INEQUALITY – A FLAWED CONCEPT AND A POLITICAL HOAX

 

Prosperity is built by deliberate choices to develop a society that works for everyone — an inclusive society, with a strong social contract that protects the fundamental liberties and security of each individual. It is driven by an open economy that harnesses the ideas and talents of the people of a nation. To assume that wealth can only be created by inheritance or unfair means is a sick communist idea. Human efforts to improve skills and material conditions results in wealth creation, and majority of wealth creators today are self made. To define how much profit is appropriate is an exercise designed to kill entrepreneurship and a plan to redistribute wealth of haves to have nots is the last nail in the coffin of a prosperous nation.

 

Why are we discussing this?

In this election the Congress has offered a plan of redistribution of wealth to achieve prosperity. The grand plan involves taxing the middle class and upper class disproportionately and giving 1 lac (Rs. 100,000) to one woman of every family, a total of 32 lack crore annually, almost the entire revenue expenditure of the Government of India! While a poll promise can be a hyperbole, the very idea is able to send an alarming shudder down the spine of our economy. It will surely discourage entrepreneurs, and their money will start getting invested overseas, thus halting our progress. When the tax payer’s money is used in welfare of the poor like giving free ration to the poor, educating their children, giving them easy loan to start a business, offer them healthcare services, home to live, electricity, cooking gas and running tap water, the tax payer feels proud. But when the same money is used to waive off bank loans, provide electricity to rich farmers to further deplete our water table, there surely is a problem.

 

Releasing the party's poll manifesto at a public meeting a Congress leader stressed on "jitni aabadi, utna haq" principle. "First, we will conduct a caste census...to know the exact population and status of backward castes, SCs, STs, minorities and other castes. After that, the financial and institutional survey will begin. Subsequently, we will take up the historic assignment to distribute the wealth of India, jobs and other welfare schemes to these sections based on their population.” The question that we are discussing is “is this how we will address poverty?” The grandmother started with “Garibi hatao” and the grandson is following it up with “Amiri hatao!”

 

Picketty has got it wrong

The million dollar question is “is inequality the cause of poverty?” Thomas Picketty, a famous economist and author strongly feels so and for him inequality is the problem and a higher tax is the solution. Even he does not advocate giving Rs. 100,000 annually to every family for doing nothing. Why will anyone work if they are assured a lifelong pension? Is this not the best recipe to kill the will to work and struggle to prosper. Equal distribution of wealth is not good, because people produce dramatically different amounts of value. If you do not reward them accordingly, they stop doing it, and ultimately the whole society will suffer.

 

Thomas Picketty

Picketty and his colleagues have for quite some time been harping on how today’s India is more unequal than the British Raj and the era of Nehruvian socialism.  Off course it is. India has embraced economic growth, free market and globalization and despite what his research paper entitled ‘Income and Wealth Inequality in India, 1922-23: The Rise of Billionaire Raj’ says, India is not abandoning the growth path and returning to the scary days of growth-less socialism. Post liberalization, the paper says, India has become more unequal. But, what it does not say is that during the same time 400 million people have been pulled out of poverty. Compare this to the pre-liberalization days, when poverty kept on increasing despite the sloganeering of ‘Garibi hatao!’ Picketty seems to have overlooked the British orchestrated Bengal famine during the British Raj, or does equality means that equally everyone died of poverty and hunger?

 

Are common people bothered about inequality?

Ask yourself an honest question; are the common people of this country angry with Adani and Ambani because they are rich? Or are they desperately trying to attract their attention and work in their ventures to contribute to nation building? Inequality is not a problem that policy makers in India should worry. Our economic challenge is to create sustainable growth and opportunities for hundreds of millions of youth, to exploit on our demographic dividend and government alone cannot do this without the help of private enterprise. We need not one or two Adani and Ambani, we need thousands of them. They will set up newer industries and create newer opportunities.

 

Those who specialize in sounding the alarm about rising inequality have rarely succeeded in doing anything about it. Probably they also know that nothing needs to be done and high growth creates higher inequality.

 

Gini coefficient

Gini is an index that takes the value of zero when income/wealth is equally distributed in a population and 1 if it is concentrated in the hands of one person. Thus a rising value of the index indicates rising inequality. In India Gini coefficient was 0.30 in 1993-94, 0.35 in 2004-5, 0.36 in 2009-10 and 20011-12. While post liberalization hundreds of millions experienced the joy of escaping extreme poverty, were they aware that inequality too increased with their prosperity? And were they even bothered? The common man knows what his consumption is, what his neighbour’s consumption is but does he even care about Adani’s consumption or for that matter, the nation’s Gini coefficient?

 

While we are at Gini, would you believe if I tell you that Kerala is the state with maximum consumption inequality, despite having a communist government and Bihar has the least consumption inequality? Yes, poorer states are more equal, but they are poor. So, people are concerned about poverty not inequality. Adani and Ambani are not getting rich at the cost of the poor. They are helping the poor by opening opportunities for them. That is what entrepreneurs do. Do you see protests in the streets and looting of shops by the agitated poor? I find people hurrying about their jobs and looking for opportunities. Every 5 years they get the opportunity to choose a new government, I don’t see them choosing the party which is most concerned about inequality and with a vintage slogan of ‘Garibi hatao!

 

Where does inequality matter?

It only matters in your immediate social circle. If Adani and Ambani add a few more billions to their kitty a common man is not concerned. But, in their immediate social context it is a different matter. How a select group of Yadavs became rich overnight in Uttar Pradesh did not escape the eyes of their neighbourhood. Their one time friends did not grudge the wealth of Adani and Ambani but surely the neo-rich Yadavs were a sore to their eyes.

 

In a developing country, fighting poverty triumphs over pursuit of equality. Poverty reduction requires wealth creation. If these wealth creators keep even a tiny portion of their profit as their share before reinvesting the rest in more opportunity creation for theose seeking an opening, their wealth gradually increases and they can afford extravagant wedding receptions for their children. The poor never grudge that so long as their own economic condition also improves. Needless to say, the wealth created also generates taxes for the government, which again can be invested in poverty alleviation programmes.

 

If redistribution of wealth is not the answer then what is?

We have to increase productivity and make a substantial shift from low skilled agricultural jobs to higher skilled manufacturing jobs. People cannot be paid for doing nothing in the name of wealth distribution. The answer lies in skilling, transportation, infrastructure and market development. Raising incomes will reduce poverty, and we can stop bothering about inequality. The negative effects of inequality are better tackled by increasing competition in the market enabling people to capture opportunities and strengthening social capital. Higher taxes and license raj are relics of the past, never to return again. Bolstering our human resource and improving overall governance along with reforms in education, manufacturing and environment are the need of the hour. Simplifying the laws, punishing the corrupt, enforcing equality before the law and an agile and swift justice system will help and restoring regressive tax laws will only result in black money, graft and disaster. Inequality is at best a political hoax, pulled out for the election season.