The bigger problem is inequality

The Modi Government has implemented welfare programmes like providing free gas cylinders under Ujjwala scheme to poor persons. Such efforts are most welcome. However, these will not bring peace and social cohesion and may not even beget votes for BJP because the bigger problem is that of increasing inequality.

Poverty alleviation and reduction of inequality are two entirely different concepts. Poverty alleviation means that the poorest are “alleviated,” that is, basic means of livelihood such as food, clothing and shelter are made available to every individual. This can be done along with prevalence of high levels of inequality. It is like well-kempt grass in the garden coexisting with tall eucalyptus trees.

Big companies can keep wages low, while the government gives out free gas cylinders, even as they make huge profits and give out huge dividends to their rich shareholders. The common man is like the well-kempt grass while the rich are like the eucalyptus tree. Such a situation simultaneously leads to poverty alleviation along with high inequality. The poor get enough to keep their body and soul together but the disparity between their incomes and the rich prevails at high levels.

The inequality not only persists but increases in the modern economic system. The use of labour-saving technologies in industries reduces the demand of labour and depresses their incomes. One skilled worker can manage 10 automatic looms in a modern textile mill. The wages of this skilled worker are only a bit higher than the unskilled workers but the profits earned by the owner of the textile mill increase many times over.

Thus, increase in inequality can go together with reduction in poverty. The zamindar can start using tractors and simultaneously provide a pair of dhoti, shoes and an umbrella to the labour. The use of tractors will increase his incomes while providing dhoti to the workers will alleviate their poverty.

We must see Prime Minister Modi’s efforts to alleviate poverty by providing free gas cylinders to the poor in this backdrop. The poor get free cylinders worth Rs 2,000 while big companies make profits of 200 thousand crores. The loan waiver for debt-ridden farmers and provision of subsidised food grains to BPL families are all designed with the same objective.

The underlying thinking is that poverty must be alleviated. That is correct but grossly inadequate. Inequality is emerging as the main problem now-a-days. Actually, the reduction of poverty enables the poor to become aware of and to rebel against inequality.

The hungry have no capacity to participate in a mass procession or hartal. They have to work and earn their daily bread because only then they can get a meal in the evening. But highly subsidised food grains and free gas cylinders make it possible for them to skip a day’s work and participate in a hartal. In areas like Bastar, the tribals were previously too poor to protest.

The area had widespread poverty but was yet peaceful. Now, fortified with cheap food grains provided to BPL families, they are joining the Naxalites in protesting against inequality. Yet another problem with the model of inequality with poverty alleviation is that it kills the incentive to work among the poor.

Easy availability of food, clothing and shelter removes the incentive to work for a better life among the poor. This problem is now clearly visible in countries like the United States and Germany. Poor people are content living with the unemployment compensation and social security benefits. They have stopped trying to find work.

For these reasons, I believe that the model of allowing inequality to increase along with free distribution of gas cylinders for poverty alleviation will not provide stability to the society. That said, inequality has a positive dimension as well. The rich save and invest in factories and create jobs for the poor – even if they pay less wages. Absence of inequality will lead to stagnation in the economy just as we can see in certain tribal societies.

This is what happened in China during the Cultural Revolution of the 1960s. The rich and the educated were sent to the villages to learn from the peasants. Equality was promoted. But this led to economic stagnation and to the collapse of economy. Ultimately, China had to adopt the capitalist model of development in the 1970s.

The economic growth of England in the 18th and the 19th centuries was built upon such inequality. The worker was deprived of even subsistence wages while the profits were used for investment. The industrialists became rich while the workers became poor and inequality increased. India and China are passing through such a phase presently. The rich are making huge money while the common man is getting impoverished or, at best, holding on to his low incomes.

We have a difficult choice to make. Inequality is likely to increase because it is inherent in the use of modern labour-saving technologies that are an integral part of the process of economic development. This inequality will create a social problem. At the same time, we need savings and investment that are promoted by inequality. We have to walk between these two opposite forces.

The solution, perhaps, lies in the rich adopting a lifestyle of simplicity and undertaking more private charity. Simple lifestyles by the rich will remove the irritation towards richness among the poor. The poor rickshaw puller is less likely to be agitated if the rich businessman sitting behind him is wearing simple clothes.

Simultaneously, distribution of wealth by the rich in building village roads, schools and hospitals and running old age homes will transfer incomes to the people and create demand in the market. Therefore, we must combine rising inequality with simplicity and charity. The present model of ever increasing inequality with poverty alleviation will not work.

Author was formerly Professor of Economics at IIM Bengaluru