India's economic growth is associated with rising inequality. How does it so happen and what actions need to be taken to mitigate the problem?

How Economic Growth is Associated with Rising Inequality in India

Several interconnected factors contribute to the association between economic growth and rising inequality in India:

1. Skill-Biased Technological Change

• Technological advancements and globalization have increased the demand for skilled labor, leading to higher wages for those with education and expertise.
• This creates a wage premium for skilled workers, widening the income gap with those lacking such skills.
• The Indian education system, despite improvements, still struggles to provide quality education and skills training to a large segment of the population, exacerbating this skill bias.

2. Sectoral Shifts and the Nature of Growth

• India’s growth has been largely concentrated in the organized sector, particularly in services and high-tech industries.
• These sectors tend to be more capital-intensive and employ a relatively smaller proportion of the workforce.
• The informal sector, which employs a vast majority of the Indian population, has not benefited as much from economic growth, leading to stagnant or declining incomes for many.
• The agricultural sector, employing a significant portion of the population, has experienced slower growth and faces challenges like land fragmentation and climate change, contributing to rural inequality.

3. Policy Choices and Institutional Factors

• Taxation: India’s tax system has historically been regressive, with a relatively low tax burden on high-income earners and wealth. While recent changes are attempting to address this, the overall impact is still limited.
• Social Sector Spending: Insufficient investment in public health, education, and social security programs limits access to opportunities for marginalized communities and hinders their ability to benefit from economic growth.
• Labor Laws: Rigid labor laws can discourage formal employment and protect existing jobs at the expense of creating new ones, particularly for low-skilled workers.
• Land Acquisition: Controversial land acquisition policies often displace vulnerable populations without adequate compensation or rehabilitation, contributing to inequality.
• Globalization & Liberalization: While fostering growth, these policies have also increased competition, potentially leading to job losses in certain sectors and wage stagnation for low-skilled workers.

4. Asset Accumulation and Wealth Inequality

• Economic growth has led to increased asset prices (real estate, stocks, etc.), disproportionately benefiting those who already own assets.
• This creates a cycle of wealth accumulation, where the rich get richer, while those without assets struggle to improve their economic standing.
• Limited access to credit and financial services for marginalized communities further hinders their ability to accumulate wealth.

Actions to Mitigate the Problem

1. Investing in Human Capital

• Education: Increase public spending on education, focusing on improving quality, access, and relevance. Implement skill development programs aligned with industry needs. The National Education Policy (NEP) 2020 is a step in this direction.
• Healthcare: Strengthen the public healthcare system to ensure affordable and accessible healthcare for all.
• Nutrition: Address malnutrition, particularly among children, to improve cognitive development and future earning potential.

2. Promoting Inclusive Growth

• Rural Development: Invest in rural infrastructure, agriculture, and rural industries to create employment opportunities and reduce rural-urban disparities. The Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) provides a safety net for rural households.
• MSME Support: Provide financial and technical assistance to Micro, Small, and Medium Enterprises (MSMEs) to promote entrepreneurship and job creation.
• Formalization of the Informal Sector: Implement policies to encourage the formalization of the informal sector, providing workers with better wages, benefits, and social security.

3. Progressive Taxation and Social Welfare

• Progressive Income Tax: Increase the progressivity of the income tax system, with higher tax rates for high-income earners.
• Wealth Tax: Consider implementing a wealth tax to address wealth inequality.
• Universal Basic Income (UBI): Explore the feasibility of a UBI to provide a basic level of income security for all citizens.
• Strengthen Social Safety Nets: Expand and strengthen social safety net programs, such as public distribution systems and unemployment benefits.

4. Strengthening Governance and Institutions

• Land Reforms: Implement equitable land reforms to address land inequality and empower marginalized communities.
• Transparency and Accountability: Improve transparency and accountability in government spending and decision-making.
• Effective Implementation: Ensure effective implementation of policies and programs to reach the intended beneficiaries.