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The big cost of inequality

Gulf News

Unlike China where labour movements are restricted, India is awash with transient labour. Humans who are on the move from one end to another in a country greater than 3 million square kilometres in size.

In the early years of the post-Independence era, south Indians (from the states of Andhra Pradesh, Karnataka, Kerala and Tamil Nadu) headed to the big cities of Delhi, Mumbai and Kolkata to become clerks and stenographers, journalists and some even ended up as mafia dons.

But hard numbers on the size of such migrations were difficult to come by. It was in the 1961 census that intra-district migration was measured. Even today, there remain conceptual issues on how to measure the size of migration. Two popular methods that document migrant status, one which relies on place of birth and the other on place of last residence, themselves have a net difference of 3.2 million in the count of who qualifies as a "migrant".

Be that as it may, since the beginning of the last decade, migration patterns have had a change. This "underclass" travels from one construction site to another. The reasons for such large-scale dislocation are many: end of farming as a means of livelihood, debt traps, opportunistic migration that prefers urban poverty to rural destitution and so on.

Standard explanations of why the south of India has pulled ahead revolve around education and land reforms. Since the 1970s, successive governments had invested in education, food programs and other social measures. With a certain amount of serendipity, when that generation came of age, the era of economic liberalisation had begun in earnest.

Predictably, they acted as feeders of labour into the global economy and as early adopters of new technologies. Relatively better [compared to north India] land reform programs had enabled more greater dispersion of social welfare programs. But, this success story is now become more complex and less clear as to where it is headed. Income inequality is on the rise in these states and the consequences are progressively dangerous for India, as a whole.

The Gini coefficient measures inequality within a distribution. So, the higher the Gini coefficient, the more unequal the distribution is. A Gini coefficient of 1 for an income distribution means all wealth in that sample is held by one individual. In contrast, a Gini coefficient of 0 means, perfect equality. Based on data from 2010, first of it's kind, the results are striking. The three most unequal states are Gujarat [0.587] in the West, Karnataka [0.589] and Kerala [0.562] in the south.

There are other measures of inequality, as well. If one uses a 90/10 ratio — the results are starker and counter-intuitive. The 90/10 ratio is understood as thus: if 90/10 ratio is 5, this means the poorest person in the richest 10 per cent of the sample earns 5 times the richest person in poorest 10 per cent. By this measure, Kerala is the most unequal in India, with a measure of 16.5. Whichever measure we use, the rise of inequality is all more real and palpable.

India's Gini is itself around 0.56 — again, considerably higher than all of the OECD countries, including the most unequal country in that OECD group: the US. It is instructive to see the US income distribution. Based on 2010 data, the bottom 90 per cent of the American population makes an average of $29,840 (Dh109,579) (including realised capital gains). The top 10 per cent makes an average of $125,627; while the top 1 per cent make $2,802,020. And in a sign of extreme wealth concentration — the top 0.01 per cent make $23,846,950. i.e., the top 0.01 per cent of the population make 80,000 per cent more the bottom 90 per cent every year.

While we do not have this level of granularity for Indian data it is not difficult to extrapolate similar, if not worse, extremes of wealth concentration in India.

Yet, the question remains — should inequality really matter from an economic perspective? The answer is yes — it matters, all the more today than in the past. Inequality breeds political pressure in a democracy to take the easy route to improve levels of consumption. Given India's already high cost of capital (borrowing rates are 12-15 per cent), the last thing it can afford is misallocation of it. To wit, it might be that to save capitalism in India, we need more socialism to reduce income inequality!


The columnist works for a major European investment bank in New York City. All opinions are personal and don't reflect any institutional perspectives