Why India has less inequality than U.S.

By Anja Manuel
May 8, 2014

Voters line up to cast their votes outside a polling station at Wadipora in Kupwara district

The outcome of India’s general election may have dramatic consequences for the nation’s economic health.

India now has more equal wealth distribution than the United States. Steven Rattner, a Wall Street financier and former Obama administration economic adviser, recently announced this on MSNBC’s Morning Joe, while discussing Thomas Piketty’s new book, Capital in the 21st Century.

It sounded unlikely, but Rattner’s charts and statistics showed that India is indeed a more equal society. The top 1 percent of Americans earn more income and hold more wealth, compared to the nation’s poorer citizens, than their Indian counterparts.

Economists are puzzling over how this happened. One key reason could be the massive income-redistribution programs that Indian Prime Minister Manmohan Singh and his Congress government have created. Though many programs are inefficiently run, they have achieved some remarkable successes.

Hindu nationalist Modi shows his ink-marked finger to his supporters after casting his vote in AhmedabadSome 815 million Indians have registered to vote in the world’s largest democracy, in an election that runs more than a month, April 7 to May 12. The Congress government now looks likely to lose to the Bharatiya Janata Party (BJP) under Narendra Modi, who has a strong Hindu nationalist background. This new BJP government is expected to focus more on overall economic growth than equality.

This could shift the economic dynamics that the Congress government has worked hard to create.

India’s economic liberalization in the 1990s — when the current prime minister  served as finance minister — unleashed massive economic growth. Yet the wealthy benefited far more than the poor, as is often the case, and inequality increased by some measures. To counteract this, the left-leaning Indian Congress Party, in power since 2004, implemented substantial wealth-redistribution policies.

These policies are now weighing heavily on the national budget. But rather than scrap the programs, a new BJP government should streamline and reform them.

When Singh and his Congress Party won in 2004, Indians hoped he would be a good steward of the economy. For a while, this seemed to be the case. His reform goals included increasing investments in infrastructure, updating labor laws so that employers could hire and fire workers more easily, removing continued restrictions on foreign investment and streamlining licensing requirements. From 2001 to 2010, India’s gross domestic product grew, on average, 7.7 percent annually, reaching 8.5 percent in 2010.

Hindu saints stand in line to cast their votes at a polling station in AhmedabadBut the Indian economy has faltered in recent years. The more ambitious reforms have been left fulfilled. Economic growth has slowed to below 5 percent, and inflation — around 8 percent to 8.5 percent annually — has eroded wages.

The key cause of inflation is India’s large budget deficits, which have recently been running at 4 percent to 5 percent of GDP. Though one year’s shortfall almost reached 8 percent. The expensive populist programs help keep deficits high.

For example, the National Rural Employment Guarantee program, which guarantees 100 days of paid employment to unskilled workers in rural areas, costs more than $9 billion annually. In addition, there are substantial subsidies on essential food, fuel and fertilizer products. The National Food Security Bill, a program that subsidizes food and grains, feeds a staggering 800 million people and costs $23 billion annually.

These two programs alone are more than 10 percent of India’s entire government budget. Both are marked by corruption and human error, which are rampant in many public assistance programs. One recent study found that half of all food distributed is diverted through errors or corruption.

Yet these programs have produced positive results. The Congress Party contends that public programs have helped pull 138 million people out of poverty.

The party’s election platform, under prime ministerial candidate Rahul Gandhi, promises continued “inclusive growth,” with quixotic goals to lift 800 million people into the middle class and raise the GDP growth rate to 8 percent within three years. The party also proposes guaranteed access to healthcare, pensions and housing.

Kashmiri women line up to cast their votes outside a polling station at Badkoot in Kupwara districtCritics argue, however, that India cannot afford such lavish spending without boosting overall growth. Cynics add that recent spending increases on food aid and other programs seems designed largely to win votes in the elections.

Modi and his BJP party have said little about wealth redistribution. They argue that stronger overall economic growth will lift all Indians — including the poorest. The BJP party’s “India Vision 2025” platform asserts that government should be less involved in the economy and commerce. Instead, it emphasizes renewed investment and completing key infrastructure projects.

The latest Indian polls show Modi, the BJP and its allies beating the Congress party by a landslide.

Because Congress’ wealth redistribution programs are popular, the incoming BJP-led government should concentrate on making them more efficient. Here are some possible fixes the new government could try:

  • Replace some of the unsustainable food subsidies with more cash transfers, based on India’s new national ID scheme.  (The Congress government has started experimenting with this.)
  • Focus on restoring soil fertility, reviving groundwater levels and using more productive farming techniques. Long term, this could make food aid unnecessary.
  • Make information about the 100-day rural-employment program more widely available. The program has helped some of India’s poorest families. Yet many potential workers don’t know how to use it or — due to corruption — are not paid for the work they do. Strengthening oversight would vastly improve the program.

India’s middle class has grown substantially in the past 20 years because of both overall economic growth and active income redistribution. The new government should double down on the growth and equality policies that have made this possible. For the sake of India’s poor, the BJP should improve income-redistribution programs to realize the promise of the new India.

 

PHOTO (TOP): Voters line up to cast their votes outside a polling station at Wadipora in Kupwara district, north of Srinagar, May 7, 2014. REUTERS/Danish Ismail

PHOTO (INSERT 1): Hindu nationalist Narendra Modi (C), the prime ministerial candidate for India’s main opposition Bharatiya Janata Party (BJP), shows his ink-marked finger to his supporters after casting his vote at a polling station in the western Indian city of Ahmedabad, April 30, 2014.  REUTERS/Amit Dave

PHOTO (INSERT 2): Hindu saints stand in line to cast their votes at a polling station in the western Indian city of Ahmedabad, April 30, 2014. REUTERS/Stringer

 PHOTO (INSERT 3): Kashmiri women line up to cast their votes outside a polling station at Badkoot in Kupwara district, north of Srinagar, May 7, 2014. REUTERS/Danish Ismail

5 comments

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I think much has to do with real-estate boom where middle class became rich in a short time leading them to start enjoying the fruits by hiring workforce to get jobs done while the demand for labor force increased, their wages went up in return leading to bridging of income gap over time.

Posted by Mott | Report as abusive

Rattner’s charts date to 2010, much before the NREGA and other schemes, mentioned by he author,picked up speed.

Wrt to inequality measures re top 1%, it may be helpful to note that in India, a person earning just about $17,000 a year (roughly Rs 10 lakhs)would,in all likelihood, figure in the top 1% bracket and, as we have largely single-person earning households, consisting of 4/5 persons, this sum hardly allow for the luxurious lifestyle that the ‘top 1%’ tag typically denotes.

Posted by vmishra | Report as abusive

This is a really misleading headline. Sure, if you wish to only equate income inequality as the difference between the 1% and everyone else (Gini Coefficient) then perhaps the USA has more inequality. But in the real world concerning the average persons well being, the comparisons are more complex. To imply that India has a somehow better situation for the average person is absurd. The poverty rate there is 30% and their definition of poverty, is income of less than $2 per day. The poverty rate in the USA is 15% and as we know, our definition of poverty is several orders of magnitude higher than $2 per day.

Posted by joefults | Report as abusive

I thought this was a very moderate and reasonable article. It was also genuinely informative. So different from much of the hysteria that comes from the US.

The causes of the difference between the US and India might also have to do with India, despite the corruption and inefficiency, being a more humane and civilised society.

Posted by nickir | Report as abusive

Not True. Wealth is located in the Religious Temples of Hinduism. They have 7 safes in each temple. A survey was run a couple of years ago on ONE temple and in ONE safe. Gifts given at a temple ARE NOT spent but stored. The safe reviewed had enough wealth in it to pay off ALL national debt and insure no one would pay taxes for some 20 years. That was ONLY one safe of SEVEN in ONE Temple. Interesting isn’t it?

Posted by tommelba | Report as abusive