Tackling the virus of income inequality

Income inequality is a monstrous byproduct of market economies, while they go about their job of creating wealth. Since capital is the pampered mistress of market economies, capital providers get to enjoy control over enterprises, triggering a pattern of corporate behaviour that glorifies profit maximisation, giving primacy for return on capital over responsibilities to labour.

The textbook medicine to tackle this clinical side-effect is an interventionist state that legislates measures, such as minimum wages, to protect labour and follows an economic ideology to distribute state resources disproportionately in favour of the poor.

India rightly liberalised the economy in the ember years of the last century, paving the way for higher economic growth. However, this was at the cost of widening income inequalities. The Gini Index, which measures the level of income inequality, has been steadily worsening since 2000.

Top heavy

According to a study, the top 10 per cent of Indian population controls over 77 per cent of the national wealth, while the bottom half of the population holds a mere 2.5 per cent share. True to the nature of the market economy, investors have stood to gain significantly better than wage earners. The BSE index grew seven times in the last 20 years compared to less than half that increase in average wages.

There is an added challenge of deep inequality within the salaried class: The salary of CEOs, as a ratio of the average pay, has become more skewed over the years, reaching three-digit levels. The alarming income inequality was already a ticking time bomb. And the pandemic has widened the gap.

Firstly, the poor, particularly the urban poor, are more vulnerable to the coronavirus infection, although, there are no studies to suggest that the fatality rate is higher among low-income groups. Higher density in their habitation, inability to observe social distancing, etc., would all point to a higher proclivity for infection.

Secondly, low-income jobs, particularly in the service industry, such as delivery personnel, shop assistants, and drivers are exposed to much higher levels of human contact, which increases their vulnerability. The pandemic has also exposed the fragility of India’s employment pyramid and the vulnerability of its foundations.

Costs of the shutdown

In ‘normal’ times, salaried employment, which implies some degree of job security, has accounted or less than a third of the total employment, leaving a bulk of the employment in the informal sector, either as contract labour or self-employed. The stark reality is that self-employment is not a choice, but the last resort of those unable to secure jobs. The economic cost of the shutdown has, therefore, fallen disproportionately on the contract labour and the self-employed, mainly in three ways.

Firstly, within the organised industry, during the last two decades, there has been a steady increase in the employment of dispensable contract labour, both in order to respond elastically to business cycles as well as to save costs and improve profitability. These workers have been the first on the firing line during the shutdown and consequent demand contraction.

Secondly, services that have high levels of public interfaces, such as tourism, restaurants, etc, have faced prolonged closure, dragging down jobs of millions of low-income personnel.

Thirdly, with no paid leave or savings to fall back on; illness directly results in loss of income for the bottom rung.

There is also the indirect hit in the form of denial of public services, such as education and public transport, which will have a longer-term impact on low-income groups. A recent survey among students in government schools in Tamil Nadu showed that less than 15 per cent of the students had access to smartphones even for a few hours, rendering any attempt towards distant learning unworkable. Children on the wrong side of the digital divide, are running the risk of completely losing out on school education for a whole year, which will have the effect of postponing their entry into the job market at least by one year, with further adverse consequences to their economic status.

In contrast, with the advanced economies opening the floodgates of liquidity, the stock markets have been inundated, including India, resulting in the markets getting unhinged from the real economies. Investors have thus been relatively cushioned from the adverse economic impact of the pandemic.

A veteran financial journalist has forecast a K type of recovery of the Indian economy, arguing that the rich will recover quickly, while the poor would get poorer. This is a distinct possibility, considering that the post-Covid world would have been reset with a higher digital medium. Tourism and hospitality, which employ a vast army of informal labour, will lag in recovery, while IT and banking, which employ salaried staff, would get back on their feet sooner.

Redefine economic ideology

With a significant risk of widening income inequality post the pandemic, the government needs to redefine the economic ideology to avert a potential explosion of social unrest.

Firstly, there is no turning away from a market economy, as India needs rapid growth, more than ever. That would require kickstarting the economy through a massive programme of infrastructure investment. However, funding for this has to be secured from overseas, including the IMF, sovereign funds and the like, conserving domestic savings and budgetary support for a massive welfare programme.

Secondly, welfare programmes including free rations, direct cash transfers, subsidised cooking gas, etc., need to be looked at as medium- and long-term measures, rather than bandaids.

Thirdly, the endemic weakness in the employment pyramid needs to be addressed, with the objective of increasing the proportion of formal labour. A cadre of the semi-permanent labour force in organised industries needs to be encouraged with higher minimum pay, but with minimum job security. It would also be necessary to increase minimum wages across the board and tighten enforcement of legislation.

The inequality demon needs to be looked at in the eye. Unfortunately, it cannot be chased away for long with emotional weapons.

The writer, formerly with Ashok Leyland and IndusInd Bank, is a corporate director and advisor