India and the Gini coefficient: Economic development is more than a single number

A lot of attention has been focused on India’s growing inequality as evidenced by the high Gini coefficient,i.e.percentage of wealth owned by 1% of the population shown in Figure 1. (The actual figure is still open to debate, but for this article’s sake it is assumed to be correct).

The richest 1% own 58.4 of India’s wealth

Why Gini alone can be misleading?

It is tempting to assume solely reducing the Gini coefficient is the solution to economic woes, however this is not the case. This is because the Gini coefficient does not consider the Gross Domestic Product (GDP) and Purchasing Power Parity (PPP).

To illustrate this, the following table shows two countries at the top and bottom ends of the Gini coefficient list.

Gini coefficients, PPP and GDP

Let us take a closer look at how the economies in these countries are functioning:

1. Russia: The economy is primarily dependent on oil and the surge in GDP over recent years has been due to the high oil prices, leading to a growing economy where the oligarchs have a major share.
   With the oil prices tanking, aging population and political issues-can the high Gini coefficient be sustained?
2. Japan: Japan’s low Gini coefficient hides the fact that the country has economic stagnation, low population growth, a growing debt to GDP ratio and is one of the most expensive places to live.
3. Afghanistan: If Gini coefficient were the only determinant of economic wellbeing Afghanistan would be the ideal economy, but it is not. With war, low GDP and PPP it certainly has lot of catching up to do

Causes of high Gini coefficient for India

1. A shift in focus in economic growth from agricultural to industrialisation (oil refining, steel etc.) and services (Information technology) has lead to high concentration of wealth in urban cities like Mumbai, Bangalore etc.
2. Low value jobs are being displaced or replaced entirely by technology. For example, Uber has disrupted the taxi industry. Agricultural jobs are now being mechanised, leading to unemployment of low wage earners.
3. Regressive taxation results in those with lowest income paying a larger percentage of their salary to acquire basic goods leaving them with less savings compared to high income groups.
4. The increase in salaries has not kept up with inflation rates. Similar to regressive tax, high inflation has a bigger impact on the savings of low income group.
5. Tax evasion in the form of black money for property purchases, offshore accounts e.g. Switzerland have reduced the governments funds to provide safety nets to the low income groups.
6. World wide recession has resulted in jobs not being sent to India, and thus adding to unemployment.
7. Disinvestment causing Public Sector Undertakings (PSUs) to be competitive as per market conditions by laying off workers.

The way out

A certain degree of income inequality is to be expected in a growing economy, in fact countries with low income inequality (Sweden, Japan etc.) have high costs of living and taxation. So while everyone is ‘equal’, the talented people are considering migration as they feel they get can better deals elsewhere, thus such countries are dying a death of a thousand cuts till eventual implosion.

Demonetisation, Make in India programs and a young population ensuring high domestic demand led growth will reduce the income inequality to sustainable levels in the long term.

However, in the short term this economic growth will not be smooth and layoffs are to be expected. This can be offset by adequate Voluntary Retirement Scheme (VRS) packages and retraining opportunities to make employees relevant in today’s economy.