Explain the main causes of inequality in income distribution in India and examine how it affects welfare of the society.

Historical Causes of Income Inequality

India’s historical context significantly contributes to present-day income disparities. The legacy of the caste system, land ownership patterns established during British rule, and limited access to education and opportunities for marginalized communities have created deep-rooted inequalities.

• Caste System: Historically, the caste system restricted economic mobility for lower castes, limiting their access to land, education, and skilled occupations.
• Land Reforms: Incomplete land reforms after independence left land concentrated in the hands of a few, perpetuating agrarian inequalities.
• Colonial Exploitation: British policies de-industrialized India, destroying traditional industries and creating economic dependence.

Structural Causes of Income Inequality

These are inherent features of the Indian economy and social structure that perpetuate inequality.

• Education Disparities: Unequal access to quality education remains a major driver of inequality. Public education systems often lack resources, particularly in rural areas, while private education is expensive and inaccessible to many.
• Skill Gaps: A mismatch between the skills demanded by the market and the skills possessed by the workforce leads to unemployment and underemployment, particularly among the less educated.
• Informal Sector Dominance: A large proportion of the Indian workforce is employed in the informal sector, characterized by low wages, job insecurity, and lack of social protection. (Approximately 90% of the workforce is in the informal sector as of 2021-22, Labour Force Survey).
• Regional Disparities: Significant economic disparities exist between states, with some states lagging behind in terms of development and opportunities.
• Gender Inequality: Women face discrimination in education, employment, and wages, contributing to income inequality.

Contemporary Causes of Income Inequality

These are recent trends exacerbating existing inequalities.

• Globalization and Liberalization: While globalization has boosted economic growth, it has also led to increased competition and wage stagnation for unskilled workers.
• Technological Change: Automation and technological advancements are displacing low-skilled jobs, widening the gap between skilled and unskilled workers.
• Taxation Policies: Regressive tax policies and loopholes benefit the wealthy disproportionately, while the burden of taxation falls heavily on the poor.
• Corruption and Rent-Seeking: Corruption diverts resources away from public services and benefits a small elite, exacerbating inequality.
• Demonetization & GST: While intended to formalize the economy, these policies initially disrupted the informal sector, impacting livelihoods of daily wage earners.

Impact of Income Inequality on Welfare of Society

Income inequality has far-reaching consequences for societal welfare.

• Economic Impact: Reduced aggregate demand, lower economic growth, and increased financial instability. High inequality can lead to underconsumption as a large segment of the population lacks purchasing power.
• Social Impact: Increased social unrest, crime rates, and erosion of social cohesion. It can also lead to health disparities, as lower-income groups have limited access to healthcare.
• Political Impact: Increased political polarization, reduced trust in institutions, and potential for political instability.
• Human Development Impact: Lower levels of human development, including education, health, and living standards for the poor.

The following table summarizes the key impacts:

Dimension	Impact of Income Inequality
Economic	Lower GDP growth, reduced consumption, financial instability
Social	Increased crime, social unrest, health disparities
Political	Polarization, reduced trust, instability
Human Development	Lower education & health outcomes, reduced living standards