Structural Transformation, Growth and Inequality: INDIA

Mr. Panchanan Das
Professor of Economics,
University of Kolkata
Kolkata, West Bengal, India

Financial Blog in behalf of GLARiUS - wwww.glarius.com 

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The increases in productivity and income per capita are extremely important for development in an economy guided by the market fundamentals through the process of division of labour and expansion of trade. But the process of faster economic growth through faster proportional productivity growth creates inter-personal and inter-regional inequality. As productivity grew at a higher proportional rate than the growth in wage rate, capitalists’ surplus or profit rate moves up disproportionately raising inter personal inequality. Also, the surplus is normally transferred towards the location with easy access to capital and skilled labour, and better state support for infrastructure and tax concessions. The productivity of workers with better technology in the developed regions is higher and thus wages are also higher compared to those in less developed regions using inferior technology in producing similar products. In this way faster productivity growth in a market based economy may create inter-regional inequality.

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The union government of independent India initiated experiment with planning at the beginning of the 1950s, but it was effectively suspended in 1991 with the beginning of the liberalisation process. One explicit objective of the experiment was to limit the economic power of the elite within the frame of a mixed economy. The first three decades of planning (1950s to 1970s) was associated with a marked decrease in inequality that had prevailed during the colonial period. In particular, the growth rates of real income of the rich, the super-rich, and the ultra-rich, as defined in Banerjee and Piketty (2005), declined significantly, even as average income grew slowly. The situation changed dramatically in the early 1980s, which marked the turning point for the dynamics of income inequality in India and indeed across the world. While average income grew faster since the mid-1980s than it had in the planning period, inequality increased rapidly primarily because of an enormous increase in incomes at the top, particularly incomes at the very top (Basole, 2014). The top 1 percent in income distribution owned roughly 9 percent of the national income in India in the late 1990s (Banerjee and Piketty 2005). 

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The structural transformation of the Indian economy from a socialistic to a pro-business path was well-underway before the 1991 reforms. The new economy of the 1980s and 1990s, even as it delivered faster growth on average, ensured higher proportional rates of growth of top incomes as compared to the first three decades of planning. In the early 1990s, the economy of the country opened its doors to the world. Subsequently, people with accumulated, or inherited wealth benefited the most from the openness of this kind even though it is said that the middle income people are also better off in this process. But, very recently the growth rate declined and the people in the lower percentile has been slipping deeper into poverty. The pro-business policies made more wealth for the upper end while the lower end dropped down further into oblivion. Thus the price of the spectacular growth of the 1990s was equally remarkable and has been paid at least in terms of higher inequality.

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References

Banerjee, Abhijit, and Thomas Piketty. 2005. “Top Indian Incomes, 1922–2000.” World Bank Economic Review, 19(1): 1–20.

Basole, A. (2014), Dynamics of Income Inequality in India - Insights from World Top Incomes Database,Economic & Political Weekly, 49(40), 14-16