Too Much Inequality Tends to Retard Economic Growth

Context: Inequality is an inevitable consequence of economic activity and vice versa hence inequality reduction is just as important for growth as measures like the ease of doing business.

Inequality and economic growth

• Inequality fuelled social instability: crime and insecurity of private property, could slow down investment and growth. 
• Inequality affects economic growth through political channels: if vast majority of voters are poor not themselves subject to a tax, implies heavy taxation of the rich or high taxes on capital.

• Only seven payers of direct taxes for every 100 voters.

• Highly concentrated income distribution: limits effective aggregate demand, purchasing power and investment (low rural purchasing power lowers demand of consumer goods and two-wheelers).

Way Forward

• Universal distribution: of foodgrains, pulses, oil and even soap.

• Cash transfers (Jan Dhan Account): into households for a period of four to six months.

• Credit availability: Clearing the pending dues of small business and increasing access to future loans.

• Fiscal stimulus: for increasing demand (Keynesian policy) and income distribution for sustainable growth.

• Focus on Quality: increased level and quality of public goods and services to make today’s debt more affordable.

Conclusion: Neither philanthropy (free market view) nor government intervention (redistributive taxation) can reduce inequality, hence there is a need for scientific and reasoned approach to inequality.