What is Income Inequality, Meaning, Definition, Consequence

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India has achieved excellent growth in its economy after the introduction of liberalisation reforms in early 1990s. These reforms have led to increase in GDP growth, stimulated industrial production in India, has put on curbs on fiscal deficit of the Central Government, and to a large extent reduced poverty in India. On the other hand, this unprecedented growth has been accompanied by rising inequality of income and wealth in India. Inequality is defined as domination of a higher or wealthier class over less wealthy and weaker class. Though there can not be perfect equality in any society but inequality shall not rise to such levels so that the fruits of the hard work of the poor people are not enjoyed only by the rich at the top.

Rising inequality may affect the abilities of poor people. They may not invest in education, their health and other essential social services that have positive influence on their lives. It also affects the level of trust between the common citizen. Social capital get restricted as people tend to maintain relations not beyond their own income group. The elite groups may also exclude the outsiders’ from the economic opportunities they generate. Thus, income and wealth inequality tend to create several problems for the existing social-economic order in the country

Extent of Inequality in India

Inequality has been rising in India sharply from the last three decades. The rich are getting richer at a faster rate whereas the poor are still struggling to earn even a minimum wage. According to Oxfam, an international organisation, the top 10% of people in India have 73% of total wealth of the country, whereas the bottom 50% of indians which are almost 67 million in number have seen only 1% rise in their incomes. Between 2018-2022, India is estimated to produce 70 new millionaires every day. The number of billionaires have increased from 9 in 2000 to 119 in 2019. The wealth of all the billionaires of India is more than entire Union Budget of India for the year 2018-19.

Due to high inequality, many ordinary Indian citizens are not able to access healthcare services that they need. 63 million Indians are pushed into poverty because of rising healthcare costs every year. This equals to almost 2 people per second. The extent of inequality is such that it would take almost 900 years for a minimum wage worker in rural India to earn what a top paid executive at a leading company in India would earn. Rising inequality in wealth is further aggravated by lack of essential services such as clean water, clean air, lack of education, health, sanitation etc.

Causes of Economic Inequality in India

In India several factors are responsible for the existence of economic inequality within a society. These factors are

• Market Based Labour Wages

After the economic liberalisation, the wage rates are purely determined by markets . Inequalities are caused by differences in supply and demand of various kinds of works. The labour markets are inefficient in providing equal opportunities to everyone due to unequal competition, uneven distribution of information and inequalities in the level of education and capabilities.

• Abilities of People

Differences in abilities such as intelligence, motivation, strength, etc., largely play an important role in determining individual’s wealth. Individuals with higher capabilities are able to work more efficiently as compared to people which are less capable.

• Tax System

The level of tax rate in a system has a direct impact on the level of inequality within a society. If tax is progressively applied on the income, it tends to reduce inequality whereas regressive taxes promote inequality. Thus, progressive taxation, coupled with good planning can lead to more equal societies and vice-versa.

• Education

Education is an important criteria in creation of inequality. Sectors of economy where there is high demand for higher education jobs, creates higher wages. But people with lower levels of education tend to fall behind. Lack of education leads to lower incomes as well as lower savings and investments in one’s health, education etc. This creates a vicious cycle in which even the upcoming generations tend to be poor because of lower productivity and income of the existing generation. This phenomenon continues for generations.

•Technological Advancements

Technological advancements such as new machines, robots, automation of processes, artificial intelligence, machine learning, neural networks etc., seek to replace low level jobs. This reduces the demand for these jobs and reduces the incomes of the common workers. This also improves the efficiency of manufacturing and consequently more profits for the elite class. This further leads to rise in inequalities.

• Neo-liberalism

Economic neo-liberalism, coupled with deregulation by the governments has become one of the sources of income inequalities in India. This has also led to reduced organisation of the labour class, which is exploited by the capitalists, thus inequality increases.

• Wealth Condensation

Wealth condensation is a process by which a newly created wealth is concentrated in the possession of already wealthy individuals and entities. These people who already have enough wealth, also find new avenues of wealth creation to raise their existing income levels. Thus, people who are already wealthy becomes more wealthy.

Consequence of Inequality in Wealth

Inequality and its disproportionate rise has several harmful consequences for the society. Rising income inequality worsens the conditions of the poor labour class and people who are engaged in lower income generating employments such as agriculture and farming. This has following effects

• There is distress migration from the poorer regions of the country towards the wealthier regions. Cities are flooded with migrant labour in India. This puts enormous pressure on the cities of India. The city infrastructure cannot bear such huge burden and often city governance collapses. Cities are filled with heaps of dust, a poor drainage system, closed compact living spaces ete due to rising income inequality.

Increasing inequality also increases the burden on Government for providing subsidies for the poor. Various kinds of subsidies are provided by the government on food, fuel, free health services, education etc. to reduce inquality and redistribute wealth among the people. Thus, as inequality rises, burden on government expenses rise.

• Increase in inequality also leads to decreasing trust level among the citizen. This may also take the form of social unrests and civilian movements to demand special rights. For eg. OBCs demanding their rightful quota under the affirmative action policy of government.

• Increase in inequality of income also leads to rise in poverty levels and inter-generational inequalities. This forms a vicious cycle of rise in inequality and poverty that cannot be broken without intensive and disruptive interventions.

• The pace of economic reforms is slowed down because of rising inequality. The previously successful reforms also start bearing fruits of inequalities and the national level gains in various social indicators are lost.

• Rising income inequality also deepens political inequality. Political power tends to concentrate in the hands of few wealthy. The poorer section is deprived of its right to participate in political processes and express their opinions.

• Overall it leads to deterioration in human capital of the country as due to lower incomes, the health, wealth and education of the poorer class is deteriorated. It leads to overall de-development of the country in real sense even though the economic growth may rise in numbers.

Way Forward

Inequalities of income may exist in any developing or developed economy. They not get completely eliminated but it can be reduced. One step that can be taken in this direction is to fix minimum wages and enforce the laws on minimum wages strictly. The minimum wage should not just be calculated on paper but its effects on the lives of the people should be determined to ensure a decent and minimum standard to living. Social security measures such as free and cheap education, cheaper health facilities, sickness compensation, schemes of social insurance etc. should be provided to the poorer class. The taxation system should be improved so that who earns more should be taxed accordingly whereas those who earn less shall pay nominal taxes. There must be ceilings on large agricultural holdings, which may help in reducing inequalities in the rural areas the country. The government should promote the agenda of more inclusive growth so that the economic growth and rise in GDP levels can be complemented by equal rise in the standard of living of the people. Labour reforms should also be started to ensure that labour productivity is not affected.

Emphasis should be laid upon skilling of labour and skilling of school children that they get ready to face the job market as soon as they complete their academic careers. The difference between haves and have nots should be reduced and domination of one class of people should be stopped. A more equal India would be a more prosperous India.

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