globalized. In other words, environmental degradation is integral and essential to the structure – the political economy – of today’s economic system. This is a hard and inconvenient lesson to stomach. Our immediate reaction is to assert that no, the economic system is fine as it is! It’s just that our technologies are not efficient enough or that regulations are not smart enough or that behaviour patterns are less than ideal. This is alas, a half-truth.

The other half is the structure of the contemporary production-consumption system. Structure here captures the mechanics of how production of goods and services are arranged and how benefits and costs are distributed in society. Questions such as how to produce? What to produce? For whom to produce? What wages to pay labour? What profits to pay capital? Whose land to mine? Which species’ habitat to pollute? What level of exposure to pollution to normalise? Where to invest? Who can invest? At a more abstract level, it also asks how the norms shaping these decisions are ethically and morally justified? How are they made politically resonant and thus ultimately, institutionalized as tax, labour, land or environmental legislation? These questions and their answers often remain hidden from popular political discourse. However, these questions are all around us. They are squarely within the purview of political economy, a holistic approach that takes power and justice seriously.

Even prior to any formal analysis we can plainly see that the structure of our production-consumption system produces income and wealth inequality of an unimaginable, indefensible and vulgar, level. Consider just one example of the many trends that can more formally validate this point. The World Inequality Lab reports cumulative real income growth per adult between 1980 and 2016. The cumulative real (i.e. adjusted for inflation) income of an Indian adult in the bottom 50% of the income deciles increased 107% in these 36 years. For an Indian adult in the top 10% the increase was 469%. If this adult was in the top 1% the growth was 857%. But if this adult was in the top 0.1% (about 1.3 million Indians fall in this bracket), 0.01% or 0.001%, his or her real income growth was 1295%, 2078% and 3083%, respectively. Such differences in individual outcomes do not emerge simply from personal virtues or individual behaviour, but from the structure – the political economy – of the contemporary production-consumption system.

Even while unimaginable levels of real income inequality were produced, the contemporary production-consumption system has degraded the biosphere. This essay started with a reference to outdoor air pollution, which is just one facet of this degradation. Earth system science, a relatively new field, now reveals conclusively that the demand for natural resources (e.g. minerals, wood, fibre, fish and fuel) and the generation of waste material (e.g. pollution of numerous types) by the production-consumption system undermines the ability of the Earth system to support life as we have known it over many millennia. This is not a future possibility. This is now. Climate change, that is finally and very belatedly gaining popular media attention, is one example.

Simultaneously, the impact of degraded environments are experienced more immediately and drastically by the poor. It is the poor whose forests and lands are taken away for “development” and it is the poor who are exposed to higher levels of pollution. It is the poor whose livelihoods and health is undermined. Scientists have started mapping what are called environmental justice conflicts, where people challenge decisions by governments, corporations or oligarchs to deprive them of their lands and livelihoods. But far too often when these processes driving deprivation are questioned, i.e. when the existing structure is challenged, murderous violence is unleashed. The civil society organization Global Witness maintains a database of land and environmental defenders assassinated for the work they do.

This is our normal world. This is the world into which COVID-19 emerged as a pandemic. The pandemic, with the suffering and shock it has unleashed, has inadvertently helped by pressing the pause button on that normal. It is creating an opportunity to rewrite the structure of the production-consumption systems that shape the world and to reclaim, quite simply, our humanity. Simply returning to business-as-usual with more money thrown at technological improvements alone, without challenging the ways in which production-consumption is arranged and organized will be a wasted opportunity. During this crisis and a pause on our hectic, unrelenting normal that it has engendered, we must keep our eyes on the stimulus packages being unrolled by governments across the world. It is these stimulus packages that are writing into reality our future after COVID-19.

We know already that that corporate lobbyists and Wall Streeters or Dalal Streeters are already in on this game. Ordinary citizens must ask what answers these packages are writing into law to structure the production-consumption system: What will the economy after COVID-19 prioritise? Will it depend on consumerism or foster human well-being? Will it produce homes, healthy food, health care, education and livelihoods for the needy or will it continue to depend on corporate controlled aspirational and hyper-consumption – fast food, fast fashion, fast (air) travel, and exotic vacations – for wealth creation? Will it prioritize walking, cycling and public transport or will it prioritize private cars? Will it decentralize production-consumption as already advocated for and practiced by a number of reform efforts? Will it limit the role of markets in the provisioning of basic services and legislate ideas like Universal Basic Services into law? Will it allow for reasonable profits to capital and enterprising and empathetic risk takers, but preclude the vulgar inequality normalised over four decades? Will it understand the meaning of consent while seeking lands to mine or build infrastructure on? Will it respect the rights of not just human beings but of all species to their habitats and health and stop the murder of environmental defenders? Will it respect the planets ecological boundaries? The answers to these questions, and others like these, are being written into law today, often behind closed doors. This process needs to be opened up and the answers scrutinised.

COVID-19 can be an opportunity to restructure our normal economy if citizens globally, engage and mobilise for the common good. Citizens have to ask, specifically, are the responses by governments also changing the destructive political economy of our normal world, or are they, like the policies after the Great Recession, simply aiming at managing the crisis with short-term measures and marginal changes?

Manu V. Mathai is an assistant professor in the School of Development at Azim Premji University. He serves on the Steering Committee of the Future Earth Knowledge and Action Network on Systems of Sustainable Consumption and Production.

Corona: The Inequality Virus

The coronavirus pandemic affects everyone, but it doesn’t affect everyone equally. Working-class neighbourhoods have it much harder than wealthy enclaves – and that’s unconscionable.

The Trump administration’s predictable mishandling of the COVID-19 pandemic and the scattershot congressional response both underscore and distract us from a larger problem: the policies and institutions that we count on to provide some semblance of economic security are fundamentally broken.The last few weeks have laid bare the stunning flaws of the American health-care system and public health infrastructure. They have reminded us how deeply we rely on basic public goods and services. They have demonstrated — in dramatic and terrifying ways — the fragility, the fragmentation, and the sheer inadequacy of the US welfare state.And they have shown that the costs of this economic and social disaster will be borne unevenly. “In societies where the virus hits,” the New York Times noted earlier this month, “it is deepening the consequences of inequality, pushing many of the burdens onto the losers of today’s polarised economies and labour markets.” Nowhere is that more true than in the United States.

Health

The core inequality in our health-care system — that some are insured and some are not — makes it harder to stem the coronavirus contagion, dramatically raises the costs of any intervention, and ensures that the most susceptible are the least likely to get the care they need.

Every economic downturn exposes the folly of the United States’ employment-based, private health insurance system, which throws millions off their insurance coverage the moment they lose their jobs. Those consequences are even more pronounced in a recession accompanied (or precipitated) by a public health crisis.

Our crazy-quilt health-care system not only offers uneven coverage but squanders about a third of its resources (or up to a trillion dollars a year) to administer the distinction between the insured, the uninsured, and the underinsured. Let that sink in: the annual waste in our health system carries about the same price tag as the federal government’s first-round response to the COVID-19 crisis.

Also read: 1.3 Billion People. One Virus. How Much Privacy?

For those without job-based coverage, the Affordable Care Act and Medicaid expansion extend some peace of mind, and many states are considering bolstering these options. But the gaps remain wide. Fifteen states, nine of them in the South, still have not expanded Medicaid. So while the national uninsurance rate stands at about 10 percent, most of the uninsured are low-income working adults, almost half of them workers of colour in non-expansion states (see Figure 1). In other words, it is precisely those hardest hit by the coronavirus-induced collapse of the service economy that lack reliable access to health care.

Figure 1: Rates of Uninsurance, 2018. Source: Kaiser Family Foundation analysis of ACS 2018.

The COVID-19 threat is exacerbated by persistent disparities in health access and health outcomes. While most acute in the non-expansion states, they are by no means confined to the South. And inequality, quite simply, breeds vulnerability. One’s well-being is shaped not just by access to reliable care, but by a broad array of social determinants, including healthy food, clean water, recreation, functional neighbourhoods, and safe streets. Low-income workers are far more likely to suffer from preexisting conditions — such as respiratory illness — that amplify the risk of any public health crisis. And these risks are compounded — think of the impact of the last heat wave — by social isolation and the paucity of neighbourhood services.

Schools

The shuttering of basic public goods and services — especially schools — also threatens to deepen inequality stemming from the crisis.

American public schooling has reliably held out the promise of ameliorating background social and economic disparities, and just as reliably fallen short of that goal. The culprits here are familiar: a long history of school segregation (before and after the 1954 Brown v Board of Education decision), a reliance on local revenue that means struggling neighbourhoods are served by struggling schools, and the dramatically localised exercise of policy and discretion within schools and districts that distribute opportunities (such as advanced placement classes) and punitive measures (school suspensions) in starkly unequal ways.

Also read: COVID-19 Border Lockdown: How Precariously Placed are Our Food Supply Chains?

Despite these shortcomings, public schools are critically important to working-class children and families. They provide not just educational opportunities, but essential social supports: before- and after-school programs, school-based health clinics, mental health services and emotional supports, and a reliable source of nutritious food. Indeed, the first priority in many districts as school buildings began to close was not how to maintain instruction but how to maintain access to school-based meals.

That’s not to say the interruption in instruction won’t be felt differently in tony suburbs than in working-class neighbourhoods. In some places, including Philadelphia and Seattle, K-12 school districts have directed teachers not to move to online classes, citing uneven access to computers and broadband internet. Well-heeled districts, meanwhile, are sending students home with laptops or tablets, and setting up Google classrooms.

Assuming that conventional K-12 instruction is on hold until at least the fall, there’s also the danger of an unequal summer slide (the academic ground lost from the end of one grade to the start of the next): In the summer following third grade, students fail to retain between 20% and 25% of their school-year advances in reading and math; in the summer after seventh grade, students drop between a third and a half of what they’ve gained. The impact, of course, varies considerably by socioeconomic status. Low-income children and their families have less capacity and opportunity to engage in out-of-school enrichment activities. And that chasm — driven largely by increased spending by high-income parents — has exploded over the last generation (see Figure 2). The absence of public schooling burdens low-income families more in the short run, and it widens the opportunity gap in the long run.

Figure 2: Annual Enrichment Expenditures on Children, 1972–2006. Source: Greg J. Duncan and Richard J. Murnane. “Introduction: The American Dream, Then and Now,” in Whither Opportunity?, ed. Greg Duncan and Richard Murnane (New York: Russell Sage, 2011).

Work

Recessions always bear hardest on working families. Inequality widens because the economy sheds low-wage and marginal workers at higher rates, because barely a quarter of those laid off will ever see an unemployment check, because many states have dramatically pared back both the size and duration of unemployment benefits, and because widespread joblessness undermines bargaining power and wage growth for those who do stay employed.

The COVID-19 recession put all of that on steroids. This is not a slow contraction — it is a shutdown. The job losses are already staggering. In the first week of the COVID-19 recession, to cite but one example, initial weekly unemployment claims in Ohio skyrocketed from 7,051 a week to 78,000; new claims this week pushed past 3 million nationally — almost five times the previous weekly peak set in 1982. National job losses by summer, estimated at 14 million, will push the unemployment rate well above that seen in the depths of the Great Recession. And, to make matters worse, as Josh Bivens of the Economic Policy Institute notes, this recession is “laser-targeted at low-wage, low-productivity, and low-hours jobs in service industries.”

Figure 3: Weekly Unemployment Insurance Claims, 1967–2020. Source: Department of Labor, Office of Unemployment Insurance Weekly Claims Report

Service workers bear the burden of this recession in multiple ways: for one, they cannot work from home – a luxury enjoyed by two-thirds of workers in the top quarter of the earning distribution, but by fewer than one in ten in the bottom quarter. (A third of all white workers can clock in from home, but only one in five African-American workers and one in six Latino workers have that option.) This also means they face a much greater risk of unemployment as the service economy shuts down — and a heightened risk of exposure to the virus if they keep working.More broadly, the collapse of stable employment — and the scramble to patch together a response — exposes the ragged weakness of our safety net. The problem here is threefold: first, a generation of devolution in social policy has vested discretion and responsibility in state and local governments that lack the interest or capacity to respond to routine needs, let alone a crisis of this magnitude. As a result, the response to the COVID-19 crisis has been uneven and fragmented, and local and state governments (hamstrung by limited taxing capacity and balanced budget requirements) are at the mercy of federal aid.

Also read: 17 Migrant Workers, Kin Have Died Trying to Return Home Since the Lockdown Started

Second, our social policies have dramatically narrowed the definition of the “deserving” poor in such a way that work or parenthood, or both, are prerequisites for state assistance. These are the baseline assumptions that leave so many slammed by the incipient recession (part-timers, the self-employed, gig workers) without anything to fall back on. And these are the baseline assumptions that, in the last GOP version of the congressional stimulus, would have excluded the poorest Americans (those without a tax bill to credit) from direct relief.

Finally, when pressed to look beyond these constraints and limits, the political class’s policy response has been to cobble together piecemeal and temporary fixes — an extension of existing programs, an easing of eligibility thresholds, a run of one-time payments or tax breaks — rather than acknowledging that the core programs themselves are woefully inadequate to the task.

What to do

The task ahead is daunting, in part because the trajectory and duration of the pandemic is still unknown, and in part because our policy capacity and infrastructure — even in these early weeks — is so clearly lacking. To meet this crisis both effectively and equitably, we need a short game and a long game. We must, of course, slow the spread of the virus — not just for public health reasons, but to buy some time to develop the novel policy responses needed to attack this crisis and prepare for the next one.

In the short run, we also need courageous and expansive federal action — buttressing consumption, backfilling state budgets, propping up key economic sectors, and assuming a wide array of economic risks. We need something at least on the order of the New Deal, with massive investments in public goods at the local, state, and national level.

The relief and recovery measures of the mid-1930s were quickly dwarfed by the progressive gains — collective bargaining rights, social insurance, robust financial regulation, progressive taxation — that sustained security beyond the horizons of the immediate crisis. By the same token, the real measure of our COVID-19 response will be in the long run — whether we emerge with equitable and universal access to health care, paid sick and family leave, expansive and generous social insurance programs, and well-funded public goods and services.

If COVID-19 is the inequality virus, we must attack it as such.

Colin Gordon is a professor of history at the University of Iowa and the author, most recently, of Citizen Brown: Race, Democracy, and Inequality in the St. Louis Suburbs.

This article was originally published on Jacobin.

IMF Says It Cares About Income Inequality, But Will It Change Its Ways?

This new-found mission is laudable, but neglects the manifold ways its own policy advice contributed to growing income inequality.

The International Monetary Fund (IMF) has become increasingly infatuated by the negative consequences of excessive inequality. This new-found mission is laudable, but neglects the manifold ways its own policy advice contributed to growing income inequality.

As lender of last resort, the IMF provides countries in economic turmoil with financial support. In return, borrowing countries must often commit to far-reaching policy reforms. While some view this so-called ‘conditionality’ as a necessary instrument to address the root causes of economic crisis, others point to its adverse social implications.

We examined how policy reforms prescribed in IMF lending programmes affected income inequality for developing countries between 1980 and 2014. We found increases in income inequality by on average 6.5% a year once the programme commenced. These effects persisted for three years.

Our measure of income inequality was the Gini coefficient. A score of 0 means income is equal for everyone in the country; 1 indicates one person earns all the income. For example, the US had an income Gini of 0.379 in 2014. During the period we studied, the Gini coefficient for developing countries with IMF programmes ranged from 0.228 (Belarus, in 1996) to 0.571 (Papua New Guinea in 1996).

Our research advances our understanding of the causes of income inequality, one of the most pressing issues of our time. In particular, we highlight an important yet insufficiently understood international-level determinant of inequality in the developing world: structural adjustment programmes by the IMF.

The impact of IMF programmes

In our work, we detail how IMF lending arrangements affect the income distribution in borrowing countries.

First, the IMF set expenditure reduction targets for borrowing countries. These so-called austerity measures were meant to balance the budget. But cuts in government spending can widen income inequalities because low-income households often depend on government transfers. For example, a lending programme with Togo mandated such reforms between 2008 and 2011. Over this period, income inequality rose by 3.7% (from 0.379 in 2007 to 0.393 in 2012).

Second, the IMF repeatedly mandated the removal of restrictions to trade and financial flows. Policies promoting international economic openness can increase demand for skilled labour in developing countries. But low-skilled labour typically loses out, and income inequality increases. Financial development and capital account liberalisation also favour individuals with access to financial capital and services.

In developing countries, these tend to be people with high incomes. For instance, Sri Lanka had to establish a flexible exchange rate regime to qualify for financial assistance in 2001 (which lasted until 2005). Under the tutelage of the IMF, the Gini coefficient of disposable income increased by 5.6% between 2000 and 2006.

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Third, the IMF typically called for reforms on monetary policy, initiated the privatisation of financial institutions, and specified targets for the inflation rate. These measures can increase investor confidence, the benefits of which are mostly felt by individuals with high incomes. For example, in 1982, a lending arrangement with Guatemala included restrictions on the growth of bank lending to the private sector, domestic credit, and credit to the public sector. One year after the programme ended, in 1985, the income Gini was 0.482. This was 0.8% higher than when Guatemala negotiated lending terms with the IMF in 1981.

Finally, IMF targets limiting the provision of new external debt can force governments to reduce social spending since they are unable to fund it. These lower the income share of poor populations who depend disproportionately on government transfers. For instance, IMF-designed reforms for Indonesia in 1998 included criteria to limit external debt. In 2004, after the programme terminated, income inequality had increased by 1.6 %.

These findings show that the policy reforms prescribed in lending programmes affect income inequality in multiple ways. Indeed, the Fund appears to have heard the criticism of its policy prescriptions and now devotes considerable attention to inequalities.

But an Oxfam report evaluated IMF pilot projects that were supposed to incorporate inequality analyses and failed to find evidence of policies promoting lower inequality.

An Oxfam report evaluated IMF pilot projects that were supposed to incorporate inequality analyses and failed to find evidence of policies promoting lower inequality. Photo: Reuters/Vivek Prakash

More work to be done

At their most recent annual Spring meeting in April, the IMF and World Bank hosted a seminar ‘Income Inequality Matters’, discussing ways to achieve inclusive growth.

If the IMF is serious about reducing inequality, then it needs to carefully consider the types of conditions included in lending programmes. The 2030 Sustainable Development Goals (SDGs), to which the Bretton Woods institutions remain committed, offer a window of opportunity to address what is one of the most pressing issues of the day.

With just over a decade left to achieve the SDGs, it’s high time the IMF put words into practice regarding tackling inequality to right its wrongs of the past.

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