Good and bad inequality

In India it’s not uncommon to have heated debates on whether India is ‘shining’ or it’s creating another India which many of us are ‘afraid to see.’ Being an economist I have been a part of such debates more frequently. Fortunately or unfortunately, but because of my understanding of economic systems as part of my education, I have been on the side that is less emotional but more realistic. My stance is also generally in contrast to what one would associate with the ostensibly-socialist attitude of a JNU pass out.

As has been the case a less emotional side doesn’t appeal much to the larger audience. People like to be swayed  by the imagery of people dying, children working, etc. and in the process they tend to suggest or follow or practice or patronise such policies that actually act in ways contrary to what their objective is.

One of the best cases of such emotion driven misconceived ideology is ban on child labour. People would hate a person like me who suggests that you shouldn’t ban child labour. They would rarely take the pains to understand that I am suggesting so not because I am a sadist who hates children or an opportunist who has hired several of them at home, but because banning child labour actually reduces the well being of those very children. (For details on this argument see Kaushik Basu’s paper – The Economics of Child Labor)

On similar lines one of the common complains of many in the middle and upper income classes is that the gap between the rich and the poor is growing.

This is a fact and I wouldn't dispute it. What I, however, try to dispute is the presumption that this growing gap or inequality is making people worse off. My observation of the economic development of India over the past two decades suggests that more and more people are reaping the benefits of a growing India.

In my attempt to reconcile these two varying opinions I felt it might be a good idea to instead classify inequality as ‘good inequality’ and ‘bad inequality.’ This is akin to the concept of inflation being classified in to ‘good inflation’ and ‘bad inflation’ so as to put to rest the blanket notion that all inflation is bad inflation.

‘Good inequality’ then according to me, is the inequality which is the by-product of a nation’s economic growth. Such inequality is representative of the presence of opportunity for people seeking growth, for trade and entrepreneurship to flourish, for  growth in employment opportunities, for technological progress and so on and so forth. Today’s India has the potential to give birth to more and more millionaires and billionaires. And these individuals weren’t all born with silver spoons. At a smaller level or a bigger level, it wouldn’t be incorrect to say that most Indians today have a dream to fulfil – for some it’s about buying a new house, for others it’s about educating children or taking their parents for a world trip.

In terms of concrete examples, recently sweets were distributed in my office and the occasion was construction of our CEO’s driver’s house. Rising aspirations are also manifest in housemaids hired for household chores sending their kids (or at least their sons) to private schools even if these are expensive.

At a much personal level I am happy to see the progression in my family. My grandfather started with selling clothes in streets on a bicycle while I started with a job with Deloitte, thanks to the economic growth in Andhra Pradesh, India (AP) brought about by former Chief Minister Chandrababu Naidu. Inequality has certainly grown in AP but is this inequality bad? In fact the growth brought about by Naidu seems to have played an important role in bringing down naxalism in the state.

The growth in India has also led to increased demand for labour and as a consequence this segment of the population feels much empowered today. The labour today can choose between different employers and can bargain for what s/he thinks are the right wages. The salesmen at my father’s shop have staged 3 walkouts to demand wage hikes over the past two years. Earlier the frequency of such an event was hardly once in a few years.

Good inequality I feel, is also where the increasing numbers of rich leads to increasing philanthropy (see Bain’s “India Philanthropy Report 2012”) and where the rural consumption starts to evolve beyond agrarian products.

I have also felt that the issues of inequality, for the sake of discussion, troubles the middle and upper classes more than the people in the lower rung who are keen on tapping all possible opportunity to grow. I felt so particularly while listening to a programme by the Manav Rachna radio (FM - 107.8) while driving to my office. The radio jockey was interviewing migrants to Gurgaon and trying to understand how they fare. These people were mainly fruit vendors or labourers that had been working in Gurgaon for about 5 years. I was taken by surprise to know that most of them were utterly grateful to Gurgaon for being a land of opportunities. A city that changed their fortunes and a city that has given them an opportunity to lead a better life back home. The grievances, when prodded, were few and far between and included distaste for the rustic language of Gurgaon.

Well, one might think that I am broadly an optimist who sees more of good in every situation. This could be somewhat true but I am quite cynical about a number of things in the Indian story. One amongst those is all instances of ‘bad inequality.’

‘Bad inequality’ according to me is something that doesn’t allow a less well off person to benefit from these opportunities. It is symbolic of such growth that happens at the cost of the poor. These are more of governance issues that snatch away level playing field from the less privileged.

So while a new highway or a new expressway is good for growth of India it shouldn’t ignore the interest of the poor. A person without a bike or car should also be able to navigate the roads with equal ease. A pedestrian shouldn’t be disadvantaged because s/he lacks the means.

Similarly, while the Indian mobile revolution is good and is quite an example for many countries malpractices by some telecom companies hurt the poor more. A daily wager is badly hit if the prepaid recharge is wrongfully deducted for unsolicited ringtones. A doctor fleecing thousand of rupees from an illiterate farmer by scaring him of a non-existing disease is also unfair. These are instances of issues where strict enforcement of rules and delivery of justice by the government would immensely help.

Another instance could be hoarding of tickets in Indian Railways. The option to book tickets four months in advance puts a poor fellow at disadvantage because he can’t block his money for so long.

Reduction of loan disbursement to poor retail borrowers on account of lending to institutional borrowers, something that was highlighted by the Finance Minister P. Chidambaram recently, can be one more instance of such ‘bad inequality.’

It is important to understand this delineation between good and bad inequality. Trying to call economic growth bad names is gross simplification of facts and an unintended attack on one of the most promising paths to making more and more Indians better off. Today's reality of 'poor governance along with growth' is certainly better than yesteryear's 'poor governance without economic growth'.


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For those interested in a more detailed study, please refer to 'Growth and Poverty - The great debate', CUTS International, which is a follow up to Jagdish Bhagwati's lecture in the Indian Parliament in 2010