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Reforms and inequality

By BS in New Delhi
October 04, 2007 09:40 IST
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The issue of increasing inequality on the consequences of the economic policy trajectory has featured prominently in the public debate since the early 1990s. It came to a head during the general elections of 2004, when the then ruling coalition focused on the beneficiaries of their economic management, while the opposition targeted the segments of society to whom the benefits had accrued marginally, if at all.

Of course, much of this discussion took place in a bit of a factual vacuum, created in part by the fact that India's statistical system produces comprehensive data for the estimation of poverty and inequality only once every five years or so. Anecdotal and impressionistic evidence is all very well, but sound policy needs solid and comprehensive evidence. The most recent large sample survey of households covering consumer expenditure and employment was done during 2004-05 and the data were put in the public domain earlier this year. It is only since then that systematic analysis of this data is beginning to enter the policy debate, providing a solid empirical basis for debating critical issues.

One recent example is a study by Bibek Debroy and Laveesh Bhandari, "Exclusive Growth -- Inclusive Inequality". The estimation of state-level poverty incidence by the Planning Commission on the basis of this data has already allowed researchers to conclude that, over the period 1993-94 to 2004-05, success in poverty reduction across states is closely associated with rapid GDP growth. That is a tangible and unambiguous achievement in and of itself. However, the study also finds that inequality, as measured by the Gini coefficient of the distribution of household expenditures, has increased somewhat over the 11 years. 

Across states, this increase is positively correlated with both the current level of prosperity and the growth rate over the last decade. In other words, richer states tend to have greater inequality, as do states that have grown the fastest over the period. This pattern conforms to the well-known Kuznets Curve, a relationship postulated by the late Nobel Laureate in Economics, Simon Kuznets, which indicates that economic growth is typically accompanied by rising inequality until a certain threshold level of income is crossed, after which it is associated with decreasing inequality.

Two important patterns are identified by the study. One, across states, there is an inverse relationship between inequality and the proportion of the labour force that is self-employed. The opportunity to find substitutes for employment in organisations, whether private or public, is apparently an equalising factor and indicates that facilitating self-employment at every level should be a policy objective.

The other, across income groups, suggests that real incomes have grown fastest at the top and bottom of the income ladder, leaving the middle segments somewhat behind. The decline of the public sector undoubtedly has something to do with this, but the more significant point is that there is a widening gap between educational attainments at these socio-economic levels and market requirements. Reforms have clearly created lots of opportunities and people at both ends of the income distribution have benefited; however, there is also a large cohort, which risks getting left behind in the absence of adequate and relevant channels of skill creation and upgrade. Sustaining inclusiveness, the study concludes, and quite rightly, requires creating these channels rather than trying to compensate for their absence with handouts of various kinds.

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BS in New Delhi
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