Every economy does have a particular social and political environment that determines the existence and degree of various types of disparities which in turn influence the way to sustainable development. Social inequalities always impact negatively however certain economic inequities may or may not encourage economic development. Economists with divergent theoretical underpinnings agreed that income inequalities have negative economic consequences. The rich tend to spend a smaller fraction of their income than the poor which leads to lessening aggregate demand and slow economic growth, withal, the attempt of monetary authorities to offset these effects can contribute to credit bubbles, and economic instability (Doyle & Stiglitz, 2014). Increasing inequalities with a concentration of wealth in a few hands is more pernicious and creates an immense challenge to sustainable development. In the last two to three decades, income inequality between countries has lessened, implying that average earnings in developing countries have increased at a quicker rate. This can be attributed to the robust economic growth of China and other Asian rising economies. However, the gap within countries is still considerable as income inequality between countries has lessened, yet income inequality within countries has widened. Before 1980, income inequality in advanced economies was on a downward trend during the post-World War era. But since 1990, it has risen in the vast majority of advanced economies and is typically higher in developing and emerging economies than in advanced economies (Derviş & Qureshi, 2016). So, it can be inferred that the era of contemporary capitalism promotes an economic process where returns to capital are larger than the returns to labor, as a result, the rich are getting richer, and the poor getting poorer. The powerful elite controls the political power and manages to form public policies in their vested interests. The struggle to get the quality equation, better health services, and equal opportunities in highly unequal countries shows the vulnerability of people at the bottom. Alleviating inequality has become a necessity as it provides both social and economic advantages. It fosters people's beliefs of fairness in society, as well as social cohesiveness and mobility. However, the goal is not complete equality but to avoid exacerbating levels of income inequality.

 The excessive inequities, both within and between countries, remain detrimental to the well-being of a huge populace around the world. Unlike poverty, a trait that can be defined at the individual level is inequality. It is a relational concept that refers to discrepancies between individuals or groups across several social and economic dimensions. Income inequality has been growing speedily, and it has recently reached unprecedentedly higher levels. Prior evidence of the contamination caused to society by high levels of inequality, recent analysis, and widespread initiatives have seen a relatively rapid formation of a new consensus on the detrimental effects of prolonged, substantial income inequality for individuals and the social foundation more broadly, in 'rich' as well as 'poor' countries. Human development automatically leads to sustainability but equity, productivity, empowerment, cooperation, and security are the prerequisites. Individual well-being is necessary to accomplish long-term human growth. So, SDG10, with its explicit goal of "progressively achieving and maintaining income growth of the bottom 40 per cent of the population at a rate higher than the national average," embodies this widespread attention toward the significance of reducing inequality not just between countries, but also inside them.

One cannot accomplish sustainable development and make the world a better place if a certain section of people is excluded from the opportunity to live a better life. Even the pandemic has impacted highly vulnerable persons, specifically, those who are frequently subjected to greater prejudice. UNDP (2020) states that inequality threatens long-term social and economic development, harms poverty reduction and destroys people’s sense of fulfilment and self-worth which, in turn, can breed crime, disease and environmental degradation. So, while recognizing the constructive role of equality in sustainable development, the paper aims to discuss the theoretical debate on inequality and the reasons behind the emergence of equality. Further, the paper will cover the extent of income inequality in India using the World Inequality Database. It will also examine how the rising inequality is a barrier in the way of sustainable development, hence the need for inequality reduction.  

Theoretical Debate on Growth-Inequality Nexus

Development economics developed as a broad domain of economics with an emphasis on economic growth and inequality as a secondary issue. The unequal distribution of income and resources among the people has always remained a challenge across countries. In both industrialized and developing economies, the income disparity between affluent and poor is substantial and growing. When income inequality reaches extreme levels, it fosters social discontent and escalates the risk of social and political upheaval. (Mdingi & Ho, 2021). The theories based on the growth-inequality nexus demonstrate a positive, negative, and even inconclusive relationship between income inequality and economic growth. The classicals always focused on the higher concentration of income and wealth for the overall growth of the economy and neo-classicals also followed the same path. However, the Marxian theory postulated the concept of inequality in the form of the class system. Neo-liberal policies were adopted in the post-World War era to promote growth while ignoring the disparities that resulted from them (Fisher & Erikson, 2007). The pioneering research was conducted by Simon Kuznets on the relationship between income inequality and economic growth. According to Kuznets's (1955) seminal hypothesis, income inequality tends to decline when more and more workers get employed in highly profitable sectors at higher levels of growth which implies that inequality tends to decline with high rates of growth. Other economists after the mid-50s like Kaldor and Solow also stated that inequality would boost the growth process and eventually poor countries would converge towards the level of developed countries. Kaldor (1956) stated that the high level of inequality stimulates aggregate savings which would eventually lead to capital accumulation because the rich have a lesser tendency to consume and invest more. The convergence theories state that the high level of investment and economic growth will eventually lead to lower levels of inequality. Solow also asserted that Global inequality would decrease as a consequence of poor countries converging towards developed countries due to technical advancement and decreasing returns.  

The classical utilitarian formulation of social welfare is judged by the sum of utilities, assuming diminishing marginal utility of income pointed to social welfare losses from high inequality at a given mean but that did not persuade those who believed that there was a trade-off between equity and growth (Ravillion, 2014). Invoking John Rawls (1971) "Indifference principle," which holds that more inequality can be justified as long as it serves the most disadvantaged segment in society, might also be used to defend the idea that inequality is not a significant issue for a developing nation that is rising. As high inequality creates incentives to work more, invest more, and take risks in order to benefit from substantial returns, if highly educated people are significantly more productive, then large disparities in rates of return may encourage more people to pursue education (Mirrlees, 1971). However, empirics suggest that income inequality hinders growth (Perotti, 1993; Alesina & Rodrick, 1994; Barro, 2000). Evidently, the growth rates in the developing world have been noticeably higher since 2000. However, inequality also increased as a result of the dynamics leading to stronger economic growth in developing nations and the acceleration of growth seen since the turn of the century. It is not true that the growth boosts the incomes of the poor by roughly as much as it raises the incomes of everyone else. The income gain from aggregate growth for the richest decile in India will be about four times higher than the gain for the poorest quintile (Ravillion, 2014).

For decades, the argument over the influence of inequality on development as aforementioned has been the focus of a wide spectrum of study. The study of the consequences of inequality on development was primarily concentrated on economic growth, but now it is widely accepted that development is much more than economic growth. The relationship between inequality and other facets of sustainable development, such as social and environmental development, is relatively underexplored. Inequality not only causes economic underdevelopment; it also seems to cause human underdevelopment and there is strong evidence of a negative long-run effect of inequality on sustainable human development (Castells‐Quintana et. al. 2019). Environmental degradation seems to be another unintended consequence of economic disparity. Boyce et. al. (2007) has proposed that the unequal distribution of wealth and power within countries leads to greater environmental damage by undermining the collective action required for environmental protection and found that there is a negative correlation between income inequality and environmental sustainability. It revealed that the higher the income inequality, the worse would be the environmental indicators. So, the new development paradigm has shifted the emphasis from rising economic growth to sustainability, human development, and equality. The desirability behind achieving this became obvious when the term sustainable development got major recognition in 1972 and the idea of human development emerged with the development of HDI by Mahbub Ul Haq and poverty reduction & inequality by Amartya Sen in the 1990s. In the last few decades, the level of inequality has increased unprecedently creating new threats to sustainable development. It affects the social and economic performance of an economy by perpetuating poverty and creating disparities in the provision as well as outcomes of various developmental indicators. Furthermore, it creates inter-generational inequalities and has increased the poverty rate during the last two decades by distorting people’s equal access to various social and economic opportunities which act as a hindrance in the roadmap of sustainable development. With the failure of a steady state and trickle-down mechanism, the focus is gravitating towards equality and inclusive growth. As per World Bank (2020), more than 100 million people were pushed below the poverty line in 2020 and the increase in the rate of poverty has been seen for the first time in the last 20 years. The wealth is concentrated in the hands of the world’s billionaires whereas the bottom half of the population’s share in wealth has been declining. The top 10 per cent of the population have more than half of the income share. Albeit, the bottom 50 per cent have less than a 10 per cent share of the income. At the national and international levels, various efforts have been made for the reduction of the widening gap between rich and poor.  Even the United Nations designed a blueprint of 17 Sustainable Development Goals in 2015 to ensure that people become prosperous in an equitable manner by 2030. Amongst these goals, SDG10 intends to reduce inequality in terms of income and other indicators like assets, health and education. It ensures economic growth at full potential and in a sustainable manner. Hence, various conjectures have been made on the positive and negative ramifications of inequality. Whether the recent expansion had benefited only a few and resulted in growing inequities. Income inequality is a barrier in the way of sustainable development. In this light, the extent and effects of inequality have been explored in the next sections to revisit the ongoing discussions about equity.

Income Inequality

Income inequality is predominantly an economic subject that can engender pervasive economic outcomes and has been linked with reduced growth, investment and innovation (Polacko, 2017). In the early 1970s, the prevalence of substantial inequality within many developing countries, with chronic poverty, drew attention. Yet, the mainstream position in development economics persisted that high and/or rising inequality in poor nations was a far less critical worry than ensuring sufficient growth, which was the key to poverty reduction, throughout the 1980s and well into the 1990s (Ravallion, 2014). Now, more questions have been raised generally about the role that equity plays in achieving other important aspects, such as eradicating poverty and advancing human development. High inequality is more likely to be perceived as a danger to future progress and the long-held belief that there should be growth-equity trade-off is now significantly under doubt. For the last two or three decades, there has been a more intense and broad challenge to this long-held belief in pro-poor disparity. A further stage in the empirical research is to examine the growth effects of inequality across the income distribution. This conclusion is reached by using measures of top and bottom inequality. The ratio of mean disposable income in one top decile to average income in the country is used to calculate top income disparity, and vice versa for bottom income inequality. An attempt has been made to analyse how income inequality is accentuated in India and impacts sustainability.

Figure 1: Percentage share of different classes in the Income distribution

Source- Researcher’s calculation using WID (2022), https://wid.world/

The share of the top10 per cent, middle 40 per cent, and bottom 50 per cent in the national income distribution from 1980 to 2019 is depicted in the figure no.1. The chart clearly shows that the percentage is highly uneven, with the top 10 per cent holding a greater slice that has substantially expanded and the expectation that economic reforms implemented by the Indian government would result in a decrease in poverty and inequality has been derailed. The share of the top 10 per cent has increased from about 32 per cent in 1980 to 57 per cent in 2020 whereas the share of the bottom 50 per cent has dwindled from about 21 per cent to 13 per cent in the income. The majority of academics discovered that the top 10 per cent now control more than half of the income distribution as a result of the Indian economy's gradual destruction of its socialistic structure through tax rate reductions and privatisation (Chancel & Piketty, 2019; Sahasranaman, 2020). Appallingly, out of the three groups, the middle 40 per cent has suffered the most from the drop, going from 46.43 per cent in 1980 to 29.74 per cent in 2019.

Further, to measure the extent of inequality, the Gini coefficient of income distribution is used in figure no. 2 and the picture depicts that reveals that the Gini coefficient of income distribution has increased from 0.44 to 0.63. The era of the 80s had a low Gini coefficient i.e. around 0.4 showing moderate levels of inequality while it started rising with the evolution of the economic structure. In the early 90s, there was a slight drop but it never experienced a downturn after the mid-90s. The reasons for this rise in income inequality are often referred to as the expansion of informal jobs nowadays which are associated with low wages, unstable jobs, and jobs that are not at all supportive of the accumulation of human capital and growth of careers (Solanki, 2022). Further, the process of globalisation intensified the demand for skilled labour as a result of which the pay gap between skilled and unskilled labour was exacerbated. The IHDS (Indian Human Development Survey) Report of 2005 reveals the fact that income inequality in India is very high following the trend of many developing economies of the world with a Gini of 52(Nath, 2015). It was less than 5 till the early 90s remained 0.5 to 0.6 till 2010 and then increased to since 2012 it is 0.63. So, the higher the coefficient, the higher the inequality. The figure clearly depicts the position that inequality in income distribution has continuously increased in India and it has only recently stagnated during the last decade.

Figure no.2: Gini coefficient of income distribution in India during 1980-2020

Source-WID (2022), https://wid.world/

Inequality, poverty, growth and sustainable development

Hence, a substantial rise in inequality in the pre-reform period and opening up of the economy to global trade is likely to show a rise in these figures of inequality, i.e., raising inequality in the income of the group of the household’s way above the poverty rate indicating that the trickle-down effect of growth on the decline of poverty might have weakened considerably. Further, such a distorted pattern has impacted environmental issues also and has resulted in environmental degradation which in itself has implications for sustainable development. The concept of sustainable development and environmental degradation has grabbed the attention of the research field. The majority of the greenhouse effect is now known to be caused by carbon dioxide emissions, which were originally considered to be a benign by-product of combustion and Inequality may reduce the ability of society to achieve cooperative solutions to environmental problems (Ravallion et. al., 2000). Most of the studies found that the higher inequality reinforces the power of the rich to impose environmental costs on the poor (Boyce, 1994). Grunewald et. al. (2017) suggest that for low and middle-income economies, higher income inequality is associated with lower carbon emissions while in upper-middle-income and high-income economies, higher income inequality increases per capita emissions. Whereas some studies have found that higher levels of inequality are negatively related to carbon emissions or environmental degradation (Heerink et. al., 2000; Ravallion et. al., 2000). So, the new dynamics of inequality having debated relationship with carbon emissions has been further explored with the help of the data on average per capita carbon emissions by the top 10 per cent and bottom 50 per cent Add in the effect of High levels of inequality of opportunity discourage skills accumulation, choke economic and social mobility, and human development and, consequently, depress economic growth. It also entrenches uncertainty, vulnerability and insecurity, undermines trust in institutions and government, increases social discord and tensions and triggers violence and conflicts (UNDP,2020). The post-2015 development agenda urged the reduction of inequality. Add studies here then as far as India is concerned

Figure no. 3: Average per capita carbon emissions by top 10 per cent and bottom 50 per cent in India

Source- WID (2022), https://wid.world/

The connection between sustainable development and inequality has been analysed by using average per capita carbon emissions by the top 10 per cent and bottom 50 per cent in Figure no. 3. The lines in the figure unveil that the carbon emissions by the top 10 per cent have always been higher and increasing continuously. Currently, the gap is eight times higher than the bottom 50 per cent. It has increased from about 3 metric tons in 1990 to 9 metric tons in 2019. In contrast, the emissions are low and remained consistent at around 1 metric ton among the bottom 50 per cent. Hence, it is quite evident that the extreme level of inequality can affect the sustainability of development through environmental degradation.

Further, regression analysis has been used to analyse the relationship between income inequality, economic growth and sustainable development. Equation no.1 shows the regression equation used to show the effect of independent variables like poverty, economic growth and carbon emissions on income inequality.   

Gini =α1+β1NNI +β2PR+β3CEGR +µi+νt+εit                                                                (1)

 where Gini is used as a proxy variable for the measurement of income inequality, NNI is the net national income, PR is the percentage of people living below the poverty line and CEGR depicts the growth rate in carbon emissions and is used to analyse the relationship between income inequality and sustainable development. β1 estimates the change in income inequality with a given change in national income. The estimated β2 coefficient shows how much income inequality could be reduced in percentage points for a given change in the poverty rate. β3 estimates the effect of growth in carbon emissions on income inequality.

Gini = 0.4 + 0.78NNI + 0.2PR+ 0.31CEGR +µi+νt+εit                                                     (2)

Equation no. 2 shows the regression estimates for the determinants of income inequality to the impact of explanatory variables like national income, poverty rate and growth rate of carbon emissions. The main findings of the regressions analysis are as follows:

a). There is a positive and significant correlation between national income and income inequality. From the statistics, it is inferred that the level of income inequality has been rising with economic growth. The results in this paper don’t confirm the validity of the Kuznets curve, according to which income inequality first increases and later decreases during the process of economic growth.

b). There is no significant relationship between the level of income inequality and the poverty rate. The coefficient for the change in the poverty rate(β2) is positive as expected but is insignificant.

c). Further, the analysis found a statistically insignificant relationship between income inequality and the growth rate in carbon emissions.

Hence, it is another evidence of the positive link between inequality and economic growth because those born at the bottom of the economic pyramid are likely to never realise their potential due to inequality in opportunities.

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