How much inequality is too much?

It is important to distinguish between the two concepts of poverty and inequality.  The former refers to lack of access to basic stuff like food, clothing and shelter. The latter refers to how income or wealth is distributed in society. The former is measured in terms of a poverty line, and what fraction of the population is below that line. The latter is measured in terms of the gap between the rich and poor.  Poverty is an absolute concept, whereas inequality is a relative concept. Theoretically it is possible to have zero poverty and high inequality (say in a rich country), or very high poverty but low inequality (say in a country like Cuba). Most countries fall in between and have both. The World Bank defines extreme poverty as living on less than $1.25 per day. In a recent report the WB estimated India’s poverty ratio to be as low as 12.4 percent. India has had a huge debate on defining its own poverty line, and there is still no consensus. The most recent estimates are based on the Rangarajan committee, which estimated the poverty rate to be 29 percent. This all India number hides a wide variation across states of India, as well as between rural and urban. For instance, a state like Goa has a poverty ratio of less than 5 percent, whereas Odisha could be 46 percent. This column is not about the Great Indian Poverty Debate, but rather about inequality.

Whether it was the “Occupy Wall Street’ agitation, or the Arab Spring, the theme was a backlash against rising inequality. An Oxfam report showed that the richest 62 billionaires in the world own as much wealth as the poorer half of the world’s population.  Since 2010, the bottom poor lost $ 1 trillion wealth, while the richest 62 gained about half trillion.

As can be seen that even poverty is unequally distributed across India. Regional inequality is also seen in growth rates, investment, job creation, educational institutions, law and order and governance.  In current times of drought distress, we are seeing migration to the cities, because that’s where you find drinking water, and maybe employment. Thus water resources are very unequally distributed (and indeed water trains are running between Rajasthan and Maharashtra to neutralize some of that inequality).  Most of India’s inward foreign direct investment comes only to four of five states, exhibiting highly unequal absorption.  Just like regional inequality, one can measure inequality in income earned, or in wealth distribution. Thomas Piketty’s bestselling book “Capital in the Twenty-First Century” makes the case that unbridled capitalism leads to more concentration of wealth. It’s in the nature of functioning of capitalism to increase inequality in society. In recent times there’s been much focus on this phenomenon across the world. Whether it was the “Occupy Wall Street’ agitation, or the Arab Spring, the theme was a backlash against rising inequality. An Oxfam report showed that the richest 62 billionaires in the world own as much wealth as the poorer half of the world’s population.  Since 2010, the bottom poor lost $ 1 trillion wealth, while the richest 62 gained about half trillion.

Inequality is an inevitable part of society, and the consequence of the competitive processes in any economy. Not everyone is equally endowed, either with capital, skills or intellect.  Hence the competition and race of daily life will create leaders and laggards. The job of the government is to periodically redress inequality by redistribution i.e. taking money from the rich and giving it to the poor. Leave aside the problem of leakages, and how to identify the poor. If there is too much redistribution then it kills enterprise and incentives, and eventually hurts the growth process itself. Entrepreneurs will cease to invest or take risks, if taxation takes away all their riches. Or they may hide their income in Panama! Incidentally not all anti-inequality measures have to be redistributive. Increasing supply of public goods like roads, railway, public transport, quality educational institutions, are all examples where beneficiaries get more than what is borne by taxpayers.

The job of the government is to periodically redress inequality by redistribution i.e. taking money from the rich and giving it to the poor. Leave aside the problem of leakages, and how to identify the poor. If there is too much redistribution then it kills enterprise and incentives, and eventually hurts the growth process itself.

But how much is too much inequality? This is for every society to decide, collectively. Measured as the Gini coefficient of income distribution, India fares better than Brazil and possibly China and Russia. But in wealth inequality terms we fare much worse. And if we use metrics like access to healthcare, basic quality education, sanitation we see a very unequal society. For a mere hundred government jobs (seen as secure), we routinely see a scramble by lakhs of applicants. Unlike most other countries, the municipal school is not the first choice for most parents. That shows unequal access to quality schooling too. This space is too short to provide a much longer list of evidence that shows the highly unequal nature of Indian society. It manifests whichever way you slice the stats, whether by region, income, wealth, education, caste, religion or gender. If the evidence is overwhelming, then we must accept social and economic policy that focuses on reducing this inequality. On the occasion of Dr. Ambedkar’s 125th birth anniversary, it is worth recalling his prophetic words, cautioning us about inequality. He said India’s Republic was founded on the principle of political equality but there was the scourge of social and economic inequality. This is from his speech in the Constituent Assemby, on November 26, 1949. “How long shall we continue to live this life of contradictions? How long shall we continue to deny equality in our social and economic life? If we continue to deny it for long, we will do so only by putting our political democracy in peril. We must remove this contradiction at the earliest possible moment or else those who suffer from inequality will blow up the structure of political democracy which this (Constituent) Assembly has so laboriously built up.” Spoken decades before the upheavals of modern India, Ambedkar was prescient and prophetic.

(The author is a senior economist based in Mumbai)