Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.This is an entirely free service. No payments are to be made.
The rich get richer while the poor get poorer is a common mantra we hear in India. Income inequality is one of the biggest challenges that India has been facing over the years. And it’s not only that. If one goes by close observation it can be noted that the gap between the rich and the poor has only grown starker over the years.
An article in Livemint offers some data and elaborates the extent of income inequality in India.
To start with, we have the Net Gini Index. Gini coefficient measures inequality. A Gini coefficient of zero expresses perfect equality whereas a Gini coefficient of one expresses maximal inequality. As per the data, India’s net Gini index of inequality - based on income net of taxes and transfers - rose from 45.18 in 1990 to 51.36 in 2013. This records as one of the highest levels of inequality in the Asia-Pacific region, followed by China and Papua New Guinea.
Data shows that India records one of the highest rise in inequality between 1990 and 2013 in the world, second only to China.
Further, while China leads the chart of income inequality, it has done better than India in reducing poverty. The rural areas of China, Vietnam, and Indonesia all started with higher poverty levels than in India in 1990. However, their present levels suggest a significant reduction in poverty, both in rural and urban areas. Also, it has been noted that China and Indonesia have done significantly better than India in growing their middle classes.
The rise in income inequality could be due to the lack of access to opportunity for the poor. Not every Indian has access to basic factors such as education and employment. Other factors include the capture of subsidies by the rich, skewed distribution of wealth, and the rural-urban income gap. And as a result, the income divide has just become more pronounced.
This can hurt the growth of the Indian economy. As Satyajit Das, an economic commentator, puts it: “First, empirical research suggests that an increase in income inequality by 1 Gini point decreases the annual growth in GDP per capita by around 0.2 percent."
Further, inequality has social costs as well. It can create major resentment in large number of people. It imposes other direct costs such as poorer health, higher crime rates, lower life expectancy, etc.
India’s growth story is unlikely to take off unless the issue of inequality is tackled by the Government. In fact, its most valuable asset, the youth, could become one of its biggest liability if the gap keeps growing.
This brings us to the question of how can the problem of inequality be solved? Vivek Kaul, editor of Vivek Kaul’s Diary, states that the issue can be dealt with bringing more and more Indians who should be paying income tax, but do not, under the tax bracket.
Apart from this, the government must undertake innovative routes, bring new technologies for skill development, and promote productivity to reduce the funk of income inequality in India.
For information on how to pick stocks that have the potential to deliver big returns, download our special report now!