Fighting income inequality: How India’s policies stack up against IMF’s prescription

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New Delhi | Published: July 3, 2015 5:18:58 PM

The IMF paper notes that governments in emerging market economies need to push such efforts at inclusion to make a dent in inequality.

IMF on income inequality“…Less-regulated labour markets, financial deepening, and technological progress largely explain the rise in market income inequality in our full sample over the last 30 years,” the IMF paper has said, and listed six broad policy prescriptions for governments.

A significant new document released last week by the International Monetary Fund (IMF) has argued that rising income inequality will pull down the growth of world GDP the fastest, and called for national policies to be focused on the bottom 20 per cent of the population by income. Weeks earlier, the Organisation for Economic Cooperation and Development (OECD) had released a discussion note on global income inequalities.

“…Less-regulated labour markets, financial deepening, and technological progress largely explain the rise in market income inequality in our full sample over the last 30 years,” the IMF paper has said, and listed six broad policy prescriptions for governments. With financial inclusion being one of its key policy objectives, the Indian government is broadly aligned with the IMF’s advice. This is how some of its flagship schemes, evaluated against the IMF’s assessment, measure up.

Jan Dhan Yojana

The IMF paper notes that governments in emerging market economies need to push such efforts at inclusion to make a dent in inequality. Country experiences suggest that policies such as granting exemptions from onerous documentation requirements, requiring banks to offer basic accounts, and allowing correspondent banking are useful in fostering inclusion. Jan Dhan Yojana seeks to bring banking services to the poor, including landless labourers, and offer them easy credit. However, the IMF warns against offering too much credit “without sufficient regard for financial stability”.

Labour Reforms

States like Rajasthan and Maharashtra have begun to loosen rules for hiring of labour. Cross-country evidence shows easing of market regulations and technological progress reduce the chances of the less-educated labour force rising in life, the IMF paper says. Both the IMF and OECD say labour market policies should attempt to avoid both excessive regulation and extreme disregard for labour conditions.

Tax Reforms

The IMF paper is clear that tax rates need to be far more progressive across most of the world. It uses data from non-official sources to show that the income share of the middle 20% in BRICS countries has shrunk even more than for developed countries in the period 1990-2009. “The redistributive role of fiscal policy could be reinforced by greater reliance on wealth and property taxes, more progressive income taxation, removing opportunities for tax avoidance and evasion, better targeting of social benefits while also minimizing efficiency costs, in terms of incentives to work and save,” it says. Budget 2015-16 has announced a timeline to ease corporate tax rates to 25% in the next four years, but plans to erase most tax exemptions.

Skill Development

Both papers argue that raising skill levels can alleviate the pain from the relaxation of labour laws, technological change and financial openness. “Improving education quality, eliminating financial barriers to higher education, and providing support for apprenticeship programmes are all key to boosting skill levels in both tradable and non-tradable sectors. These policies can also help improve income prospects of future generations as educated individuals are better able to cope with technological and other changes,” says IMF.

FDI and FII

Decades after the Bretton Woods institution espoused greater cross-border flow of financial capital, the IMF adduces data to show that increased financial flows, particularly foreign direct investment, increases income inequality in both advanced and emerging market economies. In the last one year, India has opened the gates wider for insurance, railways and defence, and is debating the chances of opening them for multi-brand retail too.

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