Fighting inequality

Dec 09 2013, 05:48 IST
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SummaryPolicies aimed at income equality have never worked. The government needs to invest in education and skill development

The recent article “India’s growth-inequality predicament” (FE, November 23, http://goo.gl/nj1AdW) by Rajesh Shukla makes the policy argument that both growth and poverty reduction are necessary in a country with many very poor people. Social welfare schemes that are in the nature of charity for physical well-being must accompany others that build skills. This enables the poor to seize the opportunities offered by a growing economy. Such charity welfare programmes must be within the country’s means. They should not lead, as they have done in India, to large government deficits. Persistent large government deficits have had negative consequences, one being persistent inflation. Persistent inflation hurts the poor and can make charity for physical well-being less effective. That is why growth is important. It enables increasing tax revenues, which can fund such programmes. It is not the “trickle-down” effects of growth (a presumptuous phrase) that reduce poverty. When growth pulls up the well-to-do, it does so, to a much smaller rupee income extent, the badly-off as well. The poor earn better because of growth, not from a “trickle” from the tables of the well-to-do.

Is economic inequality at all avoidable? Most people do not want to be equal; they want to be better than their friends and neighbours. Political parties and governments must not attack income inequalities. Inequalities in wealth are a different matter, since a concentration of wealth in a few hands might lead to political power as well. In a democracy, policies to ameliorate the effects of social inequalities must be followed. Urban migration seems to lead to diminishing social inequality. Merit and hard work are the differentiator, not caste, community, etc.

However, a more basic issue must be addressed. Should governments tackle poverty or income or wealth inequality? During India’s socialist era of a “command and controls economy”, all three were the objectives of state policy. Government policies did not reduce poverty. To control income and wealth inequalities, penal rates of income taxation, high import duties, high wealth and inheritance taxes, and other indirect taxes, were expected to limit the consumption of goods and services considered as “luxuries”.

For example, polyester fabrics were for many years considered as luxuries and the fibre for its manufacture was subject to heavy duties. Even the chemicals to make polyester fibres were heavily taxed. In the event, even the poor were willing to pay the high prices for polyester fabrics because they could do with fewer

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