Inequality angst can derail growth

Time of India

a day ago

Latest World Bank data puts India's Gini index at 25.5 in 2022-23, making it the fourth most 'equal' country in terms of income, after Slovak Republic, Slovenia and Belarus. While GoI has described this as a 'remarkable achievement' that 'reflects how India's economic progress is being shared more evenly across its population', the insight is different.Other indicators are also trotted out to show India's achievement in growing 'equality'. Household Consumption Expenditure Survey (HCES) 2024 claims a decline in consumption inequality between 2011 and 2023 across rural and urban India. But data becomes more acute, with less uncertainty, in wealth-compared to income.India's wealth concentration is high and increasing. But so is the case with China, at a rate faster than ours. Brazil is higher than both. An obvious rationale could be the stage of development-lower- and middle-income countries have higher structural inequalities compared to high-income countries. Perhaps it's the price to pay for growth? Even accounting for that, India's wealth concentration is high by Asian standards.India's financial markets are an outlier-in terms of efficiency, sophistication and global interest, they compare with developed countries. Bangladesh, Brazil, or even China don't have comparable market architecture. This enables India's entrepreneurs to monetise assets efficiently. It also prices Indian assets at a premium to most other EMs.Is the paper wealth of promoters a function of structural wealth inequality or merely a function of the premium pricing of assets? There have been several cases, including storied start-up founders, where paper wealth has been eviscerated overnight as businesses floundered or investor interest dried up.So, promoter equity valuation is an imperfect measure of wealth, given how unmonetisable and ephemeral it can be. The bulk of common outrage on inequality, though, hangs its coat on the hanger of this singular variable.Besides redistribution, the other fix to inequality has been to expand and deepen the tax base. With great results too-the number of I-T filers has doubled in the last decade while I-T as a % of GDP has gone from under 2% in 2020 to nearly 4% in 2025. Despite progress, a small cohort-2-3% of the population -accounts for all income taxes and a large proportion of indirect taxes.At less than $3,000 per capita income, India's tax-to-GDP ratio, at 17-18%, is in line with global averages at similar income levels. China, with four times India's per capita income, has a slightly higher ratio. There are some extreme anomalies-farm income is an obvious one-but by and large, Indians pay enough tax. Affluent Indians, as they should, pay more than enough-peak tax rates in India are at the top end of Asian levels.India, since 1991, has been a great macroeconomic story and a spectacular markets story. A steady, compounding GDP growth rate of 6-6.5% is an achievement. But it pales against the performance of other Asian countries-the Tiger economies in the 1970s/80s and China since the 1990s-most of them clocked 8% and more for decades at a stretch.More worryingly, the single-biggest structural lever of development since 1991-growth in IT services that enabled the creation of tens of millions of high-paying jobs-is running out of steam. AI and automation are rendering large swathes of IT jobs redundant globally. There is a desperate need for India to identify the next big thing, without which it will be near impossible to take growth up from the sticky 6-6.5% handle.The biggest challenge now is to graduate to at least upper-middle-income status quickly, before demographics start to militate against the effort. It's not only an economic imperative but a national security imperative. A national polity obsessed with inequality will make suboptimal policy choices and perform sub-optimally, as India has often done in history.The writer is chief investment officer, ASK Wealth Advisors