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The main idea behind the decision was to attack the black money hoarded by many Indians. Doing so is supposed to put an end to the parallel economy. The move is also meant to weed out terror funding and corruption. This is all known.
But one indirect objective of checking black money is to bridge the income disparity in the economy. As black money loses its power, we assume there will be a shift of funds from illegal activities to more honest and deserving hands.
Well, that's the story we hear. But will the demonetisation drive really reduce the disparity between the rich and the poor?
As far as facts are concerned, it seems very unlikely that is going to happen anytime soon.
In fact, income disparity in India has been widening over the recent past. According to the latest data on global wealth from the Credit Suisse Group, the richest 1% of Indians now own 58.4% of the country's wealth. This share of the top 1% is up from 53% last year, and 49% in 2014.
That's not all. The richest 10% of the Indians own 80.7% of the wealth. This trend is also going in the upward direction every year, which means that in India the old cliche, the rich get richer and the poor poorer, rings true.
The above report concludes that India is the second-most unequal country in the world.
The lack of education and employment opportunities for the poor are the primary factors that cause income inequality.
Other factors include the capture of subsidies by the rich, skewed distribution of wealth, and the rural-urban income gap.
This deepening income divide can hurt the growth of the Indian economy. According to Satyajit Das, an economic commentator, '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.'
Inequality has social costs as well. It can create resentment in large numbers 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, India's most valuable asset, its youth, could become one of its biggest liabilities if the gap keeps growing. With neither the problem of education nor job creation getting addressed, gaping income inequality remains a huge social risk.
We recently came across a truly shocking number that highlights this risk. A number that concerns every Indian, including you and me. And there is a possibility that the demonetisation drive will make this number worse.
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