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Mainstream, VOL LIV No 45 New Delhi October 29, 2016

Growing Inequality in Wealth and Income: Threat to Nation’s Stability

Sunday 30 October 2016, by Arun Kumar

The new ‘World Wealth Report’ points to an increase in the number of crorepatis from 2.36 lakhs currently to 5.54 lakhs by 2025 (at the 2015 prices). But these figures are not reliable. In the Indian economy, a substantial amount of black incomes are generated annually and they lead to the accumulation of black wealth which is often not counted in estimates made by agencies. A large part of this wealth is held in real estate and it is hard to estimate its amount. Further, at present, there are no official estimates of the amount of declared or undeclared wealth held by individuals.

The Report presents data on the increase in the number of billionaires (having assets of more than Rs 6700 crores) and Ultra High Net Worth Individuals (UHNWI), defined as those with net assets of more than $ 30 million (about Rs 200 crores). The number of billionaires and of UHNWIs has tripled in the last 10 years to 78 and 6020 people respectively. Earlier Credit Suisse had come out with its own analysis and defined UHNWI as those with net assets of more than $ 50 million (Rs 335 crores) and they said that their number was 2080 people. It said that the number of dollar millionaires (assets of more than Rs 6.7 crores) were 1,85,000.

Even if these figures are taken to be correct, and the numbers of the rich rise, as stated by these reports, it can only mean that the gap between the rich and poor is slated to rise. If the black economy, which is concentrated in the hands of the top three per cent of the population, is included in the analysis, then the gap would rise even further and faster because the black economy is growing rapidly.

Currently, the population below the poverty line (BPL) is substantial. If one goes by the Socio-Economic Caste Census (SECC) released in 2015, 74.5 per cent (13.34 crores) of rural households have a monthly income of Rs 5000 or less for their highest earner. These are the poor in the country. In the aggregate, about 40 per cent would be below the poverty line while the next 30 per cent would be those with few resources. Even though there is a technical difference, the difference in the standard of living between these two groups is not much.

Successive governments have said that the population of the poor is falling. But often the argument is on the basis of the 1962 determined poverty line or its later modifications. At that time education and health were not taken into account in defining the poverty line because it was assumed that they would be provided free to all by the state. This has not come to pass. In fact, the cost of education and that of health have risen dramatically since 1991.

The poor reside in unhygienic conditions with inadequate nutrition and both these factors impact their health and make them susceptible to disease. In urban areas, most of them live in slums and the quality of water and air they get is poor so that they are afflicted with diseases. This has rapidly raised the health costs for them and a major part of their income is spent on health. For better quality education (even though of poor absolute standards) also, many are turning to private schools which are getting more and more expensive. Net of these expenditures, the rising incomes are not able to sustain the consumption of basics like food. Malnourishment among women and children is to the extent of 40 per cent and this is an indication of extreme poverty in 40 per cent of the households in the country.

Poverty needs to be defined on the basis of ‘social minimum necessary consumption’. As society progresses in material and social terms, the necessary consumption rises. For instance, in India, family expenditure on transportation, communication, entertainment, beverages, tobacco, social functions, etc. has gone up since the 1960s. These must also be included in the minimum necessary consumption. Consider, if a family has a person who partakes of alcoholic drinks, it does not imply that the family has crossed the poverty line. In fact, it is likely that this habit has led to a cut-back on the family’s expenditure on education and food, thereby aggravating poverty. Similarly, the ownership of a mobile phone need not imply that the person has crossed the poverty line. For many in the cities and for small traders and service providers, it is a necessity today.

Incomes of the poor have risen but by little and at times less than the rate of inflation. The minimum wages on an average have gone up by a factor of five since 1991. However, in contrast, the wages of managers in companies have risen by more than a hundred times. They were capped up to 1992 at Rs 3,12,000. The cap was removed and now they run into tens of crores. Corporate profits have risen rapidly due to the pro-business stance of policy. Their share in the GDP has risen while that of agriculture has dropped. The private corporate sector is controlled by about 0.1 per cent of the population but agriculture still sustains about 47 per cent of the workforce. The gap between these two has grown.

If black incomes, controlled by the top three per cent in the income ladder are added to the white incomes, the gap between the rich and poor becomes enormous. Since the black economy is now estimated to be 60 per cent of the GDP, the real disparity comes from the black economy. Further, the disparity is not just among wage earners but principally between the wage and profit earners since profits of the individual rich can be in thousands of crores. Further, since black incomes are by definition undisclosed profits, this adds to the disparity between wage and profit-earners.

While incomes may be estimated, the estimation of wealth is very difficult and no official agency measures the wealth of different segments of the population. It is also true that no official estimate of income distribution is available currently. What is available officially is the consumption pattern of households but this underestimates the incomes of the top income earners since they consume a very tiny per cent of their incomes.

Wealth can be held in various forms and this has to be aggregated to get the figure of total wealth. Valuation of wealth poses serious problems. Property prices keep changing and so does the value of capital used in production. Further, often there is speculation in various assets, like real estate or shares, and that boosts their value above the economic value (like during the dot com boom). These are called capital gains. But under adverse economic circumstances, the values can also drop sharply, like during the global financial crisis starting in 2007. In addition, there is depreciation of assets and there are different norms for them. Finally, due to the black economy, people do not declare the true value of their assets. No wonder, estimation of wealth is difficult and very few try to estimate it.

However, what is true is that the disparity in wealth would be far greater than in incomes. This is due to the fact that the poor hardly save while the rich save a high per cent of their income. Further, assets earn an income which boosts the incomes of the well-off beyond their income from work. Taxation of wealth has been eliminated in India so that disparities have increased. Before the wealth tax was eliminated, there were a large number of concessions on holding property. These were deliberately provided to the well-off by the policy-makers. Finally, it must also be considered that the rich split up the income among various members of the family to lower their tax burden and also to take advantage of the various concessions and deductions in the income tax law. Thus, to find the actual disparity, the family and not the individual wealth should be taken into account.

Globally, the rich recognise that they pay little tax and that the disparity is growing. Just a few years back George Soros said that the rich should pay more taxes. This call was taken up by the rich in France, Germany and Italy. But the Indian rich did not make any announcement of support.

Growing disparities lead to social tensions. In today’s consumerist world, the demonstration effect has become very important so that the dissatisfaction among the deprived is rising rapidly. Earlier the rich did not demonstrate their wealth but now that is the norm with expensive clothes, watches, pens, fancy houses, yachts, etc. TV as a medium has also propagated the idea of high living through serials and advertising. Even the poor in the TV serials look like the well-off. In advertising the well-known stars are shown as having a high life-style and that is becoming the norm for others to imitate. The vast majority of the poor and middle class, who cannot live like the images projected in the media, feel dissatisfied with their lives and this has resulted in growing agitations and criminal activity.

To conclude, income inequality is easier to measure than wealth inequality but even that is not officially worked out. The two are inter- linked since one feeds into the other. Both are impacted by the black economy which has been growing and aggravating inequality in the country. The government’s policies, like those regarding taxation or giving incentive to production or in the name of ease of doing business, are in a large part responsible for this state of affairs. The political and social consequences of this growing divide are already visible and threaten the stability of the nation as those who are falling behind are revolting in a variety of ways.

[Based substantially on the book by the author, Indian Economy since Independence: Persisting Colonial Disruption, Vision Books]

The author is a Professor of Economics (now retired), Jawaharlal Nehru University. He can be contacted at e-mail: arunkumar1000@hotmail.com