The Union Budget 2022-23 was expected to take steps to tackle the problem of inadequacy of demand so that the economy’s rate of growth could be accelerated. This problem has persisted and had led to the rate of growth slowing down in the last four years. In turn, this problem is linked to the growing inequality in the country, which has been highlighted by several recent reports. The latest report is from the non-profit think tank People’s Research on India’s Consumer Economy [PRICE]. It shows not only the aggravation of inequality but also of poverty since 60 per cent at the bottom who were already poor or close to the poverty line lost incomes.
It is true that the problem predates the pandemic. It has been ignored by the elite and the well-off because it was a statistic that could be invisibilized. But no more during the first COVID-enforced national lockdown, when images of the distress of the poor were daily beamed into homes by the media. Millions walking back to their villages under trying conditions could not be cynically ignored. An overwhelming majority of the workers said that they did not have enough savings to buy even one week of rations; that implies that poverty increased phenomenally during the pandemic.
Thus, tackling poverty and inequality should have been a high priority. Let us understand the nature of poverty and inequality in India and then what could have been done in the budget.
Rise in Income Inequality
The PRICE report presents the average income in 2015-16 and 2020-21 in five quintiles. It shows that the bottom 60 per cent of the income ladder have lost incomes (in real terms) and the poorer the household, the more the loss of income. This is the period during which demonetization and the Goods and Service Tax also hit the unorganized sectors hard.
The report shows that the bottom 20 per cent, the ones below the poverty line, lost 52.6 per cent of their household income. It needs to be remembered that India’s poverty line only defines extreme poverty. The next 20 per cent, who are also poor, lost 32.4 per cent of their income and would have slipped below the poverty line. This confirms the reports in 2020 that 230 million additional people had become poor. Even the next 20 per cent, who lost 8.9 per cent of their household income, would have come closer to the poverty line.
The next 20 per cent gained seven per cent of incomes. However, its bottom half is likely to have also lost income while the top half of this interval would have gained incomes. The top 20 per cent gained 39 per cent of incomes. Its top few per cent would have gained substantially more income due to a steep rise in corporate profits. Also, the top 3 per cent income earners generate substantial black incomes which they do not reveal.
In effect, the top three per cent have considerably more incomes than the data reveals, so the disparity between them and the bottom 60 per cent has risen substantially more than what is revealed by the PRICE survey.
The Delhi socio-economic survey of 2018 supplements the above. It showed that in Delhi, 90 per cent of households spent less than Rs. 25,000 per month, while 98 per cent spent less than Rs. 50,000 per month. Since Delhi’s per capita income is 2.5 times the all India average, one can deflate the Delhi figures by this factor to approximately arrive at all India figures.
So, 98 per cent of the families would have spent less than Rs.20,000 per month, and 90 per cent less than Rs.10,000 per month. Effectively, 90 per cent of Indian families were poor in 2018 if not extremely poor (implied by the poverty line). These people would have been forced to curtail their consumption with loss of income during the pandemic.
This estimate is based on consumption, while the PRICE survey is based on income. Surveys usually suffer from discrepancies of various kinds but the most important is deliberate under-reporting or inability of individuals to recall accurately their actions a week or a month back. Experience of this author in collecting income data from households suggests that not only do people not report their black incomes, they also do not fully reveal their white incomes. So, data typically under-represents disparities.
Hierarchy of Disparities
Global financial services firm Credit Suisse and British confederation of charitable organizations Oxfam have been publishing reports on wealth inequality. They have highlighted the growing gap between the top one per cent and top ten per cent versus the bottom 50 per cent. According to Credit Suisse, in 2018, of the total wealth, the richest one per cent held 51.5 per cent and the richest ten per cent owned 77.4 per cent of it, while the bottom 60 per cent, the majority of the population, only had 4.7 per cent.
Surveys of wealth are even trickier than that of incomes since the valuation of wealth poses problems. There is an undervaluation of assets like real estate and jewellery. Also, the valuation is done at the purchase price years back and not at the current market price. Since the former is usually a fraction of the latter, there is an underestimation. In effect, the disparity is higher than the surveys reveal. There are then three different kinds of disparities – wealth, income and consumption. Theoretically, wealth disparity is greater than income disparity, which should be greater than consumption disparity.
The reason is that the poor by definition do not have enough income to even fulfil their basic needs so they hardly save. They typically dissave when they borrow for consumption. So, their consumption is more than their income. The well-off sections save, so their consumption is less than their income. That is why the income disparity is greater than the consumption disparity. The savings of the well-off accumulate every year and add to wealth which gets them a return, so it grows rapidly while the poor have little savings and hardly have any wealth. That is why wealth disparity tends to be greater than income disparity.
Wealth disparity is an important factor in growing income disparity since there is a return on investments that can be very large. That is why the real disparity in society is between holders of capital and wage earners and not among the wage and salary earners. Further, wealth is passed on from one generation to the next and keeps accumulating in the hands of well-off families. Also, due to their political clout, the wealthy obtain many concessions in taxes on the plea of incentivizing them to invest more. This lowers their tax rates and that helps their wealth and income to grow further. So, the crucial disparity is the wealth disparity.
Budget Misses Addressing Inequalities
Disparities and poverty push down consumption and result in slowing down of growth as witnessed in India pre-pandemic. American investor Warren Buffet said in 2011 that inequalities are bad for capitalism and proposed that the rich be taxed more. He was supported by the rich in the US, Germany, and France, among others. This call was repeated in 2019 and again recently during the pandemic, to support the poor.
Given the need to tackle the current crisis of poverty and shortage of demand, the budget needed to act on reducing inequalities. An increase in employment generation was crucial. The budget does propose a 35 per cent increase in capital expenditures, but most of this is allocated to capital intensive infrastructure like roads and railways. Construction of such projects is very capital intensive and offers few direct jobs. The allocation for the Mahatma Gandhi National Rural Employment Guarantee scheme has been drastically cut while allocations to rural development, agriculture sector and health sectors are less in real terms compared to the current year. So, these areas that can offer many jobs are being curtailed.
The substantial step up in the education sector is for technology rather than employing more teachers. In fact, the budget is proposing much greater use of technology everywhere, like the use of drones in agriculture. That will not offer jobs to the large numbers who have low skills and have been displaced from the unorganized sector. The emphasis is on the organized sector which directly offers few jobs rather than on the unorganized sectors where many more jobs can be generated.
The large numbers who are now permanently unemployed and have given up looking for work, the underemployed and the disguised unemployed need work to boost incomes and consumption. So, there is a backlog of unemployment, and lack of adequate amount of generation of work is adding to the problem of inequality and disparities. For boosting consumption at the lower end of the income scale, food subsidies and transfers to the poor needed to be increased, but they have been curtailed.
For improving income distribution, an increase in direct tax rates and lowering of indirect taxes was required which has not been proposed. Finally, to lower wealth disparities, wealth tax was required but it has not been introduced. Along with that, there was a need for estate duty and gift tax.
Reduction in disparities and increase in growth would have put far more income in the hands of the lower 60 per cent in the income ladder than all the schemes for the poor, and there are many of them. Such schemes do not solve the basic problem but are palliatives. The Prime Minister said at the World Economic Forum last month that 80 crore Indians were offered free foodgrains during the pandemic. While this highlighted his government’s achievement, it is also an admission on the world stage of the existence of mass poverty. The crux of the matter is the elimination of poverty, and that requires instituting basic changes in policies that currently lead to the persistence of mass poverty.
First published in The Leaflet, Union budget 2022-23: which of the inequalities will it impact? on February 21, 2022.
About the Author
Arun Kumar, Malcolm Adiseshiah Chair Professor at the Institute of Social Sciences, New Delhi and the author of `Indian Economy’s Greatest Crisis: Impact of the Coronavirus and the Road Ahead’.