DOES DEMOCRACY ENSURE INCOME EQUALITY?

By: Nitin Garg

“When the gap between the average income and the average voter (who are typically close to the median of the income distribution) is greater, this re-distributive tendency should be greater. That is he should stand for policies that taxes the rich and focuses on running a more welfare oriented economy.”

Arvind Kejrival rallies against corruption, Rahul Gandhi advocates empowerment, while Narender Modi promises new national pride enabled by development. However, each leader misses a glaring fact about the country they wish to lead: rising economic inequality.

On January 28, the US President Barack Obama made inequality the centrepiece of his State of the Union address. Tolerance for inequality has been steadily shrinking elsewhere – a trend visible by Occupy movements from New York to Johannesburg and rising minimum wages in China. But somehow it largely goes unnoticed from the Indian conscience.

According to a study by Keith Gehring and Kishore Kulkarni, the top 10% of wage earners make 12 times more than the bottom 10%, up from a ratio of six in the 1990s. Gini coefficient, the official measure of income inequality, has gone from 0.32 to 0.38 with 0 meaning everyone has same income and 1 meaning one person has all the income.

Inequality in initial stages of development is considered normal or perhaps even beneficial. As a country develops the industrial sector employs abundant labour force from the rural sector who keeps the real wages down. However, as a certain threshold level of income is achieved and the surplus work force becomes scarce, the average wages begin to rise and the level of inequality diminishes. This is because the democratic power of the state and the trickle-down effect takes over. These are the specifications of the celebrated Kuznet hypothesis on inequality and growth.

But somehow even after 68 years and several waves of reforms, some of them specifically aimed at inclusive growth like Mahatma Gandhi National Rural Employment Guarantee Act, we are still experiencing a rising level of income inequality.

According to the IMF data the mean income of the Indian household stands at $1219 per person and the median income at $616 per person. Thus, we arrive at the following dilemma; how is it that the middle/representative bundle is worse off and yet the average improves?  The answer does not require a degree in statistics. The households above the mean did much better than their counterparts below the mean.

There is a popular presumption that the more democratic the society is, the better would be the redistribution of resources. When the gap between the average income and the average voter (who is typically close to the median of the income distribution) is greater, this redistributive tendency should be greater. Therefore, he should stand for policies that tax the rich and focus on running a more welfare oriented economy.

These strong predictions notwithstanding the evidences in India point to a sad truth: that democracy may be captured.

Even though democracy clearly changes the distribution of power of law in the society by making it fair for everyone, but inequality not only depends on the equanimity of law, but also on the actual distribution of power. Vested interest groups who see their influence on the judiciary eroded by democratization may sufficiently increase their investments in de facto power like mobilizing non-state armed actors, lobbying, or capturing the party system.

The decisions undertaken by the state sometimes reveal this trend.  The Central Government relinquished potential revenue of Rs 4.6 lakh crore due to various tax exemptions and incentives to industrialists, compared to the Rs 1.54 lakh crore on the farmers’ subsidy. The opaque nature of campaign contributions is also a case in point.

Rent seeking tendency of our political parties as recently highlighted by the 2G spectrum and Coalgate scam further reinforces the belief of our political system has become a hostage of the crony capitalism. This not only leads to concentration of wealth in fewer hands but also deprives the government of resources to run welfare schemes, thus leaving a larger section of our society left-out from riding the prosperity tide and thus widening the inequality.

The Forbes list of billionaires features 55 Indians in 2013. The estimated net worth of only the top ten is $102.1 billion or approximately 5.5 per cent of India’s gross domestic product. Barring Azim Premji, each individual from the top 5 is in a sector which warrants some kind of government concessions like construction, petro-chemicals and steel.

Factors like illiteracy, malnutrition and lack of marketable skills all contribute to income inequalities by limiting the scope of human participation in the economic activity. The more alarming situation is the loosening of the very fabric of the constitution by the capturing of democracy. Who will the poor vote for in the next elections? Who is the hope of the marginalised? When our very own custodians have abandoned us!

(The Author is a student at Madras School of Economics)

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