Why India has less inequality than US
May 09 2014
Congress’ income-redistribution plans have achieved some success
India now has more equal wealth distribution than the US. Steven Rattner, a Wall Street financier and former Obama administration economic adviser, recently announced this on MSNBC’s Morning Joe, while discussing Thomas Piketty’s new book, Capital in the 21st Century. It sounded unlikely, but Rattner’s charts and statistics showed that India is indeed a more equal society. The top one per cent of Americans earn more income and hold more wealth, compared with the nation’s poorer citizens, than their Indian counterparts.
Economists are puzzling over how this happened. One key reason could be the massive income-redistribution programmes that Indian prime minister Manmohan Singh and his Congress government have created. Though many programmes are inefficiently run, they have achieved some remarkable successes. Some 815 million Indians have registered to vote in the world’s largest democracy, in an election that runs more than a month, April 7 to May 12. The Congress government now looks likely to lose to the Bharatiya Janata Party (BJP) under Narendra Modi, who has a strong Hindu nationalist background. This new BJP government is expected to focus more on overall economic growth than equality.
This could shift the economic dynamics that the Congress government has worked hard to create.
India’s economic liberalisation in the 1990s — when the present prime minister served as finance minister —unleashed massive economic growth. Yet the wealthy benefited far more than the poor, as is often the case, and inequality increased by some measures. To counteract this, the left-leaning Indian Congress Party, in power since 2004, implemented substantial wealth-redistribution policies. These policies are now weighing heavily on the national budget. But rather than scrap the programmes, a new BJP government should streamline and reform them.
When Singh and his Congress Party won in 2004, Indians hoped he would be a good steward of the economy. For a while, this seemed to be the case. His reform goals included increasing investments in infrastructure, updating labour laws so that employers could hire and fire workers more easily, removing continued restrictions on foreign investment and streamlining licensing requirements. From 2001 to 2010, India’s gross domestic product grew, on average, 7.7 per cent annually, reaching 8.5 per cent in 2010.
But the Indian economy has faltered in recent years. The more ambitious reforms have been left fulfilled. Economic growth has slowed to below 5 per cent, and inflation — around 8 per cent to 8.5 per cent annually — has eroded wages. The key cause of inflation is India’s large budget deficits, which have recently been running at 4 per cent to 5 per cent of GDP. Though one year’s shortfall almost reached 8 per cent. The expensive populist programmes help keep deficits high. For example, the National Rural Employment Guarantee programme, which guarantees 100 days of paid employment to unskilled workers in rural areas, costs more than $9 billion annually. The National Food Security Bill, a programme that subsidises food and grains, feeds a staggering 800 million people and costs $23 billion annually.
These two programmes alone are more than 10 per cent of India’s entire government budget. But both are marked by corruption and human error, which are rampant in many public assistance programmes. Yet these programmes have produced positive results. The Congress Party contends that public programmes have helped pull 138 million people out of poverty.
The party’s election platform, under prime ministerial candidate Rahul Gandhi, promises continued “inclusive growth,” with quixotic goals to lift 800 million people into the middle class and raise the GDP growth rate to 8 per cent within three years.
Modi and his BJP party have said little about wealth redistribution. They argue that stronger overall economic growth will lift all Indians — including the poorest. The BJP party’s “India Vision 2025” platform asserts that government should be less involved in the economy and commerce. Instead, it emphasises renewed investment and completing key infrastructure projects.
The latest Indian polls show Modi, the BJP and its allies beating the Congress party by a landslide. Because Congress’ wealth redistribution programs are popular, the incoming BJP-led government should concentrate on making them more efficient. Here are some possible fixes the new government could try: Replace some of the unsustainable food subsidies with more cash transfers, based on India’s new national ID scheme. Focus on restoring soil fertility, reviving groundwater levels and using more productive farming techniques. Long term, this could make food aid unnecessary. Make information about the 100-day rural-employment programme more widely available. The programme has helped some of India’s poorest families. Yet many potential workers don’t know how to use it or — due to corruption — are not paid for the work they do. Strengthening oversight would vastly improve the programme.
India’s middle class has grown substantially in the past 20 years because of both overall economic growth and active income redistribution. The new government should double down on the growth and equality policies that have made this possible. For the sake of India’s poor, the BJP should improve income-redistribution programs to realise the promise of the new India.