Almost every government irrespective of its political affiliation assigns top priority to accelerating economic growth [commonly understood as giving a push to gross domestic product (GDP)] believing that fruits of this acceleration will automatically percolate to the lowest strata of the society resulting in their higher income and better living standard. This belief has led successive regimes to single mindedly focus on growth without even bothering to look at income distribution. This task is left to economists for analysis more in the nature of a post mortem and mountain of research but is of little use in so far as learning lessons and changing policy discourse is concerned.
One such piece of research is ‘Time to Care’ released by rights group Oxfam ahead of the 50th Annual Meeting of the World Economic Forum [WEF] current underway in Davos. According to the study, India’s richest 1 per cent hold more than four-times the wealth held by 953 million people who make up for the bottom 70 per cent of the country’s population. Further, the combined total wealth of 63 Indian billionaires is higher than the total Union Budget of India for the fiscal year 2018-19 [Rs 24,42,200 crore].
At the global level too, the report [it draws upon latest data sources available, including the Credit Suisse Research Institute’s Global Wealth Databook 2019 and Forbes’ 2019 Billionaires List] brings out glaring inequalities in the distribution of wealth. The world’s 2,153 billionaires have more wealth than the 4.6 billion people who make up 60 per cent of the planet’s population. The 22 richest men in the world have more wealth than all the women in Africa. The report notes “global inequality is shockingly entrenched and vast and the number of billionaires has doubled in the last decade”.
The governments world over are fully aware of these glaring inequalities as also their consequences. The WEF’s annual Global Risks Report [this is being discussed during the 5 days brainstorming at Davos ] observes “inequality underlies recent social unrest in almost every continent, although it may be sparked by different tipping points such as corruption, constitutional breaches, or the rise in prices for basic goods and services”. It has also warned “the downward pressure on the global economy from macroeconomic fragilities and financial inequality continued to intensify in 2019”.
They also routinely take a pledge to address these inequalities and come out with lofty declarations at multilateral platforms including those under the auspices of the United Nations to bridge the gap between rich and poor including by use of what the Global Risks Report [GRP] terms as ‘deliberate inequality-busting policies’. Yet, when it comes to action on ground zero, there is acute lack of political will on the part of concerned governments and businesses; hence the business as usual scenario and ever increasing inequities.
Fundamentally, inequalities are intrinsic to the way businesses are planned and orchestrated. It all starts with the government offering a policy environment in which investors are offered an opportunity to earn an attractive rate of return on investment. What should be that attractive rate, this is not normally defined [though in certain sectors like power, it guarantees a minimum return]; so any level howsoever, high can fall within the scope of ‘attractiveness’.
A vast majority of the businesses pursue the famous adage ‘profit maximization’ to the hilt. They distribute their expenses in a manner such that the least amount is given to the labor and bulk of it comes back to the owner [or promoter] as ‘retained earnings’. The owners/promoters also leave no stone un-turned in ensuring that their tax liability – both indirect and direct – is kept at bare minimum [for this, they retain the best talent viz. chartered accountants (CAs) and other financial wizards paying them extraordinarily high salaries].
Big businesses also enjoy pricing power. For instance, those operating in metals such as copper, zinc or in hydrocarbon viz. oil, gas enjoy natural monopoly. Leveraging this, they charge high price making windfall gains even as millions of consumers suffer erosion in purchasing power. This also applies to banks who enjoy margins of 3-4% [difference between the average interest earning and the average cost of funds] yielding mammoth profit. Further, there are companies in the IT and IT-enabled sector who use their intellectual property rights [IPRs] to make tens of thousand crore every year.
There are enterprises in chemical, petrochemicals and agrochemicals sectors who have hugely benefited from a protective policy environment with high tariff on imports as well as licensing and registration requirements. These companies make money at the expense of millions of consumers including farmers [for instance, they have to pay high price for ‘new’ crop protection solutions for which substitutes are not available].
The micro, small and medium enterprises [MSMEs] may not be so well positioned versus the large enterprises but follow the same philosophy as the latter when it comes to distributing the proceeds of growth. Thus, their owners spend the least on payment to workers thereby boosting their retained earnings. They too get tax bonanza from the government in a variety of ways. They may not be entering the billionaire club but definitely become millionaires.
Then, there is the traders’ class particularly entities dealing in farm commodities. They buy products from farmers at throwaway price [the minimum support price (MSP) notified by the government remains mostly on paper as its agencies don’t have the wherewithal to procure their produce] and sell to the consumer at high price. Irrespective of whether there is surplus or deficit, Indian markets are so orchestrated that only traders emerge as the real beneficiaries at the expense of both farmers and consumers.
There is yet another class of rich who are the byproduct of corruption in governance systems afflicting ministries/departments as also agencies of the government and its undertakings. So, you have leakages from welfare schemes, inflated payments to agencies such as Food Corporation of India [FCI], diversion of funds borrowed from public sector banks [PSBs] etc. While, on one hand, this enables corrupt politicians and bureaucrats amass wealth, on the other, the poor become even poorer.
How does the government address these inequalities? Typically, this takes the form of giving relief to the poor by providing state assistance in cash or kind. For instance, under PM – KISAN, the government gives Rs 6000/- per annum to each of 145 million farmers in the country in three installments of Rs 2000/- each. As for help in kind, it provides mid-day meals to school children or free medical services to economically weaker sections [EWS] in hospitals.
There are umpteen instances of such freebies both by the centre and states entailing mountain of burden on the public exchequer. All of this goes only to help millions barely survive even as a good slice of this is siphoned off [though Modi has tried to stop it, the malicious practice still persists in substantial measure]. It does nothing to augment their productive capacity and prepare them for getting jobs.
Even where funds are given for empowering and increasing the income earning capacity [for instance, availability of credit at concessional rate of interest to farmers or others engaged in pretty occupations, supply of agricultural inputs such as fertilizers at subsidized rate, free electricity to farmers etc], much of the promised help either does not reach or cornered by better-off farmers. Even those who stand to gain from these support measures are at the receiving end when it comes to interface with traders for selling their produce [the latter being much more powerful and politically well connected].
Quite clearly, despite mammoth sums spent on welfare of the poor [or empowering them, to use Modi’s phrase], income inequalities increase even during periods of rapid growth. Even when, growth decelerates [for instance, during current year], then also this trend continues as the poor lose much more than the rich.
The way forward is not just more freebies or increase in concessional credit etc. The real solution lies in a fundamental change in the way our industrialists do businesses and how politicians and bureaucrats conduct themselves. While, the former need to shed their over-zealousness for profits, charge less from consumers, distribute more to workers and pay more taxes, the latter must ensure that every rupee is spent for the welfare and empowerment of the poor.
Even as the government shuffles policy choices to attune them for creating more jobs and increase income [e.g. by promoting labor intensive sectors such as textiles, apparels etc], unless the key stakeholders change their mindset towards majority who are not so privileged, the inequalities will continue to haunt and as pointed out in the GRP, even growth will remain vulnerable.