Division A

Bachelors of Science: Finance

[Date] INDIAN
ECONOMY IN
GLOBAL
SCENARIO
Economic Growth and Inequality

Kanishka Gupta F020

Dwij Nathani F018
Kriti Kabra F072
Anubhav Gupta F026
Arnav Kansil F064
 Economic Growth and Inequality: A Case
Study of the Indian Economy

Abstract:

India's economic growth story has been remarkable in recent decades. However, this growth
has been accompanied by a rise in income inequality, raising concerns about the
sustainability and inclusivity of this progress. This paper examines the relationship between
economic growth and inequality in India, analyzing the factors driving both trends and the
impact of different policies and regional disparities.

Introduction:

Since the economic liberalization of 1991, India has emerged as one of the fastest-growing
economies globally. This growth has lifted millions out of poverty and improved living
standards. However, concerns remain about the widening gap between rich and poor. This
paper delves into this complex relationship between economic growth and inequality in the
Indian context.

Understanding Inequality:

Income inequality is measured by various metrics, with the Gini coefficient being a widely
used one. It ranges from 0 (perfect equality) to 1 (perfect inequality). India's Gini coefficient
has been steadily rising, indicating increasing inequality.

• Further measures that shed light on income distribution include the Atkinson index
and the Palma ratio.

• The Palma ratio illustrates extreme inequality by comparing the income share of the
top 10% to that of the bottom 40%.

• The Atkinson index takes into account the distribution of income across several
levels, demonstrating the effects of policy on lowering inequality at different cut-off
points.
Factors Driving Economic Growth:

● Liberalization: Trade and investment reforms have boosted economic activity and
foreign direct investment.

● Demographic Dividend: A young and growing population has provided a large

workforce.

● Rise of Service Sector: The information technology and service sectors have
contributed significantly to growth.

• Government Initiatives: Infrastructure development and social programs have played

a role.

• Businesses that have access to capital markets can obtain funding for investment and
expansion.
 • Innovation in technology not only increases output but also opens up new markets and
economic prospects.

• Long-term sustainable economic growth and investor confidence are fostered by

macroeconomic stability.

Factors Contributing to Inequality:

● Skill Mismatch: The education system may not be adequately preparing youth for the
demands of the job market.

● Labour Market Segmentation: Formal and informal sectors have vast disparities in
wages and benefits.

● Urban-Rural Divide: Opportunities and infrastructure are concentrated in urban areas,

leading to migration and uneven development.

● Land Ownership Concentration: Unequal land distribution perpetuates poverty,

especially in rural areas.

● Caste System: Social hierarchies can limit access to education and opportunities for
certain groups.

● Skill Mismatch: Rapid economic transformation has created jobs demanding specific
skills, leaving a large section of the workforce unprepared, leading to wage gaps.

● Labor Market Segmentation: The Indian labor market is segmented, with a vast
informal sector offering lower wages and limited social security benefits.

● Urban-Rural Divide: Economic opportunities are concentrated in urban areas, leading

to migration and exacerbating the rural-urban divide in income levels. [Chart 3: Urban
vs. Rural Income Gap in India (Source: World Bank)]

● Land Ownership: Unequal land distribution, particularly in rural areas, perpetuates

poverty and limits upward mobility for many.

• Gender Pay Gap: Women consistently earn less than men for comparable work,
further marginalizing them economically.

• Trade dynamics and globalisation can increase income inequality by causing wage
stagnation and job relocation.
 • Inequality is also sustained by social factors including prejudice against people based
on their gender, race, religion, or disability.

Impact of Policies:

● Fiscal Policy: Progressive taxation and targeted subsidies can help redistribute wealth
and reduce inequality.

● Social Spending: Investments in education, healthcare, and social safety nets can
create a more level playing field.

● Labour Market Reforms: Policies promoting formalization of the workforce and

minimum wages can benefit low-income earners.

● Skill Development Initiatives: Equipping the workforce with relevant skills can
enhance employability and earnings.

● Liberalization: The economic reforms of 1991 opened India to foreign investment and
trade. While this boosted growth, it also benefited certain sectors and skilled workers
more than others, potentially contributing to inequality.

● Fiscal Policy: The effectiveness of government spending in reducing inequality

depends on the type of expenditure. Targeted social programs like the Mahatma
Gandhi National Rural Employment Guarantee Scheme (MGNREGS) can be
effective, but leakages and inefficiencies can hinder their impact.

• Taxation: A progressive tax system can help redistribute wealth. However, India's tax
system relies heavily on indirect taxes, which disproportionately burden the poor.

• Policy implications on inequality are shaped by governance systems and regulatory

frameworks.

• Mechanisms for accountable and transparent governance provide effective resource

allocation and help to reduce corruption.

Technological Advancements and Inequality:

● Technological advancements can create new jobs and improve productivity, but they
can also lead to job displacement and exacerbate inequality if the workforce lacks the
skills needed to adapt.

● Automation poses a threat to jobs in certain sectors, potentially impacting low-skilled

workers disproportionately.
 ● On the other hand, technology can be a tool for inclusive growth if used to improve
access to education, healthcare, and financial services, particularly in rural areas.

• Investing in skill development and digital literacy programs is crucial to mitigate the
negative impacts of technological change.

• Technology-related policies that encourage responsible innovation, like moral AI

frameworks, reduce the possibility that new developments may worsen inequality.

Affirmative Action Policies:

● Affirmative action policies, such as reservations in education and government jobs for
historically disadvantaged groups like Scheduled Castes and Scheduled Tribes, aim to
address historical inequities.

● These policies have had a positive impact, increasing representation of these groups in
education and government services.

● However, the effectiveness of these policies is debated, with concerns regarding

"creamy layer" beneficiaries who may not be genuinely disadvantaged.

• A focus on creating a level playing field through quality education and skill
development can complement affirmative action.

• Government initiatives to remove structural barriers to inclusion are strengthened by

targeted investments in social services and infrastructure.

• To ensure inclusivity, holistic methods that take into account the overlap of identities
are crucial.

• Welfare programme efficacy is increased through institutional reforms and capacity-

building activities.

• Using digital technology and data analytics to their full potential increases programme
delivery efficiency and transparency.

The impact of inequality on social mobility:

Inequality profoundly affects social mobility, which refers to individuals' or families'

ability to move between socioeconomic levels over time. Here are several key ways in
which inequality influences social mobility:
 1. Restricted Educational Access: In societies marked by high inequality, access to
quality education often varies greatly. Lower-income individuals may lack access to
well-funded schools, educational resources, and opportunities for higher learning, thus
hindering their ability to acquire the necessary skills and credentials for economic
advancement.

2. Disparities in Opportunities: Inequality frequently leads to unequal opportunities

for progress in employment, housing, and healthcare. Discrimination and biases
exacerbate these disparities, making it challenging for marginalized groups to ascend
the socioeconomic ladder.

3. Concentration of Wealth: High inequality tends to concentrate wealth and resources

among a small elite. This concentration creates barriers to social mobility for those
outside this elite circle, as they may struggle to access capital for entrepreneurship,
investment, or asset accumulation like property or stocks.

4. Inter-generational Transmission of Advantage/Disadvantage: Inequality often

perpetuates across generations. Children from affluent backgrounds enjoy better
opportunities, including superior education, extracurricular activities, and social
networks, maintaining or improving their socioeconomic status. Conversely, children
from low-income families encounter greater obstacles, perpetuating cycles of poverty
and limited mobility.

Comparative Analysis: Indian Economic Inequality v/s other developed countries.

Similarities
Many developing nations share similar factors that contribute to economic inequality, such as the
rapid economic growth that primarily benefits a small segment of the population, lack of investment
in education and healthcare for the poor, weak institutions and governance structures.

Differences
Level of Inequality: India ranks among the most unequal countries globally, with a high Gini
coefficient. Some other developing nations might have lower inequality levels.

Causes of Inequality: Factors specific to India, like the caste system and social hierarchies, can
exacerbate inequality compared to other developing nations.
Effectiveness of Government Welfare Programs:

● The Indian government implements various welfare programs aimed at poverty

reduction and social protection. These include MGNREGS, Public Distribution
System (PDS), and various scholarship schemes.
● These programs can provide a safety net for the poor and vulnerable, but their
effectiveness is often hampered by issues like corruption, targeting inefficiencies, and
leakages.
● Strengthening program design, improving targeting mechanisms, and leveraging
technology

Regional Disparities:

Economic growth and inequality vary significantly across Indian states. Coastal states and
those with strong industrial bases tend to fare better.
This disparity can lead to internal migration, straining resources in developed areas and hindering
progress in lagging regions.

• Reducing regional inequities requires spending on social infrastructure and human

capital.

• Inclusive growth across regions is fostered through promoting interregional

commerce and cooperation.

• The Kuznets Curve shows how social and political factors affect the trajectory of
income disparity.

• Handling the institutional obstacles to inclusion and encouraging social discourse are
critical for managing the dynamics of economic disparity.

The Kuznets Curve Hypothesis:

Some economists propose the Kuznets Curve hypothesis, which suggests that inequality
might rise initially during early stages of growth but eventually decline as development
progresses. However, the applicability of this theory to India is debatable.
The rising inequality among the middle class (Case study)

Wealth Inequality

World Inequality Database

We examine wealth inequality in India by looking at two different data sources: the World
Inequality Database (WID) and the recent All-India Debt and Investment Survey (AIDIS)
report.

The WID provides important time-series data, enabling us to understand the evolution of
inequality, while the AIDIS provides micro-level data for examining the changes in wealth
inequality in India in the more recent years. Based on the WID data, since 1981 the share of
the wealth of the top 10% and top 1% has consistently increased, while the share of wealth of
the bottom 50% has consistently declined (Table 1 and Figure 1). For the most recent decade,
the top 10% group has taken up more than 60% of the total wealth in India. This is in sharp
contrast with the mere 6% of the total wealth shared by the bottom 50% of the population,
suggesting a significant increase of wealth inequality in India over the past 40 years.
To understand the dynamics of wealth across different economic groups, we calculate the
group specific growth rates of wealth based on the WID data. As shown in Table 2, the rich
groups (i.e., top 1% and top 10%) experienced faster wealth accumulation than the bottom
50%, especially at the turn of the 21st century. Another takeaway from Table 2 is that wealth
growth significantly slowed down after 2010, from a growth rate of roughly 8% in 1995-2010
to 5% in 2011-2020.
The WID also allows us to take an international comparison of the wealth distribution
dynamics among peer and advanced economies. For India, the share of the wealth of the
bottom 50% has nearly halved since 1961 (Figure 2). In contrast, the share of wealth of the
top 10% has increased by around 50% (Figure 3) and the share of wealth of the top 1% has
increased by around 180% since 1961 (Figure 4). Among the economies, India has
experienced the largest increase in the share of wealth of the top 1% since 1961. However,
even in terms of other measures (such as the share of the bottom 50% and the top 10%), it is
at the top of the list, with only China being slightly ahead.
Based on WID data, Table 4 and Figure 6 present the average share of national income held
by the bottom 50%, top 10%, and top 1% of the population, by decade. (See Appendix 1 for
details)
Between 1951 and 1991, the share of national income held by various economic groups
witnessed modest increases and declines. However, after 1990, the share of the national
income of the top 10% and top 1% has consistently increased while the share of the national
income of the bottom 50% has consistently declined, suggesting a widening gap of income
between the rich and the poor.

The growth rate of income in an economy is an important measure of the health of an

economy, indicating the size of change in economic output. The underlying reason for
emphasis on economic growth is that positive economic growth trickles down to the poor,
thereby benefiting all individuals. However, data suggests that the growth of income of the
poor typically lags behind that of the rich. We compute growth rates of income across
economic groups in India since the mid-20th century using the share of the national income
of each economic group. (A detailed methodology is available in Appendix 2). As shown in
Table 5, the growth rates of income of the rich (top 1%, top 10%) and poor (bottom 50%)
diverge more prominently after 1980. The most recent decade, however, shows a decrease in
the gap between the growth rates of income of the rich and the poor.

Challenges and Recommendations:

Addressing inequality requires a multi-pronged approach. Here are some key

recommendations:

● Focus on Inclusive Growth: Policies should promote job creation across sectors and
ensure fair wages for all.

● Invest in Education and Skill Development: Equipping the workforce with relevant
skills is crucial for upward mobility.
 ● Bridge the Urban-Rural Divide: Infrastructure development and investment in rural
areas are essential.

● Land Reforms: Equitable land distribution can empower rural communities.

● Strengthen Social Safety Nets: Social programs like pensions and healthcare can
provide a safety net for vulnerable populations.

• Promote Financial Inclusion: Access to financial services empowers individuals and

businesses.

• Communities can take on local difficulties when social innovation and

entrepreneurship are encouraged.

• For comprehensive measures to combating inequality to be implemented, cooperation

between sectors and stakeholders is crucial.

Conclusion:

Concluding the research and highlighting the relationship between India's economic growth
and inequality highlights both the country's accomplishments and ongoing concerns. This
relationship is complex and multidimensional. Income disparity has increased despite the
remarkable advancements in technology and economic liberalisation, raising serious
questions about the inclusion and sustainability of India's development trajectory.

The gap between the rich and the poor has widened due to a number of factors, including skill
mismatch, labour market segmentation, urban-rural inequities, concentration of land
ownership, and gender pay gaps. Furthermore, societal elements that worsen inequality in
Indian society include prejudice based on caste and unequal access to opportunity.

The efficacy of many policy initiatives targeted at eliminating inequality has been
demonstrated. These interventions include fiscal measures, social spending, labour market
reforms, and affirmative action programmes. Although affirmative action laws have led to a
rise in the representation of historically underrepresented groups, issues like the "creamy
layer" phenomenon and ineffective implementation highlight the need for ongoing
assessment and improvement of these programmes.

In addition, the effect that technology is having on inequality is an important factor to take
into account. Depending on how policies and expenditures are allocated, this factor could
either make inequality worse or encourage inclusive growth.

In order to effectively address inequality in India, a comprehensive and multifaceted strategy

that prioritises inclusive growth, investments in education and skill development, equitable
land distribution, bridging urban-rural divisions, fortifying social safety nets, and
encouraging financial inclusion is needed. Furthermore, interregional collaboration and
targeted expenditures in social infrastructure are needed to alleviate regional imbalances.

In order to establish an environment that encourages equitable possibilities for all segments
of society, governments, corporations, civil society organisations, and other stakeholders
must work together to combat inequality in India. India may endeavour to achieve sustainable
and equitable economic growth that benefits all of its citizens by giving priority to inclusive
policies and tackling structural impediments to inclusion.