This Severe Inequality Hurts
India is amongst the richest countries in the world, but also one of the poorest
India is suddenly in the news for all the wrong reasons. It is now hitting the headlines as one of the most unequal countries in the world, whether one measures inequality on the basis of income or wealth.
So how unequal is India? As the economist Branko Milanovic says: "The question is simple, the answer is not." Based on the new India Human Development Survey (IHDS), which provides data on income inequality for the first time, India scores a level of income equality lower than Russia, the United States and China, and more egalitarian than only South Africa.
Inequality In Numbers
According to a report by the Johannesburg-based New World Wealth, India is the second-most unequal country globally, with millionaires (including those that are NRIs) controlling 54 per cent of its wealth. With a total individual wealth of $5,600 billion, it's among the 10 richest countries in the world—and yet the average Indian is relatively poor. Compare this with Japan, the most equal country in the world, where, according to the report, millionaires control only 22 per cent of total wealth.
In India, the richest 1 per cent own 58.4 per cent of the country's wealth, according to the latest data from Credit Suisse. The richest 10 per cent have 80.7 per cent. At the other end of the pyramid, the poorer half jostles for a mere 2.1 per cent of national wealth.
What's more, things are getting better for the rich. The Credit Suisse data shows that India's richest 1 per cent owned just 36.8 per cent of the country's wealth in 2000, while the share of the top 10 per cent was 65.9 per cent. Since then, they have steadily increased their share of the pie.
This is far ahead of the United States, where the richest 1 per cent own 42.1 per cent of total wealth. But India's 'finest' still have a long way to go before they match Russia, where the top 1 per cent own a stupendous 74.5 per cent of the country's wealth. Why Does it Matter? We, at Oxfam, believe that this sharp rise in inequality in India—and in many countries around the world—is damaging, and that countries need to make an effort to curb it. Rising inequality will lead to slower poverty reduction, undermine the sustainability of economic growth, compound the inequalities between men and women and drive inequalities in health, education and life chances. Over the years, the World Economic Forum's Global Risks Reports have consistently found "severe income disparity" to be one of the top global risks in the coming decade. A growing body of evidence has also demonstrated that economic inequality is associated with a range of health and social problems, such as mental illness and violent crime. This is true across both rich and poor countries. Inequality hurts everyone.
What Can India Do To Reduce Inequality?
The continued rise of economic inequality in India—and around the world—is not inevitable. It is the result of policy choices. Governments can start reducing inequality by rejecting market fundamentalism, opposing the special interests of powerful elite and changing the rules and systems that have led to where we are today. They need to implement reforms that redistribute money and power and level the playing field.
There are two main areas where policy changes could boost economic equality: taxation and social spending.
1. Progressive taxation, where corporations and the richest individuals pay more to the state in order to redistribute resources across society, is key. The role of taxation in reducing inequality has been clearly documented in the Organisation for Economic Co-operation and Development (OECD) and developing countries. Tax can play a progressive role, or a regressive one, depending on the policy choices of the government.
2. Social spending, on public services such as education, health and social protection, is also important. Evidence from more than 150 countries—rich and poor, and spanning over 30 years—shows that overall, investment in public services and social protection can tackle inequality. Oxfam has for many years campaigned for free, universal public services.
Two key indicators are: How much has a government committed to spend on education, health and social protection? And how progressive are the spending levels?
According to a recent Oxfam report, India performs relatively poorly on both counts. Its total tax effort, currently at 16.7 per cent of GDP, is low (about 53 per cent of its potential), and the tax structure is not very progressive since direct taxes account for only a third of total taxes. South Africa, by comparison, raises 27.44 per cent of GDP as taxes, 50 per cent of which are direct taxes.When it comes to the second indicator (levels and progressivity of social-sector spending), India compares poorly. Only 3.1 per cent of GDP goes towards education and only 1.2 per cent towards health. South Africa spends nearly twice as much on education (6.1 per cent) and more than thrice as much on health (4.3 per cent). While it's assessed as more unequal than India, South Africa rates much higher than India in its commitment to reducing inequality.
The Dream Of Ending Poverty
Oxfam has calculated that if India stops inequality from rising further, it could end extreme poverty for 90 million people by 2019. If it goes further and reduces inequality by 36 per cent, it could virtually eliminate extreme poverty. India—along with all the other countries in the world—has committed to attaining the Sustainable Development Goals by 2030 and ending extreme poverty by that year.
But unless we make an effort to first contain and then reduce the rising levels of extreme inequality, the dream of ending extreme poverty for the 300 million Indians—a quarter of the population—who live below an extremely low poverty line, will remain a pipe dream.