India’s inequality problem won’t be solved by freebies—it needs long-term solutions

The report is important, given the rise in inequality across countries, rich as well as developing. The issue is no longer an isolated phenomenon restricted to some countries in the Global South. Most governments elsewhere too are concerned by the extent of inequality and its rise, given how it has fuelled discontent among population groups that feel excluded from the growth process and also led to youth unrest in some cases.

Recent violence in our own neighbourhood, be it in Nepal or Bangladesh, is a reminder of anger among the youth against a status-quoist approach taken by governments.

Most people assume that inequality is not an issue since there are hardly any protests that arise specifically against it. That may be true. However, it is also true that most protests on issues of corruption, unemployment, inflation and so on also have an element of discontent against inequality.

Demands by caste groups for reservations are protests against inequality, for example, and so are farmer agitations for remunerative crop prices and protection from price fluctuations. Protests demanding basic rights for women and those for equal treatment irrespective of caste, region and religion also reflect unequal underlying conditions that deny some groups basic rights while the privileged bask in their privileges.

Some inequalities are structural and even historical to an extent, given their deep-rooted existence in society. Yet, every process of growth creates winners and losers. Economic processes magnify these inequalities and it is here that the role of the state is important. The state is not just supposed to provide a level playing field to all its citizens, but also create regulatory structures that restrain any rise in inequality driven by such economic processes.

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Some measures are guaranteed by India’s Constitution, which provides for affirmative-action relief in the form of a reservation policy to assure citizens a level playing field. But it is silent on the state’s role in regulating excessive concentration of wealth or income, although this does find mention in the fundamental duties of the state.

Governments at the Centre and in states have also used redistribution as a tool to reduce inequality. But there is concern over administrations resorting to freebies, which are only increasing in form and magnitude.

The recent push for cash transfers to women, youth and other groups is an acknowledgement of growing inequality and the consequent marginalization of some population groups. It is also a recognition of the need to redistribute income, even if it results in political competition for cash transfer generosity.

Clearly, fiscal policies involving subsidies and taxation play an important role and their use has been rising in India over the years as a tool to reduce inequality.

While such redistributive transfers certainly help, they come at a fiscal cost that causes other harms. Like the Centre, most state governments are now feeling the pressure of these fiscal transfers. In some cases, it has resulted in a reduction in spending on essential services such as health, education and nutrition. The net result may be rising inequality in access to critical services, which would be counterproductive.

State intervention by way of fiscal policy can be helpful when taxation is progressive. Unfortunately, the last few Union budgets have seen large tax giveaways to India’s middle class and corporations, an approach that has ironically failed to deliver on economic growth while making it harder to reduce income inequality.

For governments, redistributive transfers are an easy way to respond to rising inequality. These are tangible and visible, yielding political dividends in the short run. No doubt, they are even necessary at times.

But such efforts are no substitute for the core measures that governments must take to reduce inequality, which requires intervention in labour and capital markets. Since it is distortions here that widen inequality, we need substantive efforts to curb unfair market practices. For a long-term solution to our problem of inequality, we need to intervene especially strongly in India’s labour market.

The author is associate professor at Jawaharlal Nehru University and visiting fellow at the Centre de Sciences Humaines, New Delhi.