The Indian Economy has undergone a massive change since the independence. From a socialist, centrally planned economy to a market-driven one, macroeconomic changes have widened the wealth divide time and again.
To understand how these macroeconomic changes have led to inequality in India, we had a chat with Raj Bordia, Founder of MOODINDIA and advisory board member of Hult Prize India.
Changes in Economic Model
According to Raj,
“Inequality started when India adopted a market driven economy in the pre-independence era, where the wealth was concentrated in the hands of a few wealthy merchants, leaving hardly any choice of products for the customers and rendering employees poor, with meagre wages.”
When the British ruled over our country, the Keynesian theory was replicated here which again turned out to be a failure. The Keynesian theory states,
“In the short period, level of national income and so of employment is determined by aggregate demand and aggregate supply in the country. The equilibrium of national income occurs where aggregate demand is equal to aggregate supply. This equilibrium is also called effective demand point”.
But during the British Raj, this never happened! The British had control of all the wealth in India. Due to their political mind games to keep the countrymen under their control, they never allowed Indians to grow. Therefore, demand and supply were never at an equilibrium. This again led to only a handful rich families, who were in good books with the British, to have maximum wealth. Hence, the economic divide widened again.
The government created and promoted large organisations with a motive to create more jobs, more employment and flourishing market, which never happened. The concentration of power led to wealth getting concentrated with the powerful 1% of the citizenry.
“To make this situation better, government supported the creation of some large organisations. But that backfired again. These organisations, instead of increasing the Size of the Pie, went after increasing their Share in the pie.”
India has had high inflation compared to most nations. The inflationary situation has been volatile since the financial year beginning 2010.The inflation in the Indian economy reached as high as 14.86% in April 2010.
Inflation is an agent of poverty. It not only impacts the purchasing power of the lower-income group but also hits the financial capacity of the middle classes. High inflation destroys the wealth of the middle class.
Since the Second Plan onwards, India has experienced a continuous rise in its price level, leading to erosion in the value of real income of the working class and a huge marketable surplus to the industrialists, rich farmers, traders etc.
Moreover, this continuous inflationary rise in price level has also automatically increased the value of assets, real estate etc. owned by the richer section of the society and thereby it accentuates the degree of inequality in income and wealth to a substantial level.
Add to that, the persistent problem of Crony Capitalism and lack of transparent governance.
“Social entrepreneurship can solve this problem because they focus on increasing the size of the pie instead of boosting their share of the pie. They make new markets. They make solutions cheaper so that people from BoP can access it. They are all about making things effective and sustainable and not just cheaper.”
Looking at the promising results from Social Enterprise, Government now wants to support small and medium scale enterprises. But, banks are not ready to support them doubting their potential and therefore fearing bankruptcy. Social entrepreneurship is turning out to be the most promising solution to create more jobs and sustainable ones for that matter.
As Prof. Asit Biswas says,
“The only hope to keep India’s top 1 percent from running away with the country’s economic gains is for lower and middle-income workers to organize and demand more distributive policies. However, this would only address the symptoms; it does little to cure the structural determinants of inequality. In addition to such policies, India needs to control population growth, close educational achievement gaps, and establish a durable and defensible competitive advantage.
Beyond regional competitiveness, India should examine its collective soul to ask whether an economy by and for the obscenely wealthy is just. The inability to establish a political consensus on the extent of redistribution is a convenient excuse for ideological purists to abandon redistributive policies altogether. However, there is a line beyond which inequality is too high, and India is close to – if not already beyond – that line.
“Who decides how much inequality is unacceptable?” is no longer an excuse for inaction.”