What Latest Data Tells Us About Rising Inequality in China and India

These differences in magnitude of inequality among countries are mainly due to dissimilarities in external and internal policies.

The fast growing Indian economy can only ensure the growth process to be equitable and sustainable if different sections of the society, especially the vulnerable and poor, are included in the growth process. Representative image. Credit: PTI

The fast growing Indian economy can only ensure the growth process to be equitable and sustainable if different sections of the society, especially the vulnerable and poor, are included in the growth process. Representative image. Credit: PTI

Inequality is not a recent phenomena. However, a discernible escalation indicates the exclusion of marginalised and socially backward groups in political, economic and social activities. Globalisation has put forth additional challenges for the development discourse, as world in the post 1980 era has experienced an increase in income inequality (especially in developed countries).

Early estimates for developing countries were largely inadequate or incomplete due to lack of comprehensive data. The World Inequality Report 2018, however, allows access to inequality data for developed and developing countries like China, India, Brazil, South Africa, Russia and the Middle East. The report observed rising inequality across countries with varying magnitudes.

It estimates inequality, comparing the average adult earning between different groups; share of national income (NY) captured by each group.

Global income growth scenario

Post-globalisation (since 1980) the top 10% population has experienced an exponential growth in national income. Comparing five regions – namely US-Canada, Europe, India, China and Russia – India witnessed the highest growth in share of the aforementioned population in national income accounting for 55% (compared to 32% in 1980), followed by US-Canada, Russia, China and Europe. These trends are in contrast to the period between WW2 and the pre-globalisation period. This period (i.e. between 1950 to 1980) was relatively egalitarian. Looking at the global trend for top 10% share in national income, the middle east region (accounting 61% in 2016) tops the list followed by India and Brazil (55%), Sub-Saharan Africa (54%), US-Canada (47%), China (41 %), Russia (46%) and 37% for Europe (being the lowest in the group). The trend for the top 1% population share in national income has been similar where Brazil accounts for 27% and the Middle East (25%). India’s top one percent accounts for 24%, while Russia, US-Canada and Sub-Saharan Africa’s share accounts for 20%, China’s top 1% population accounts for 14% and Europe being the lowest in the group (13%).

These differences in magnitude of inequality among countries are mainly due to dissimilarities in external and internal policies.

It can be argued that the pre-globalisation period was egalitarian because of the state’s centralised control over economic activities, whereas post 1980s neoliberal deflationary economic policies curbed the state’s development activities (reducing government expenditure primarily in development and social services sector). Consequently, the economy was left in the hand of -private- markets.

However, rising inequalities differ in magnitude mainly due to the region specific policies.

                                                                                                         Source: World Inequality Report, 2018

Inequality in India and China

The table above represents the cumulative income growth rate for different groups between 1980 to 2016 in India and China. The table indicates that the overall population income in China grew 3.7 times more than India, whereas the income of bottom 50% grew close to 4 times more in China when compared to India. Interestingly, the income of middle 40% (representing middle class) grew 7 times more in China than in India. The table further indicates that income growth of the bottom 90% population in India was much lower than that of China. This explains the difference in magnitude of inequality between China and India. A clear difference between the two country emerges while looking at the difference between top 10% and middle 40% of population. In India the top 10% of population grew 4.18 times more than middle 40 %, whereas in China the top 10% grew 1.67 times more than middle 40%. A similar trend is observed while comparing the top 10% and the bottom 50%.  The difference in India is of 4.38 times whereas for China it is of 3.15 times. This picture becomes harsh if one compares the bottom 50% population with top 1 % in India and in relation to China.

The table below indicates the share of national income growth captured by respective income groups between 1980-2016 in India and China. The share of income growth captured by top 10 % population in India is 6 times more than the bottom 50%, where for the middle 40% it is 2.9 times higher. Therefore, the increasing share of income growth in top the 10 % population in India is at the cost of bottom 50% and middle 40%, resulting in high-income inequality. The inequality in China is mainly at the cost of bottom 50% of population.

                                                                           Source: World Inequality Report, 2018

Political and economic consciousness

From the point of view of political economy, the trend of reforms across countries has significant divergence in their approach, which is based on their political ideology. The case of India and China will be a good examples to explain. China’s economic system has always been a planned and controlled one, which is a legacy of it’s communist past. In India’s case the economic system has changed from a planned or mixed economy to accepting Big Bang reforms without any check and balance. In contrast, China (influenced by its political ideology) has taken a gradual approach to reforms while at the same time creating space for its political ideology to survive.

Comparing China and India in 1949 one finds the former lags far behind the latter in industry, infrastructure (railway) and agriculture production. However, later on, the Chinese out-performed India in a number of indicators, such as Human Development Index (HDI). The Gender Inequality Index ranks China (90) much ahead of India (131) in 2016. In the multidimensional poverty index, China (0.03) also does far better than India (0.28). Although both the countries have high degree of inequality, China fares better than India in terms of life expectancy, general education and comprehensive healthcare for all.

Major distinctions between the two countries can be seen looking at their political will and commitment for land reforms. While the landowning class lost their economic and social position during socialist revolution in China, landowners in India were able to retain their power in the post independence period. The political establishment failed to redistribute land or have collective agrarian reforms in India. Instead it had a ceiling on land holding – although two states, Kerala (in 1969) and West Bengal (extensively from 1977), undertook land redistributive reforms. However, what India had was “community development projects (financed by Ford Foundation and Point Four US aid project) to build model villages. Thus, India failed to produce a new social order and landless labourers were confined to the paradox of class and caste positions, having little to raise their bargaining power. By 1952, about 35% of national gross investment in China was financed by agriculture sector. Agrarian reforms further resulted in equalisation of rural incomes. Land reforms and collective farming in China had an indisputable socio-political impact on peoples’ lives  by creating a new social order in agrarian society.  While the green revolution (GR) in 1960 did have successful story in India – after prolonged stagnation in agrarian economy – for increasing the production of wheat and rice, its principal beneficiaries were rich farmers. Commercialisation of seeds left the petty farmers marginalised.

China’s economic reforms, which started in 1978, are very different from other countries such as India, CEE (Central and East Europe) and CIS (Commonwealth of Independent States) countries. A CIS country such as Russia, which was socialist in terms of its economic functioning, opted for big bang reforms without any measures. China was the only country, which did not jump to Big Bang reforms for openness. Rather it took a gradual approach for market economy to function on its own – albeit with authoritarian control over it –  especially with dual track policy and distributive measures. In the post reform period (since 1978) China achieved the unprecedented pro-longed economic growth with the working dynamics of “third wave of Fordist growth model” and “relative economic backwardness”.

Both the countries, China since 1978 and India since 1992 (although India started promoting private players since 1980) went through several structural changes. However, the former was able to distribute the fruits of growth relatively better than the latter. The major focus of first phase reforms in China was agriculture with de-collectivisation, incentivising production with household responsibility system, increasing agriculture procurement prices. Further structural reforms helped Chinese to shift 40% (approx) of agriculture labour force to secondary and tertiary sector since 1978 (National Bureau of Statistics of China). Whereas, reforms in India helped service sector to be an engine of growth, contributing 66.1% of growth in GVA, however accounting only 30% of the employment share (Economic Survey, 2016-17). Most importantly, controlled reforms in China helped them to have standard structural changes from agriculture to manufacturing and then to services, whereas structural changes in India skipped the standard trajectory jumping to services leaving agriculture at distress state.

A crucial distinction can be seen in financial sector. Where China has controlled financial sector even after liberalisation, it has four major public sector banks handling the bulk of transaction, which helps direct credit lending towards the priority sector whereas in India the financial sector is without comprehensive government control. Since liberalisation it has further lost control over financial allocation. For instance Priority Sector Lending (PSL) target of 40% of banks lending – for agriculture (18%), micro & small enterprises and weaker section (10%) – in India remains much below the mark level for agriculture and weaker section. Even the dissemination of PSL is mostly done in year closing i.e. March to meet the targets, whereas the demand for credit in agriculture is mainly in Kharif (July to October) and Rabi (October to March) season.

The provision of public services such as education and health in China is remarkably better then India. For instance the Chinese share of public education expenditure of GDP is more than 5 % (in nominal terms) whereas in India it is close to 3.5%. Similarly, the Chinese share of public health expenditure in GDP is close to 5.5% (in nominal terms) while in India it has been gnawing around 1% for decades. Increasing privatisation in these sector and negligent contribution from the government will have manifold affect on economy and human capital. Looking at the share of development and social services expenditure in India GDP, the picture becomes acute. The share of development expenditure in GDP has experienced a decline from 13.9% in 1990 to 12.8% in 2014 (11.8% in 2000) and the share of social service has increased marginally from 5.82% in 1990 to 6.2% in 2014 (5.69 % in 2000). This indicates the political will of the state for the provision of key public welfare services.

Although, both China and India in post 1980s has experienced a rise in income inequality, however, the situation is far more acute in latter than former. This can mainly be attributed the way both the countries has addressed the agriculture and land issues in early phase of planning.

The structural changes were successful in China relative to India as the former resolved the issue of primary sector, whereas in India the agrarian crisis is still puzzling and unresolved. In similar lines, with persistent neglect of public education (especially higher education) and health, along with increasing privatization, the trend for future income inequality seems bleaker.  The government has so far been reluctant to release more fiscal data. The picture of inequality will become clearer if the revenue department releases continuous data for comprehensive and regional analysis.

Abu Afzal Tauheed  is currently pursuing PhD in Economics from Center for the Study of Regional Development (CSRD), Jawaharlal Nehru University (JNU).  Anshita Sharma is PhD scholar of Population Studies at Center For the Study of Regional Development CSRD, JNU.