Friday 3 July 2015

India | $2-trillion Economy, Income Inequality

  • India’s GDP crossed the $2-trillion mark in 2014, according to data released by the World Bank.
  • Despite its increase in per capita gross national income (GNI), India has remained in the ‘lower middle income’ category ($1,046-$4,125).
  • India’s growth rate, at 7.4 % in 2014, makes it the fastest growing major economy along with China’s, which is a whopping $10.4 trillion in size. 

Source: The Hindu

Income inequality

  • Gross per capita annual income swells to Rs. 1 lakh.
  • The Global Wealth Databook reveals some startling facts:
    • The richest 1 % of Indians today own nearly half (49 per cent) of India’s personal wealth. 
      • The rest of us 99 per cent are left to share the remainder among ourselves. And that too is very unequally shared. 
    • The top 10% Indians own nearly three-quarters (74%) of the country’s personal wealth. 
      • The remaining 90 per cent share a meagre quarter. 
    • At the other end of the spectrum, of the world’s poorest 20 per cent people, nearly one in four are Indians. Just to show by contrast, China’s share is a mere 3 per cent.
  • Even nearly three decades after economic reforms and high growth, inequality continues to rise and wealth has become even more concentrated at the top. 
  • India has the lowest income inequality among all emerging economies, but it is much higher than most of the advanced economies - OECD
  • A significant new document released last week by the International Monetary Fund (IMF) has argued that rising income inequality will pull down the growth of world GDP the fastest, and called for national policies to be focused on the bottom 20 per cent of the population by income.
  • With financial inclusion being one of its key policy objectives, the Indian government is broadly aligned with the IMF’s advice.
    1. Jan Dhan Yojana 
      1. Seeks to bring banking services to the poor, including landless labourers, and offer them easy credit. 
      2. However, the IMF warns against offering too much credit “without sufficient regard for financial stability”. 
    2. Labour Reforms 
      1. States like Rajasthan and Maharashtra have begun to loosen rules for hiring of labour. 
      2. Both the IMF and OECD say labour market policies should attempt to avoid both excessive regulation and extreme disregard for labour conditions. 
    3. Tax Reforms 
      1. The IMF paper is clear that tax rates need to be far more progressive across most of the world - 
        1. greater reliance on wealth and property taxes, 
        2. more progressive income taxation, 
        3. removing opportunities for tax avoidance and evasion, 
        4. better targeting of social benefits while also 
        5. minimizing efficiency costs, in terms of incentives to work and save
      2. Budget 2015-16 has announced a timeline to ease corporate tax rates to 25% in the next four years, but plans to erase most tax exemptions. 
    4. Skill Development 
      1. Both papers argue that raising skill levels can alleviate the pain from the relaxation of labour laws, technological change and financial openness.
      2. Improving education quality, eliminating financial barriers to higher education, and providing support for apprenticeship programmes are all key to boosting skill levels in both tradable and non-tradable sectors. 
    5.  FDI and FII 
      1. IMF adduces data to show that increased financial flows, particularly foreign direct investment, increases income inequality in both advanced and emerging market economies. 
      2. In the last one year, India has opened the gates wider for insurance, railways and defence, and is debating the chances of opening them for multi-brand retail too.
Inequality can also be destructive to growth by amplifying the risk of crisis or making it difficult for the poor to invest in education. Reduced inequality and sustained growth may thus be two sides of the same coin”.

[Sources: The Hindu, Indian Express]


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