Ahead of the final leg of the 2024 Lok Sabha elections, Prime Minister Narendra Modi in an interview was asked about India’s growing inequality. The Prime Minister shot back: ‘Do you want everybody to be poor? If everyone is poor, then there will be no difference.’ He proceeded to explain his theory of economic growth: first a few will become rich, then their prosperity will reach the next layer, and so on until everyone reaps the benefits. The economic tide will shift gradually, not overnight, he said.
This isn’t a novel proposition: the ‘rising tide lifts all boats’ idea has been around for at least half a century, and is what the economists call ‘trickle-down economics’. It is a tempting theory except for a small problem revealed by studies around the world—it doesn’t work.
India too has held a long fascination with this failed economic theory. Ever since economic liberalisation in the 1990s, both Congress and BJP-led governments at the Centre have skimped on social sector spending and instead gave massive tax breaks, subsidies and interest-free loans to big corporate groups and foreign investors, in the hope their investments will raise overall economic growth. The Congress-led UPA regime arguably did invest into social sector schemes such as the Mahatma Gandhi National Rural Employment Guarantee Act, 2005, and the Food Security Act, 2013, but its economic policies bore a distinct imprint of the trickle-down approach.
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Post 2014, the BJP-ruled Centre under Mr Modi has gone further than any other government in independent India to staunchly promote trickle-down policies. In 2019, the Centre unprecedently reduced the corporate tax rate from 30 per cent to 22 per cent for existing domestic companies, and to 15 per cent for new manufacturing companies. The decision wiped off ₹1 lakh crore from the Centre’s annual revenues, shrinking the allocation to two dozen social sector schemes. India is also far from tiding over the bad loan crisis. Over the last decade, banks have written off nearly ₹15 lakh crore of bad loans of rich corporates from their books, with seemingly little consequences for over 12,000 wilful defaulters responsible for it. Over two-thirds of these write-offs were done by public sector banks, which operate under the government’s close supervision. As the large corporate sector basked in this generous debt relief, India’s public debt exploded from ₹53 lakh crore in 2014 to ₹169 lakh crore in 2023—an increase by 300%.
Did India’s idealised experiment with trickle-down on boosters yield results? The largest study on India’s income inequality was conducted by the World Inequality Lab and led by famed economist Thomas Piketty. The analysis reviewed trends over the past 100 years (1922-2023) to find that for the first time since independence, India is more unequal than it was under British rule. That’s not all, the share of India’s richest 1 per cent in its national income in 2022 exceeded all the G20 nations, surpassing even the US for the first time. Between 2002 and 2022, this group’s share in the national income rose from 15 per cent to 23 per cent. In contrast, the share of the bottom 50 per cent population in the national income declined from 20 per cent to 15 per cent during this period.
To make things worse, the Indian economy has over the last decade failed to create enough jobs, registering the highest unemployment rate of 6.1 per cent in 45 years in 2017-18. The India Employment Report 2024 further reveals that over the decade 2012-22, the real wages (inflation adjusted) of regular salaried workers declined by 1 per cent each year, with the wages in urban areas dwindling at a faster pace than in rural areas.
Jasmine Shah’s The Delhi Model talks about how Delhi’s experiment with trickle-up economics proves that it works—for the economy and the people.
Yet, the BJP-ruled Centre has sung hollow praises of the Indian economy, now the fifth largest in the world, and its 6 per cent aggregate GDP growth rate. It made little difference to them that as the prosperity of the masses is concerned, the growth in per capita income carries more weight than the overall GDP growth (driven by the top 1 per cent). Between 1991 and 2021, India’s GDP rank ascended from 17 to 5. However, on the metric of average per capita income, India registered a minimal improvement from rank 161 in the 1990s to 159 in 2021—reflecting that it is only the affluent who have prospered in India.
Is there a way to remedy the present crisis? Many economists, including Nobel laureate Joseph Stiglitz, advocate for replacing trickle-down economics and its embedded fetish for aggregate GDP growth with ‘trickle-up economics’. Give more money to those at the bottom and the middle, and everyone will benefit. The model is straightforward: economic and social policies need to be directly aimed at those in the middle and bottom-classes to increase their wages and earning capacity. For it is the demand for goods that powers the economy, and when there is demand for goods, the rich will automatically have an incentive to satisfy the demand without waiting for government dole outs. If there is no demand for goods, even the best of entrepreneurs will not make investments.
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Delhi’s experiment with trickle-up economics offers evidence of the theory championed by global economists. Between 2014-15 to 2022-23, Delhi’s economy (inflation adjusted GSDP) grew from ₹4.28 lakh crore to ₹6.26 lakh crore at an average growth rate of 4.9 per cent. In the same period, the Indian economy grew at 5.4 per cent. Delhi has also managed to almost halve its public debt to GSDP ratio, from 6.6 per cent to 3.9 per cent—the lowest in Delhi’s history—whereas India’s public debt as a share of its GDP sky rocketed to the highest it has ever been, at 82 per cent. The 2022-2023 data from the Centre’s Periodic Labour Force Survey (PLFS) shows that Delhi reported an unemployment rate of 1.9 per cent against the national average of 3.2 per cent. As of April 2024, Delhi registered the lowest year-on-year inflation across India. In summary, AAP’s approach has managed to grow Delhi’s economy almost at par with the rest of India while reducing its debt burden, and trumping most states and the all-India average in inflation and unemployment rates. The Delhi Model’s success offers the surest proof that trickle-up economics works—for the economy and for the people.
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It’s becoming clear that the crisis of the Indian economy is due to a flawed economic model adopted more than a quarter of a century ago. India cannot muddle along this path any longer, ignoring the most fundamental issues of human development, while still hoping to become a modern, developed nation by 2047 or even 2147. The Delhi Model is a template of possibility and promise for all Indian states and the nation as a whole that an alternate approach exists and that it works.
Jasmine Shah served as the Vice Chairperson of the Dialogue and Development Commission, Delhi government. Excerpted with permission from Penguin Random House India from The Delhi Model: A Bold New Road Map to Building a Developed India by Jasmine Shah.