Vamsi Vakulabharanam


Prime Minister Narendra Modi is unlikely to narrow the gap between Indian elites and the rest of the population.


India has experienced a significant economic growth spurt in recent decades. After seeing annual growth of 3 percent in the years after independence in 1947, the rate began to double, reaching a rate of around 6 percent per year after 1980. However, the distribution of growth proceeds has been very uneven across different constituents of the Indian population.


Can we reasonably hope that Prime Minister Narendra Modi, who has been celebrated as a harbinger of economic change by national and international media, will bring about an equalizing change in the Indian growth process? Or will he allow inequalities to rise in the coming years?


It is becoming clear that the political forces that brought Modi to power in 2014 tend to favor growing inequality in India and oppose government programs that would alleviate it. Urban elites — owners, managers and professionals in the formal sector —have garnered most of the relative gains from India’s growth. And the state is helping them: There is a revolving door between the business world and the political sphere, which ends up meaning that policies put big business over ordinary Indians.


Growing inequality


Rising inequality has become an important issue in India. The National Sample Survey Organization reports that while a majority of Indians live on less than a dollar a day (at nominal exchange rates), the country boasts a significant number of billionaires on Forbes’ 2015 list.


The NSSO collects data on household consumption (not incomes) through the use of large-scale household surveys conducted every five years. The figures show us that India hasn’t always been a massively unequal country, even during periods of high growth. In the 1980s, inequality among individuals measured in terms of consumption expenditure remained more or less the same. Meanwhile, the gap between expenditure in urban and rural areas widened, but rural areas themselves experienced a sharp decline in inequality due to proactive government interventions in the form of welfare programs and agricultural worker mobilizations for higher wages. During this period, overall inequality across the country remained roughly unchanged.


In the 1990s, the story changed dramatically: Inequality rose substantially, with the Gini coefficient — a ratio that measures the gap between the richest and poorest citizens — jumping from 32.6 percent in 1993-94 to 37 percent in 2009-10. Inequality went up primarily within urban areas; the urban-rural gap widened too. But rural inequality again remained stable, in part thanks to welfare-oriented reforms such as the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) that since 2004 has guaranteed 100 days of employment at a minimum wage to rural residents and improved institutional credit to farmers. Such measures were introduced in response to heightened rural distress, a spate of farmer suicides and resultant protests and demonstrations organized by farming communities across the country.


As in China after 1992, it was a series of market-oriented, Big Business–friendly economic reforms introduced in India in 1991 that contributed significantly to rising inequality.


First, Indian agriculture became increasingly connected to the global markets and went through a deep recession from the mid-1990s until 2006. To this day, a majority of the Indian population lives in rural areas, with incomes directly or indirectly associated with agriculture.


Second, the high-growth sectors that emerged during the reform era have not created enough jobs to lift all India’s boats. For instance, India’s well-known information technology sector (which includes outsourcing) recruits less than 2 percent of the entire workforce — and even for the slender minority that has benefited from it, wages have not kept pace with rising productivity. As Thomas Piketty outlined in his bestselling “Capital in the Twenty-First Century,” this implies that profits are growing much faster than wages, bringing about more inequality.


Third, internal migration from rural to urban areas increased between 2001 and 2011. There are also many “footloose” migrants, who spend part of the year in rural areas and the other part in urban areas. Once they move to cities such as New Delhi, Mumbai and Bangalore, most migrants find employment in the urban informal sector in low-wage jobs with little security and precarious living conditions. The low-cost informal sector enables private enterprise and wealthy individuals to increase their profits, contributing to inequality further.


Finally, trends in land and real estate ownership are concentrating assets in the hands of an ever smaller group of people. Farmers lose their land through the creation of special economic zones and expansion of urban spaces. Thistransfer of ownership — and future profits — to wealthier buyers, frequently through coercion and for cheap prices, only heightens inequality. Add to that heightened speculation in the financial and real estate markets, and inequality grows even starker.


Angry elites


A slowing Indian economy has only exacerbated the political fight over inequality. After witnessing record growth levels until 2008, it cooled significantly during the global recession, then set on a relatively low-growth path after 2011. The Indian business class grew nervous about the growth rate in 2013, a year before Modi was elected. Ratan Tata, a leading Indian industrialist, slammed the government for being hostile to investors.


Meanwhile, the (admittedly weak) welfare measures that would benefit the poorest workers introduced by the previous regime still managed to anger the rural farming elites (large landlords and absentee landowners), who backed oppositional parties such as Modi’s Bharatiya Janata Party in 2014. These are the people who provided the backbone for Modi’s victory. The previous government, led by the Congress Party, had suffered a slew of political scandals that upset urban professionals, among other groups; Modi was able to reach out to these constituents, and part of the non-elite population, by invoking his own caste (he’s a member of the Other Backward Classes, a large collection of middle caste groups who are considered relatively well-off in socio-economic terms) and by playing up his Hindu religious identity.


In the first year of his tenure, Modi has substantially weakened the welfare measures introduced by the previous government. He has tried, unsuccessfully for now, to introduce a bill that will make land acquisition from agricultural producers easier for urban elites. Such a bill will also displace and further impoverish the poorest Indians, agricultural workers, who would join the ranks of urban informal labor. He has also attempted to provide impetus to foreign and private domestic capital by giving them tax breaks, and increasing the caps on foreign capital in key sectors. In addition, Modi’s Make in India strategy that invites foreign and domestic capital to invest in Indian manufacturing to make the country an important manufacturing hub of the world may not succeed and will not reduce inequality. Given the sluggishness of the global economy since the crisis, apart from capital getting fat concessions from the Indian state, this campaign is unlikely to yield significant results in terms of growth and employment. Moreover, given the emphasis in this strategy on attracting foreign and domestic urban elites, the kinds of jobs that will be created will not come with labor protections and decent wages. These will only further increase the income gap between urban elites and the rest of the population.


These policies will only further accelerate the trends that India has seen over the last two decades, and Indian inequality is likely to accelerate, despite resistance from agricultural workers, workers in the organized sector in urban areas, and from various political parties in opposition. Whether this resistance grows strong enough to bring about a dramatic reversal in the Indian inequality pattern remains to be seen.


In order to curb this trend, the government has to create policies that favor the agricultural working population and the workers in the urban informal sector both in productive and welfare-oriented terms. He can start by stimulating the labor-intensive manufacturing sector with a focus on the internal market, and by supporting small-scale agriculture.


But given the pro-elite proclivities of the Modi government, we can’t be too optimistic that inequality in India will decrease anytime soon.


Vamsi Vakulabharanam is associate professor of economics at the University of Massachusetts Amherst.

August 25, 2015

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