Creating a more equal India

Jul 18 2014, 02:36 IST
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SummaryRising inequality can seriously reduce welfare, slow down poverty reduction, undermine social stability, and may ultimately undermine economic growth

In the Budget FY15 presented last week, part of the thrust is on boosting infrastructure and removing bottlenecks to their development, as may be seen in the proposed investment in NHAI and state highways to the tune of R37,887 crore. Such proposals were expected.

However, in an economy and society like India which is characterised by huge inequalities in income and wealth, it may be difficult to improve infrastructure significantly without reducing income inequality. Is there any link between physical infrastructure and income inequality? As per Census 2011, 65 million (or nearly 14 million families) live in the slums of India’s urban areas. The access to sanitation continues to be inadequate—19% of urban households defecate in the open and 42% do not have a toilet with a flushing system. Further, over two million are homeless living on the streets. Given this, the government’s commitment in the Budget to provide housing for all by 2022 is definitely a much-needed step in the right direction. While 40% of slum households in the country as a whole possessed only a bicycle, only 4% had a car, a van or a jeep. As many as 11% of the slum households had none of the assets specified.

Urban inequality reflects both unequal distribution of skills and unequal returns to skill. A stylised fact emerges from empirical studies of inequality, as they apply to emerging economies: inequality is more likely to harm growth in countries at low levels of income below about $3,200 per capita (in 2000 dollars), where India is currently. Theory and evidence suggest that high inequality affects growth:

(1) Through interaction with incomplete and underdeveloped markets for capital and information;

(2) By discouraging the evolution of the economic and political institutions associated with accountable government (which, in turn, enable a market environment conducive to investment and growth)—here it may be worthy to note that many studies on the consequences of income inequality find that where inequality is high, trust is low;

(3) By undermining the civic and social life that sustains effective collective decision-making.

Apart from its effects on growth, the economic problem with inequality is that it highlights the disparities between the high and the low, and prevents for everyone access to better infrastructure, impeding mobility, and access to jobs, undermining growth. For instance, while cars are affordable to the higher and middle income classes, only bicycles are typically used by the lower income groups, as is evident

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