Page 139 - ES 2020-21_Volume-1-2 [28-01-21]

122 Economic Survey 2020-21 Volume 1

INTRODUCTION

4.1 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. In the advanced economies, Wilkinson and Pickett (2009), Atkinson (2014) and
Piketty (2020) show that higher inequality leads to adverse socio-economic outcomes but
income per capita, a measure that reflects the impact of economic growth, has little impact.
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 . The significant reduction
1
in poverty that high economic growth has delivered in India and China presents the most striking
challenge to this notion of 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 because of the potential for high levels of economic growth, on the one hand,
and the significant scope for poverty reduction, on the other hand, ? This question becomes
pertinent especially because of the inevitable focus on inequality following the COVID-19
pandemic.

4.2 The question remained important for India even before the pandemic. Choices in economic
policy always present inherent trade-offs. Resolving these trade-offs in a manner that suits the
specific economic context of the day is, therefore, critical to lay out clear policy objectives.
The advanced economies may choose to focus on alleviating inequality given their stage of
development, their potential rate of economic growth and the absolute levels of poverty that
they face. Thus, they may resolve the trade-off between growth and inequality by leaning
towards alleviating inequality. However, despite facing the same trade-off, the policy objective
of focusing on inequality may not apply in the Indian context given the differences in the stage
of development, India’s higher potential rate of economic growth and the higher absolute levels
of poverty. Given these motivations, in this chapter, the Survey examines if inequality and
growth conflict or converge in the Indian context in an effort to identify the correct policy
objective for India.

4.3 By examining the correlation of inequality and per-capita income, which reflects the
impact of economic growth, with a range of socio-economic indicators, the Survey highlights
that both economic growth 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

1 See Wilkinson and Pickett, 2009; Picketty, 2013 among others for the research on inequality, mostly focused on
advanced economies.