Income inequality is one of the most deep-rooted syndromes of the country. The numbers from Oxfam prove that the inequality in the present is beyond measures.
India’s top 10% of the population owns 77% of the total national wealth. And interestingly, the data from 2017 shows that 73% of the total wealth generated belonged to the richest 1%. On the contrary, the poorest half of the population, which accounts for nearly 67 million people, witnessed only a 1% rise in their wealth. There were 119 billionaires in India and the number has drastically increased from 9 in 2000 to 191 in 2017. Moreover, it is estimated that the country will produce 70 new millionaires every day between 2018 and 2022. The Fortune of these billionaires increased by almost 10 times over a decade. Another shocking fact about these billionaires is that their total wealth was more than the entire Union budget of India for the fiscal year 2018–19.
According to the World Wealth Report: 2020 by Capgemini, in 2018, there were 2.56 lakh millionaires in India, and growth of only 3 percent was recorded in 2019 with 7,000 new millionaires taking the total to 2.63 lakh. If we talk on global terms, the list in a number of millionaires in 25 surveyed countries, was topped by the United States with an 11 percent jump in its millionaires from 53.22 lakh to 59.09 lakh. In the list showing the number of High Net Worth Individuals, India was placed at 12th highest position among the other 25 countries.
Almost two people every second are pushed into poverty because of the heavy healthcare costs. This means as much as 63 million people every year become poor, this is almost equal to the entire population of France. A minimum-wage worker in the country would have to work for 941 years straight to earn the yearly income of a top paid executive at a leading Indian garment company.
The disparity is quite vast and shows no signs of reducing. In fact, experts suggest that the divide may grow further in the coming years. So, the point is that even if we are seeing development in the economic terms in the country as a whole, the income divide withers away the effect of this positive development.
But why does this happen? Is there any well-defined reason which drives this income gap?
A lot of factors determine the quantum of wealth held by a country as well as by an individual. One of the most comprehensive analysis is given by a French Economist, Thomas Piketty, in his best-selling book- “Capital in the Twenty-First Century”.
He has explained this phenomenon by using a simple prognosis.
The growth in wages is dependant upon the growth of Gross Domestic Product or GDP. But sometimes, the growth in the capital is greater than the growth of the economy. And when this happens, a disastrous situation takes place for the working class. When we talk about growth in capital, we refer to a rise in accumulated wealth, that is, real estate, bank deposits, investments, or land. So basically, when the Return on Capital is more than growth in the economy the wealth of the rich strata would zoom up without having any effect on the income of the working class. And this “endless inegalitarian spiral” only increases with an increase in the divide.
For example, the COVID-19 pandemic has led to an increase in this difference between the return on capital and economic growth. The Indian (or global as well) economy saw negative growth due to the lockdown and measures implemented to contain it but the return on capital did not fall as much. This automatically brought in a rise in inequality by concentrating more money in the hands of a small group of rich people. Needless to say, the Indian business tycoons such as Mukesh Ambani have seen an enormous increase in their wealth during this time. On the other hand, the income from labor which is shared by a mass has seen a severe plunge.
But how did we get here?
The income of capital grows by several economic factors such as low tax rates, fewer regulations, and low inflation.
One way to put this is by taking the example of bank deposits. If one has a bank deposit that is easily accessible, is not taxed at high rates, and is also adjusted to inflation, he would obviously prefer to store his wealth in the form of fixed deposits.
Corruption and money laundering are also major determinants of wealth holding. Experts say that when a country has a higher number of corrupt and dishonest politicians, officials, or businessmen in comparison to their honest counterparts the corruption fuelled inequality will go on flourishing. And maybe, this explains why the rich in India keeps getting richer.
Where is all the wealth stored?
The richest 1% of the population invests nearly three-quarters of their savings as against the middle class, which has as much as 63 percent of their assets tied up in their homes.
The difference in the income earned by the rich and the poor is striking. In the time span between 2010 and 2013, the top 1% earned an average annual return of 5.91 percent as against the 3.27 percent earned by the middle three quartiles. The reason for this was nothing but more exposure to financial literacy and stock markets. During the same time, when the poor and middle class were selling away their holdings in private businesses and commercial assets, the rich were on an investing spree, which boosted their returns by manifold.
The portfolio of the rich has a greater investment share in high yielding stocks or assets while the poor have a greater share of money invested in housing which yields no returns.
Investment in stocks is no doubt, a crucial deciding factor but it is not everything. The stocks are not the only item fuelling the magnum returns of the rich. On simple and careful analysis it can be noticed that “bonds” could be the real deciding factor. According to a research paper by Economists Emmanuel Saez and Gabriel Zucman “Wealthy families might be able to earn 6 percent on their bond portfolio (by investing in foreign markets or in high-return convertible bonds) while the rest of the population might earn only 3 percent. In 2012, 5.4% of the total bonds owned by the U.S. households were owned by the top 0.01% population as against 1% bonds owned by the same percentage of people in the mid-1980s.
Another uncommon reason for this divide is the better returns of the rich from private equity and hedge funds. These investment options are not as accessible to the everyday investor as the big players. In several scenarios, many private equity funds and hedge funds have outperformed the stock market ultimately benefitting the rich.
A spectrum group survey shows that 50% of the surveyed investors (with more than $25 million invested in assets) are hoping for returns amounting to more than 9% this year while a quarter of them are expecting at least 11% returns.
The rich, obviously, have more opportunities and resources to take up risks and invest more and more. So, the conclusion we can draw here is that the wealth disparity is caused by the investment gap as much as it is caused by any other economic factor.