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Should prioritise income growth over redistribution: Essay published by CEA office

Noting that while it is a popular idea that redistribution is the solution to raising living standards at a large scale, the essay said there were two problems with the approach.

Noting that “bad inequalities” like unequal access to education and health reduce the potential for India’s growth, besides being unfair to the individual, an essay published by Chief Economic Adviser (CEA) V Anantha Nageswaran’s office said the country should prioritise income growth over redistribution.

The essay, part of a collection released Thursday, said the rise in inequality in India after the 1991 reforms can be attributed to market incentives for entrepreneurship and innovation. The impact of Covid-19 on inequality has been “transitory,” with the public distribution system and rise in food subsidy substantially curbing a rise in distress levels, it said.

Bad inequalities, the essay said, form one of the most entrenched problems of development whose mitigation lies in a strategic long-term effort. They directly reduce the potential for growth because segments of the population are left behind, lacking the opportunity to contribute to the growth process.

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Quoting a 2022 study, the essay said India’s rate of upward mobility has remained broadly constant since Independence. Relying on the same study, it said that contrary to the widely held belief, Dalits and Adivasis have seen some improvement, with Scheduled Castes having undergone considerable improvement.

However, people from the Scheduled Castes are also more likely to fall back into poverty, necessitating long-term conditions for upward mobility rather than a one-time effort, it said quoting another study.

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A recent NITI Aayog study had said that between 2015-16 and 2019-21, India lifted more than 13.5 crore people out of multidimensional poverty, courtesy of improvements in indicators like access to cooking fuel, sanitation, drinking water, and bank accounts, among others. The essay noted that for the “average aspirational India,” such progress at the grassroots matters “much more than the number of billionaires in the country”.

Noting that while it is a popular idea that redistribution is the solution to raising living standards at a large scale, the essay said there were two problems with the approach: the “infeasibility” of taxing wealth, and that average income needs to increase in India several times to afford a decent standard of living for everyone.

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It also emphasised that it was important for developing countries like India to prioritise raising incomes over redistribution.

Calling an increase in the number of the middle class crucial, the essay said policy attention towards the class involves looking beyond a polar view of a rich versus poor economy and beyond the “charitable notion” of redistribution towards rights-based claims for economic justice. “In the empowerment of this class lies the path to a self-sustained virtuous growth cycle,” it added.

“Employment generation, coupled with improving the quality of jobs, is a priority. Following this path, the organised sector job market conditions measured by the Employee Provident Fund Organisation and the National Pension System subscriptions indicate a year-on-year increase, pointing towards improved formalisation. Labour market indicators have improved beyond pre-Covid levels, with the unemployment rate falling and the labour force participation rate increasing,” it said.

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India has the highest share of government expenditure on public goods per capita, compared to regions like the European Union, Latin America, China and Africa, with the jump being pronounced since 2014. In India, the expenditure on public goods has led to the redistribution of about 6 per cent of the national income to the bottom 50 per cent, the essay noted.

Soumyarendra Barik is Special Correspondent with The Indian Express and reports on the intersection of technology, policy and society. With over five years of newsroom experience, he has reported on issues of gig workers’ rights, privacy, India’s prevalent digital divide and a range of other policy interventions that impact big tech companies. He once also tailed a food delivery worker for over 12 hours to quantify the amount of money they make, and the pain they go through while doing so. In his free time, he likes to nerd about watches, Formula 1 and football. ... Read More

First published on: 21-12-2023 at 20:23 IST
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