In the contemporary world, inequality in India has reached its highest peak since humans started collecting data, surpassing that of counterpart countries like the USA, the UK, and China [1]. People say India’s growing GDP has played a role in this. In fact, inequality was argued to be necessary for growth. How true is it? The pro-equality argument says reduce inequality to sustain growth, hence advocating policies that uplift the middle class and poor, whereas the pro-growth argument is that cutting taxes may boost growth as investors and businesses can save some money in their pockets, which is a pro-growth argument.
World inequality data reveals that between the 1930s and 1970s, the share of income held by the top 10% in the United States declined from about 45% to 35%. During the same period, the bottom 50% saw their income share increase from approximately 14% to 20%. One major factor behind this reduction in inequality was the high top income tax rates, which ranged from 63% to 94% [2]. The progressive tax policies played a significant role in narrowing the income gap during these decades. Inequality affects macroeconomic stability by reducing monetary policy effectiveness by distorting consumption and investment. For example high inequality reduces spending power among poor people, as people tend to start spending less, which leads to fewer sources to collect revenue from for the government, which may lead to a decline in investment in human capital investment such as education, health etc., and reduces monetary policy effectiveness by distorting consumption and investment, stifling long-term growth.
For example, successful models in Nordic countries show that achieving growth along with equality is possible. Similar to the US, they too implemented progressive taxation and social welfare systems. This balance safeguards equitable wealth distribution.
There may not be a structural way for a radical change in inequality, as developed nations and developing nations are very different. Taking the same model as developed nations could lead to various unintended consequences for developing nations. A country like India should be focusing on building wealth as much as possible for at least the next 15-20 years, taking advantage of globalisation, and then should think about addressing inequality, as India needs to think about expanding the pie in a meaningful way, which is creating jobs. It is also important to note that equality in the distribution of income and wealth would be unsuitable, as well as impossible to achieve.
Ajay Shah and Nitin Pai have mentioned that a 1% GDP rise in India lifts 2-3 million from poverty, as growth-driven job creation always outpaces the redistribution’s reach. As Lee Kuan Yew argued, “First make the economy strong, then share the fruits.”