08 December 2011

Income Inequality Doubled in India Since 1990

Income inequality is an ever existing detonation. But in last two decades it is doubled in India which lagged it in all rising economies. In 1990s the top 10 percent of wage earners used to earn 6 times more than the bottom 10 percent, which has now completely doubled and become 12 times. There are many reasons for this persistent rise of gap. In India the prime reasons are lack of good education system, unemployment, corruption, population etc.

Recent report from the Paris-based international organization – ‘Organisation for Economic Cooperation and Development’ (OECD) stated that the income inequality has raised in 17 to 22 countries and also provided the reasons for this across advanced economics. By this cross-country study of fiscal inequality it’s been clearly seen that these income gaps are not inevitable and technological forces which drives incomes can be successfully countered by active government policies. This gap has mostly widened in U.S., Germany, Finland, Israel, Luxembourg and New Zealand but is highest in Mexico and Chile.

 In India, the top 10 percent of earners make almost five times more than the median 10 percent, but this median 10 percent makes just 0.4 times more than the bottom 10 percent. This rise of fiscal inequality has a relative rise in the rewards to well-educated individuals who have benefited from the advance of new technologies. The report found that this technological progress made in the manufacturing and service sectors, has mostly benefited highly – skilled workers, and left behind the little educated or trained. Another prime reason is the globalization which has affected this gap.

The report recommends a three-pronged attack on inequality, using labour market reforms to create a level playing field between workers; education to improve the returns to work; and more redistribution from rich to poor to mitigate any rise in the underlying returns in the pre-tax income distribution. “Youth who see no future for themselves feel increasingly disenfranchised. They have now been joined by protestors who believe they are bearing the brunt of a crisis for which they have no responsibility, while people on higher incomes appeared to be spread; Education appears to have been the single most important factor contributing not only to reduced wage dispersion among workers but also to higher employment rates; The evolution of earnings inequality could be viewed mainly as the outcome of a ‘race between education and technology’,” the OECD report said.

The reports stated that a higher tax burden on the rich ‘might not be the most effective’, and hence suggested to improve tax compliance, eliminate tax breaks, and reassess the role of taxes on all forms of property and wealth, including the transfer of assets.