The International Monetary Fund (IMF) has warned that both India and China face the social risk of growing inequality.
By implication, it is suggesting that there is a problem with the redistribution of incomes in both these economies as high economic growth rates are not reducing inequality.
In its regional economic outlook for Asia and Pacific, IMF said that Asian countries are unable to replicate the “growth with equity” miracle and pointed out that inequality has only increased in the past two and a half decades, lowering the effectiveness of growth to combat poverty and preventing the building of a substantial middle class.
India’s Gini coefficient rose to 51 by 2013, from 45 in 1990, mainly on account of rising inequality between urban and rural areas as well as within urban areas. China’s Gini coefficient also rose to 53 in 2013, from 33 in 1990. At a time when inequality has been coming down for most of the world, the average net Gini coefficient for Asia rose to 40 in 2013 from 36 in 1990, the highest among the rest of the world.
Gini coefficient is a widely used measure of inequality and takes into account income distribution among residents of a country. The income in this case has been calculated net of taxes and transfers. The higher the Gini coefficient, the greater is the inequality.
“Within-country income inequality has risen in most of Asia, in contrast to many regions. In some larger countries (such as China and India), spatial disparities, in particular between rural and urban areas, explain much of the increase,” the report said.
The report stressed the need for broadening access to health, education and promoting financial inclusion and reducing inequality of opportunities to bring down overall inequality levels. It also stressed the need for effective fiscal policy that broadens the coverage of social spending but at the same time moves towards a progressive taxation system that taxes the rich more.
Highlighting the gap between the rich and the poor, the report pointed out that access to education is an important factor that explains inequality. It added that in countries including India, the percentage of people with less than four years of schooling is higher for the poor than for the rich. Similarly, there is a substantial gap in access to healthcare between high- and low-income households. It added that financial inclusion has promoted equality in India across states.
French economist Thomas Piketty, in an interview withMint in January this year, had talked about the high levels of inequality in India and made a case for taxing the rich’s income at higher tax rates.
“.. if you use the extra tax revenue to invest in the health system, in the education of the bottom 50% or bottom 70% of the country, then, yes, increased tax of the rich in India would be actually good for growth. It would reduce inequality and at the same time increase growth,” he had said.
IMF made a case for India to reduce its dependence on indirect taxes and increase reliance on direct taxes. Indirect taxes are considered regressive as they are levied uniformly across all individuals, irrespective of their income levels. In India, however, the share of direct taxes to gross domestic product has been falling. From a high of 5.93% in 2008-09, it has come down to 5.47% in 2015-16.
