Give a concerted push to reforms

Fuelled by public angst directed towards bankers who personified the ‘greed is good’ culture, the Occupy Wall Street movement has helped bring into focus a wider public discourse on rising inequality and its ramifications on the social fabric of a nation.
That inequality has been rising is beyond doubt. However, given the economic distress in the US, what ‘we are the 99%’ have succeeded in doing, is to make it an extremely important electoral issue.

More recently, the Parisbased Organisation for Economic Cooperation and Development ( OECD) brought out a report emphatically stating that the gap between the rich and the poor in most of its 34 countries continued to widen. According to the report ‘the top 10% of wage earners now make 12 times more than the bottom 10%, up from a ratio of six in the 1990s.’

However the point that needs to be stressed is ‘the top 10% of earners make almost five times more than the median 10%, but this median 10% makes just 0.4 times more than the bottom 10%.’ The report also stated that inequality in India had risen over the last decade.

While the public at large is concerned with whether inequality has risen, in other words whether the Gini coefficient has risen or not, what is more instructive is examining the underlying structure of inequality. Individuals at the top end of the distribution are found to be highly educated and are engaged in regular salaried employment or are self employed.

If rising inequality is the result of rising salaries offered by the private sector, then it can be argued that it incentivises those at the bottom end of the distribution to opt for higher education. However, supply side constraints resulting from the inability of government to provide quality educational facilities, limits the number of qualified individuals.

In turn, this leads to a rise in wage premium. On the other hand, if rising inequality is due to the rising income of a few self-employed, then we need to understand whether the supernormal profits generated are the result of superior products or marketing or distribution or R&D and so on. Or is it an outcome contingent upon the use of the states’ discretionary powers. The problem with the latter is that a distortion of the level playing field leads to creation of monopolistic or oligopolistic structures that prevent new entrants.

This has negative connotations on longterm growth. Business dynamism could increasingly become a form of consolidated oligarchic capitalism, undercutting the creative-destructive process and further weakening the autonomy of the state (Walton, 2010). Thus, seen through the prism of rising inequalities, the current government’s emphasis on redistributive policies can be viewed as an endeavor to transfer resources to the poor and unskilled – the ones who are being left far behind.

But these policies do not attack the root of the problemthe processes and systems that are in place that perpetuate inequality. Lack of access to quality education facilities, for example, remains one of the biggest impediments. Failure in the education system leads to skill differences that perpetuate inequality and hurt growth.

Additionally, it needs to be pointed out that there seems to be certain sense of complacency regarding the India growth story as many, especially in the ruling political class, believe it to be part of the preordained transfer of power from the west to the east. We seem to have forgotten that periods of rapid growth are quite common.

What is less common is sustaining rapid growth for several decades (Hausmann, et al, 2005). Additionally, as pointed out by Rodrick (2005), many factors can launch a growth spurt, but consolidation of institutional bases for long term growth is a distinct undertaking.

To shift to the upper middle income levels will involve major economic social and political transformations. It is important to realise growth, urbanisation and the spread of technology will only increase awareness of these inequalities and thus exacerbate the fault lines. Even the muchtouted demographic dividend will not materialise if we are unable to implement the next set of reforms that India so desperately needs.

With GDP growth slowing down and all indicators pointing downward, we are at the risk of getting stuck at the present growth levels and worse falling behind. The widening income differential between the rich and the poor is reinforced by unending revelations of corruption that have amplified the perceived distance between them as a result of unequal distribution of gains accruing from the spectacular growth achieved over the last decade.

It calls for a systematic cleansing of the system and processes to ensure more equitable distribution of the gains from growth. Their growing helplessness in reforming the system is reminiscent of the helplessness of the poor. With the rich receiving a disproportionate share of the total gains accruing from high growth, this vocal middle class will now play a bigger and probably deciding role in the shaping of our society and with it the polity.

One had hoped that the elections results of 2009 would have set the stage for a slew of reforms to carry forward the growth momentum. This would have also helped augment the government’s cash flow that could have been used for its signature welfare schemes. However, the series of scams has resulted in reforms taking a backseat. And there is little hope that the government can get its act together and chart a new course. One hopes that the government makes a concerted attempt to forge political consensus on key reforms that urgently need to be implemented.

(The author is an independent consultant)