Page 138 - ES 2020-21_Volume-1-2 [28-01-21]

04

Inequality and Growth: Conflict

or Convergence? CHAPTER

Poverty is the parent of revolution and crime.

—Aristotle

The Economic Survey 2019-20 argued that ethical wealth creation – by combining the
invisible hand of markets with the hand of trust – provides the way forward for India to

develop economically. An often-repeated concern expressed with this economic model
pertains to inequality. Some commentary, especially in advanced economies post the
Global Financial Crisis, argues that inequality is no accident but an essential feature
of capitalism. Such commentaries, thus, highlight a potential conflict between economic
growth and inequality. Could the fact that both the absolute levels of poverty and the
rates of economic growth are low in advanced economies generate this conflict? If so,
could it be that a developing economy such as India can avoid this conflict – at least in
the near future – because of the potential for high economic growth, on the one hand, and
the significant scope for lifting millions out of poverty, on the other hand? This question
becomes pertinent especially because of the inevitable focus on inequality following the
COVID-19 pandemic.

In this chapter, the Survey examines if inequality and growth conflict or converge in the
Indian context. By examining the correlation of inequality and per-capita income with a
range of socio-economic indicators, including health, education, life expectancy, infant
mortality, birth and death rates, fertility rates, crime, drug usage and mental health, the

Survey highlights that both economic growth – as reflected in the income per capita at
the state level –and inequality have similar relationships with socio-economic indicators.
Thus, unlike in advanced economies, in India economic growth and inequality converge
in terms of their effects on socio-economic indicators. Furthermore, this chapter finds
that economic growth has a far greater impact on poverty alleviation than inequality.
Therefore, given India’s stage of development, India must continue to focus on economic
growth to lift the poor out of poverty by expanding the overall pie. Note that this policy
focus does not imply that redistributive objectives are unimportant, but that redistribution
is only feasible in a developing economy if the size of the economic pie grows.