To a large extent life is a lottery. None of us have any influence over the hugely varying circumstances surrounding birth and their influence on our life trajectories through diverse channels: an infant cannot actively choose between a hovel and a mansion in regard to its birth and what it is fed immediately after.
To many, including myself, it would seem that it is the duty of the state to blunt the vagaries of nature through income transfers, programmes for child nutrition, and free provision of high-quality education to the needy: why should at least the opportunity to better one’s lot not be available to all? In other words, much of the responsibility for dispensing social justice lies with governments.
In reality, programmes exist but suffer from inadequate allocation of resources, inappropriate design and poor implementation, as revealed by the inertia characterizing alleviation of poverty and income inequality, phenomena which are linked in the Indian case because of her low middle-income status.
While the incidence of poverty is defined as the proportion of a country’s population not even able to afford a bare minimum quality of life, what is a ‘bare minimum’ is open to debate? The World Bank, very wisely, has come up with three poverty lines or thresholds: 1.9(A), 3.2 (B) and 5.5 (C) dollars at 2011 prices or equivalently 2.3, 3.9 and 6.7 dollars at current prices.
To identify the poor in a country other than the U.S., a dollar is converted into the number of local currency units (LCU) that yields as much in purchases in the country as the dollar does in the U.S. This number is termed the PPP (purchasing power parity) conversion factor.
The mentioned poverty lines can be used to measure the incidence of extreme, moderate and mild poverty: the proportions of population respectively lying below line A, between A and B, and between B and C. In 2011, according to World Bank estimates, such incidence was 22.5, 39.5 and 25 percent, a total of 87 percent.
But by 2021 extreme and moderate poverty have declined to 10 and 34 percent. No figures are available for mild poverty in 2021 but imputation, which involves using the rate of decline for extreme and moderate poverty and the upliftment of those moderately poor in 2011 above line B, results in an estimate of 30.5 percent.
Adding up across all mentioned forms leads to the conclusion that 75 percent of the population, around 12.5 percentage points less than in 2011, is still characterized by some type of poverty.
According to the World Economic Outlook of the International Monetary Fund, the daily per capita income in India at PPP in 2021 is $20. Observe that much more than half the poor are in moderate or more intense forms of poverty; therefore, the per capita income of the poor, the bottom 75 percent of the population, can be approximated by that defining the line for moderate poverty, $ 3.9.
The per capita income for the entire population then works out to be slightly more than 5 times the per capita income of the bottom 75% and 3 times the maximum individual income in that section of the population ($ 6.7).
Calculations using this data also reveal that the per capita income in the top 25% of the population is 18 times that in the bottom 75%. Thus, the Indian per capita income, the arithmetic average of individual incomes, is hardly representative: it may well be true that less than 10% of the population earns more than the per capita income.
To substantiate, I have indulged in some casual empiricism regarding the incomes of middle- and upper-class families and those of their household help. This reveals that most families employing such help are characterized by a daily income per person in the range of $22 – 308 while their employees are in the range, $2.53 – 25.3.
Needless to say, richer employers pay more, but in most cases for better qualified persons, and the ratio of employer and employee income is above 10. Note that these observations imply that many among the household helps suffer from moderate to mild poverty.
There are reasons other than ‘social justice’ which call for an attack on poverty and income equality: if incomes in the bottom 75% of the population remain very low, as is true now, the magnitude of aggregate demand will suffer and this section of the population will continue to suffer from low levels of human capital and productivity.
Economic growth is akin to a relay race where the burden of getting to the tape will have to be shared: if most of the runners are not sturdy, progress will be slow and the country as a whole will lag behind.
Why then do entrepreneurs not spend more on philanthropy that results in poverty alleviation through human capital formation and other means, shoring up demand and productivity in the next generation?
It seems that for an individual entrepreneur it is ‘rational’ to wait for others to invest in poverty alleviation, given that any benefits will be shared by all. When every entrepreneur thinks like this, not much of significance occurs.
Thus, alleviation of income inequality and poverty is a public good which needs to be delivered by the government. In spite of various schemes being in place, daily incomes of many people in the lower rungs of the income distribution have not registered the increase of a dollar or two in the last 10 years needed for them to hop across poverty lines.
There have been some positive developments: for example, a recently announced 100-lakh crore infrastructure scheme (Gatishakti) that should provide employment to many and help to neutralize the loss of employment resulting from Covid 19.
Increasingly, though, total dependence on labour income is becoming a risky proposition because of machines and robots able to function without human interference, in many industries, for long periods of time. It might be necessary in the future, for all humans, whether poor or middle class, to derive some of their sustenance from ownership of financial capital that entitles them indirectly to income flows from physical capital. The government has a major role to play as facilitator in this regard.
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