Creating a more equal India

Written by Kala Seetharam Sridhar | Updated: Jul 18 2014, 08:06am hrs
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 Indias urban areas. The access to sanitation continues to be inadequate19% 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 governments 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 from the data for India. The homeless population live in unsafe conditions by the roads. All these conditions lead to a peculiar situation where the development of seamless roads and highways is not conducive for the lower income groups and the vulnerable, for the simple reason that their safety is at stake with vehicles moving at high speed. Hence, we find huge humps on roads (primarily intended to check the speed of vehicles) of Indian cities, which do not meet national norms, let alone global standards.

Further, there are social problems with inequality. Crime rates are higher in places with more inequalitystudies find strong positive relationship between income inequality and murder rates across metropolitan areas. Explanations are that inequality leads to less focus on providing community-wide public goods, like policing. Another explanation is that inequality breeds resentment which then shows up in higher murder rates. Studies from the US find that inequality has no effect on property crime, but a strong and robust impact on violent crime, with an elasticity above 0.5. In India, crime trends under major heads from 1953-2011 from the National Crime Records Bureau reveal that crimes such as dacoity and burglary/house breaking have been on the decline over a period of 59 years. However, crimes such as murder, rape, kidnapping, abduction, robbery and riots have been on the rise. One reason has been widening income inequality, which in India has doubled in 20 years. The top 10% of wage earners now make 12 times more than the bottom 10%, up from a ratio of six in the 1990s, as per an OECD report which points out that, in India, informal employment includes a disproportionate number of women, home-based workers and street sellers.

Rising inequality can seriously reduce welfare, slow down poverty reduction, undermine social stability, and may ultimately undermine economic growth.

Given this, what are solutions for the new government At the national level, tax-based redistribution is a possibility, which the Budget for 2014-15 has accomplished somewhat, but at the local level, this type of redistribution can be counterproductive. Local industrial policy is also likely to have a very limited ability to reduce inequality.

Since urban inequality reflects the unequal distribution of and returns to skill, education offers some hope of creating a more equal skill distribution, and more equal skills should eventually lead to a more equal income distribution. However, improving any given school is difficult, and it is particularly hard for the central government to manage the nations decentralised school system. Still, despite these difficulties, investing in human capital seems like the most promising road towards creating a more equal nation. The Budget proposal of R100 crore for modernising madrasas is an investment in equalising the distribution of skills, while the details still need to be worked out.

Hence, isolated attempts to fix infrastructure and public services such as roads are unlikely to be successful, unless an attempt is made to reduce inequalities in income and wealth, which should foster growth and promote the development of better infrastructure.

The author is professor, Centre for Research in Urban Affairs, Institute for Social and Economic Change. Views are personal