Catastrophic Events And Their Effect On Wealth Inequality
Poverty is the state of lacking enough resources to provide for the necessities of life—food, clean water, shelter, and clothing. The majority of the poor are women and children, and most of them have no access to education. One of the most important insights of economics is that people live in poverty not because of who they are, but because of where they are. A person’s skillsets do affect their employability prospects. But all these factors are shadowed by the impact a person’s place of birth and circumstances have on their income and wealth. A person who happens to be born into a country where the average income is low is more likely to fall into poverty. A person living in Denmark has a 14% chance that they are poor. In Ethiopia, more than 99% of the population lives on less than $30 per day. This is a perfect example of wealth inequality in the form of unequal wealth distribution. Therefore, a rise in the average level of income in a country – economic growth – is crucial for reducing poverty.
India, one of the fastest-growing economies, is also one of the most unequal when it comes to the distribution of wealth. The richest 10% holds 77% of the total national wealth. The poorest Indians have not shared the post-liberalization boom of the Indian economy and have only become poorer. In comparison, billionaire’s fortunes in India have increased by 10 fold. There are 119 billionaires in India, their number has increased from only 9 in 2000 to 101 in 2017. Between 2018 and 2022, India is estimated to produce 70 new millionaires every day. The majority of Indians lack access to basic health facilities and have a tough time paying for the healthcare costs due to which around 63 million people (about the entire population of Gujarat) are pushed into poverty every year. It would take 941 years for a minimum wage worker in rural India to earn what a top executive earns in a year. Wealth inequality is one of the burning issues today, as it results in unfair political institutions, unfair control by a few wealthy over others, and crony capitalism.
People living in poverty are more adversely affected by catastrophic events, making it more difficult for them to recuperate. Research has shown that climate change itself can drive millions of people into poverty by 2030. Another such example is the ongoing covid-19 pandemic which has made things worse for the poor. The World Bank estimates that 88 to 115 million people will be pushed into extreme poverty due to covid-19 in India and this is just a projection for 2020 and does not account for the impact of the second wave.
Impact of Covid on Wealth Inequality
The International Labour Organization in its report describes the coronavirus pandemic as ‘the worst global crisis since World War II.’ About 400 million people (76.2% of the total workforce) working in the informal economy in India are at risk of falling deeper into poverty. Due to lockdown, there is going to be a loss of 195 million full-time jobs or 6.7% of working hours globally. Many are in low-paid, low-skilled jobs where sudden loss of income is a catastrophic crisis.
Titled ‘The Inequality Virus’, the Indian supplement of this year’s annual ILO report finds that “India’s wealthiest people escaped the worst impact of the pandemic while the majority of Indians suffered.” This, the report argues, is because despite implementing one of the earliest and strongest lockdowns globally, the Indian government did not immediately spend to ensure the welfare of all those who were losing their employment and livelihood.
Noting that the informal sector had been the worst hit, the report said that out of a total of 12.2 crore people who lost their jobs, 9.2 crore were lost in the informal sector. At the end of the day, the despondency people are facing in their respective lives and the ground-level situation cannot be completely analyzed by the numbers.
Why were the poor hit hard?
A nationwide lockdown was imposed in March last year and a large population of migrant workers was forced to go back to their hometowns. Some of the factors contributing to the situation were:
Many of these were daily wage workers, working at construction sites or factories, and because of the informal nature of this sector, most of them didn’t have job security.
Many people were part of the gig economy or work in the informal sector and in family businesses that could not run fully in the lockdown or be forced to shut. Workers in the gig economy were the worst hit as they had no means of employment or access to safety nets provided to other full-time workers.
Lack of Social Safety Nets
In recent years India has lifted millions of people out of poverty who were still vulnerable and just a few mishaps away from falling into poverty again. The nationwide lockdown hit hard on their earnings resulting in millions of people going back to the state of poverty. This could have been avoided to a significant extent if there were existing social safety nets. Social safety nets consist of aid like – direct cash transfers, fee waivers, food transfer, etc. which indirectly help a person to not succumb to hunger or extreme poverty. Although the government provided some form of aid, it was not enough to tackle the scale and scope of the problem.
Poor Digital Infrastructure
Another reason might be the lack of digital infrastructure possessed by small businesses which made them lose revenue during the lockdown. Unlike the big companies, which had the existing digital infrastructure, shifting from offline to online was costly and difficult for smaller businesses. In comparison, big companies benefited from this shift as it reduced the maintenance cost of their offices, the transportation cost, etc. Many companies also saw a hike in their net profit in the fiscal year during covid-19, thus further highlighting the digital disparities between the rich and the poor.
Lack of Government Intervention
There was a lack of comprehensive planning of restrictions and aid by the government, such that the government was unable to foresee the challenges of the lockdown.
Despite being a top destination for medical tourism, India still has one of the lowest healthcare spendings in the world. It is more of a commercial healthcare sector rather than being a well-funded healthcare service, where only those who can pay the healthcare costs are getting decent healthcare services. WHO estimated in 2011 that more than 5 crore Indians were pushed below the international poverty line bearing health expenses.
Tackling wealth inequality
Solutions to reducing wealth inequality require careful consideration of the following aspects:-
Reducing gender inequality or investing in women
A report by Oxfam said 1.7 crore women lost their jobs in April 2020 and unemployment for women rose by 15% from a pre-lockdown level. The IMF chief Christin Lagarde said if women’s participation in the workforce matches men India could grow at 27% per annum, and a report by Mckinsey said that women contribute only 17% of India’s GDP and India could add $700 billion to its GDP by closing this gap by 2025. This cannot be done without women empowerment and deliberate policy interventions to provide equity to women.
To run a nation, the government needs to collect taxes from eligible citizens. It is very crucial for nation-building and its development. There are broadly two types of taxes: Direct tax and Indirect tax.
Tax on Income
It is one of the major “Direct Taxes” in India. Direct Tax is the tax levied on the citizens of the country which is to be paid directly to the government and cannot be passed onto someone else. Income tax is the tax imposed on the citizens according to the tax bracket they fall in based on their earnings and revenues/profits. It is a momentous way to reduce wealth inequality. Income tax collection curbs inflation as any change in their rates can help in regulating demand and supply in the economy.
Also, it’s a crucial step to maintain social and economic balance as citizens are taxed in proportion to their economic circumstances, thereby encouraging social and economical equality. The amount of effect direct taxes have in decreasing wealth inequality efficiently is debatable but it is definite that it cannot be done without them.
Now, it is common for huge corporations to try and avoid taxes. The Business Standard in 2019 reported that “Google, Facebook made Rs 10,000 crore; paid Rs 200 crore as tax in India”, which amounts to a mere 2 % of their earnings.
Other than this, it is pertinent to note that governments often offer tax incentives, corporate tax cuts, etc, to huge corporations in order to encourage foreign or in-country investments. However, these incentives result in benefitting the huge corporation but do not really provide commensurate benefits in the long run to the public.
Tax on Inheritance
One of the most controversial types of tax is the tax on inheritance. Inheritance tax or Estate tax is imposed on the richer sections of the society to bring parity among the taxpayers to reduce the concentration of wealth, which can also decrease the liquidity of wealth. Therefore, it is imperative that an inheritance tax (a direct tax) be levied so as to ensure the redistribution of wealth. India doesn’t have any such kind of tax till now but this should probably change to reduce wealth inequality.
Universal Basic Income
(UBI) refers to the idea of providing unconditional cash transfers to all the people in a group, with group sizes ranging from certain communities to entire nations.
The driving force behind UBI is the reduced burden of administrative costs and delays due to efforts towards identifying the beneficiaries, investigating eligibility as well as the corruption caused due to the discretion involved. From the point of view of recipients, it removes any negative connotation that seeking help from the state might entail as well as gets rid of any negative incentives that a lot of welfare schemes have where people lose eligibility if they are able to outgrow their negative circumstances. This also solves the problem of people under-reporting to carve out better benefits of the schemes.
Extreme events like COVID-19 cause a lot of disruption in people’s economic and social lives, and there might not always be a scheme for people and starting a new one might cause delays that a lot of people can’t afford. The unconditional nature of UBI means that if people need help they don’t have to rely on an official authority to recognize their hardship.
The Universal nature of UBI can solve the low delivery problem of existing welfare schemes such as Social Pension (55%), PM KISAN (30%), and JAN DHAN (28%) due to lack of awareness, eligibility challenges, etc. Without spending a lot of resources, UBI ensures that everyone gets the benefits but only those who really need them get to keep it. Cash transfers under UBI are capped such that people who earn less than a threshold can benefit from the amount, while the ones who don’t need it pay it back in form of taxes.
India’s 22% of the population is classified as below the poverty line. UBI will also provide benefits to the other 78% population. Amount paid to each can be too small to have any significant impact.
The steps suggested might not be an antidote to end all the inequality but a problem as complex as inequality requires a mix of solutions and out of the box thinking to works best as a complement to the broader poverty eradication program. Wealth inequality needs serious attention because we owe an obligation to humanity to create a more just society than one that we inherited. The great American President Franklin D. Roosevelt gave us a wonderful mantra way back in 1937. It is more relevant today than ever before: “The test of our progress is not whether we add more to the abundance of those who have too much; it is whether we provide enough for those who have too little.”
Yamamura, E. (2015). The Impact of Natural Disasters on Income Inequality: Analysis using Panel Data during the Period 1970 to 2004. International Economic Journal, 29(3), 359–374. doi:10.1080/10168737.2015.1020323
Priyanshu Singhal · September 24, 2021 at 12:12 pm
A really insightful and well-researched piece!
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