Economists very often talk about the trade-off between equity and economic growth. The argument is as following:
“If there is inequality in the society, people have incentive to move up the ladder through aspirations of being at higher position. Hence, they work harder resulting into economic growth. Rich have higher propensity to save which feeds into higher investment leading to higher economic growth”
India can probably stand out as a good example of this probable economic phenomenon, albeit through a different economic logic.
According to one of the most cited reports of the Government of India, 83.6 crore Indians earn less than Rs.20 a day. Around 86% of our population is employed in unorganized sector which due to its nature often does not come under the ambit of various government policies. Most of these individuals having meagre earning work in making Biddi, Embroidery, cutting the extras in rubber equipments, working with screws etc. These industries are an ideal example of perfect competition. Due to poor conditions of millions of Indian households, a large population is willing to work at extremely low prices (Rs.5 for 2-3 hours, indicative). Moreover, this willingness is ‘exploited’ by the institutional setup of near perfect competition. Minimum wage laws become extraneous due to the informal nature of these sectors. The sectors linked to it are firms that provide them with the raw materials and they sell these products in the market, earning good (if not huge) profits.
So how does the trade-off work in India? Being a highly unequal nation, we have large population surviving in abject poverty. Since they lack skills and opportunities to earn a decent living, they work in an extremely competitive market resulting into low cost for the firms they are linked to. This further implies that the firms have a good stick to capture higher surplus and hence earn good profits. There comes the Economic growth we all are proud of! High inequality in India may thus tend to result into further increasing inequality combined with economic growth (atleast in short run. Like the recent literature points out, inequality can potentially hamper economic growth in long term). Certainly, the two combined do not point out to any ‘Development’ (Ignoring the debate on ‘trickle down effect’).
P.S: This article is not at all an exhaustive one. Just a reflection on the institutional setup in India.