Of Gini and Genies…why India’s model seems to be working ?

Summary : Our lack of privatisation in oil&gas/infra, sustained reservation of backward classes, NREGA type subsidy initiatives, our lop-sided “services-skewed” GDP growth, have in retrospect, proved to be a potent combination in controlling inequality in the past 2-3 decades, as compared to most of the other significant countries in the world.

 

A recent edition of The Economist covered the concept of Gini co-efficient across countries…across time. Gini co-efficient is a measure of the inequality of incomes (and wealth) between the top rich people and the bottom poor people.

In most of the richer countries, this Gini co-efficient had increased after the Industrial Revolution as a few people started owning the few means of production and most others were working in these factories or even stayed unemployed. Gini started falling in the 1900-1980 period as Governments stepped in to break big banks and companies, increased taxes on the rich and implemented social safety nets for the poor. Also, increasing education in USA was seen to be one of the major factors for decreasing inequality. However, alarmingly, Gini has started increasing from 1980-2012 and governments across the world are worried about it.

Why is higher Gini bad ? Greater inequality of incomes and wealth in society can lead to social unrest, the worst example being the French Revolution. Recent examples have been seen in the Middle-East or in a smaller manner in Occupy Wall Street…possibly, the Anna Hazare-Kejriwal phenomenon almost fell in a similar category. Besides this, some economists claim that higher inequality leads to slower overall growth since the impact of corrective policies are different on different segments and hence, the overall impact is diluted.

Why has Gini started increasing of late ? The theory is that with increasing globalisation and communications technology, entrepreneurs are able to extract more out of trade and business, and hence owners of bigger companies are growing faster than the rest of the population.

How is India doing ? Actually, fine, thank you – surprised ?…what with all the gloom and doom and forecasts of disaster invading our TV channels.

Well, the increase in Gini co-efficient from 1980-2012 has been 30% for America, 25% for stabler more-equal countries like Sweden and a jaw-dropping 50% for China! Comparatively, India at 8-10% is much lower in the last 30-year period. How has this come about? Well, a combination of a few things, according to me :

  • The growth in Indian economy has come largely through IT/ITES/Retail/telecom/financial services, all services businesses, which employ large number of skilled people and which have been instrumental in spreading the wealth from the enterprise more equitably.
  • The social re-distribution of wealth has moved from rationing of food supplies only to more comprehensive schemes like NREGA and hence has made some of the bottom-segments a bit better off
  • Our capital-intensive industries like oil & gas, infrastructure have been owned by governments or domestic financial institutions, and hence there has not been too much disproportionate wealth being created for a few private owners – like in Russia, South America, China (possibly, with few Government workers, if not private entrepreneurs)
  • A final factor could be the sustained reservation for backward classes that we have been doing, because of which majority of local government bodies are staffed by people from these communities, who in turn have encouraged their down-trodden brethren to scale up the ladders of society and prosperity.

 

What’s the shape of things to come ? Though our model seems to be moving in the right direction, maintaining exactly the same may not be the correct option for the future. All the above factors work only if the overall growth is strong enough to pull the poor out of poverty. Remember, our GDP has moved up from Hindu rate of growth only since mid-80s – that is no coincidence that the above period of better comparative Gini movement coincides with this. Hence, at current scale, our economy needs to grow by 7-10% p.a. for this to happen and for all the above “nice” factors to have similar impact as before. For this, we need more :

  • Liberalization (opening up of trade, infrastructure, oil & gas, insurance, retail),
  • Privatisation (Govt getting out BSNL, MTNL, LIC, SBI, etc),
  • Globalization (more Airtels in Africa and Tatas in JLR)
  • Reforms (Banking, Electoral, Police, Judiciary, Legislative)
  • Unlimited Investment in Education, Health and Infrastructure.

Also, of late, some “rent-thick” and “capital-intensive” sectors like Real Estate, Mining, etc are seeing the rise of a few plutocrats, and this could be the beginning of a dangerous trend of increasing inequality. These sectors need to be encouraged, but with much higher transparency; capital for this sector needs to be made available to all so that we see many entrepreneurs jumping into this rather than only people who are connected.

 

Sometimes, historical events in hindsight are called “Strategy”. That’s what uncharitable people would like to say about our policy-makers. Sometimes, it is easier and mentally relaxing to admit that the policy-makers might have got the larger picture in mind (and this is over the past 25-30 years and hence, across Governments – Congress-led, BJP-led, or the short-stint “socialist” ones).

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