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The Inequality Conundrum Pathways Ahead for India

Executive Summary

The Inequality Conundrum Pathways Ahead for India is the third publication from Nishant Malhotra, founder of The middle Road platform. Income inequalities are the mother of all enablers of social distress, unhappiness and social inequality. A metaphor Inequality here symbolizes income and social disparities to a diverse set of mindset governing people globally. This report shares a holistic perspective on factors governing income, social and mindset inequalities in India. I take a look at the high-income disparities in India, the low taxation percentage to GDP ratio and the potential risks highlighted by Moody’s in its recent downgrade of Indian sovereign rating to the lowest investment grade. The piece is a deep dive into few underlying reasons for social and economic inequality in India, introduces the concept of Gini Coefficient, production function, non-deliverable forward market, zero-coupon bonds and much more. Learn about a few Environmental, Social and Governance considerations impacting Indian socioeconomic ecosystem, policies enacted by the government including Make in India & its impact in India and recommendations going forward.

India’s Socio-Economic ConundrumThe Credit Suisse 2019 World Report is an eyeopener for understanding income inequalities around the world. The global income inequality has come down in the last two decades with the Gini Coefficient coming down. But the trend in the top 1 per cent of the global wealthy individuals started reversing after the financial crisis, especially in America. Today, the top 1 per cent of the population hold about 44 per cent of the worldwide wealth of the world. In a disturbing trend, the lower half of the population own less than 1 per cent of the global wealth while the wealthiest 10 per cent own 82 percent of all wealth. However, the top 1 per cent owned 46.9 per cent of global net assets in 2000, giving clear evidence that globalization has reduced inequality to a certain extent. 1

Note: left axis: % share of national wealth; right Gini Coefficient

The trend in India is worrisome. Based on Credit Suisse 2019 World Report team assessment, India has one of the highest income inequalities in the world with Gini Coefficient at 0.83. The top 10 per cent of Indian population hold 77 per cent of the total national wealth based on a report published by Oxfam International. The disturbing analysis of Oxfam report is the tenfold increase in the number of billionaires in India over a decade with their combined wealth higher than the entire union budget of India for year 2018-19 which stands at INR 24422B / ~$3226B. 2  One of the key reasons for the income inequality is lack of progressive taxation for taxing higher marginal tax rates for individuals with net assets above $IM or ultra-high net worth individuals with assets above $100M. Tax revenues as percent of GDP is one of the lowest in the world. With about 90 per cent of the Indian population in unorganized sector and a 34 per cent urbanization rate based on the World Bank’s data for 2018, India has a huge challenge in addressing both socio-economic inequalities within the country.

Recent Moody’s downgrade of India’s sovereign risk to Baa3, the lowest investment grade on the back of negative outlook exemplified by the pandemic is a worry. According to Moody’s report, the economic reforms have been stalling for some time under the present Indian government with debt at 72 per cent of the GDP, which is already 30 per cent points higher than the Baa average. Financial instability due to widespread non-performing assets among the non-banking financial companies, risk of joblessness due to 8 to 12 million labor force joining very year until 2030, and rising environmental issues are some of the key concerns cited by the rating agency. The downgrade is likely to affect FDI flows over short term but India should be able to tide through the troubled waters. The publication looks at FDI sector in India with a focus on the smartphone industry.

Agriculture still accounts for 43.21 per cent of employees although its share in the GDP is only 15 per cent. About 87 per cent of the farmers are marginalized with land holding less than 1.2 hectares. This impedes their access to the latest technology available in the world as well as limiting the support from the government. Lacking economies of scale, India farmers are less productive and open to exploitation. Services which accounts ~50 per cent share in the economy employees only 20 per cent of the employees, lower compared to rapidly advancing economies including China. The matter is further exasperated with inability to increase the size of the manufacturing sector as a percent of GDP which remains at ~15 per cent missing the 25 percent target set under Make in India mission. In spite of passing Insolvency and Bankruptcy Code, 2016, India lags behind OECD countries and China in resolving insolvency cases.

The publication includes update tutorials to build up the analysis.

Best

Nishant Malhotra

Founder | CEO

The middle Road | Middle Road OPC Pvt Ltd

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