income inequality in india: a critical realist approach

Alexander Chen

Kirstine Møller Jensen

Karl-Henrik Smith

Copenhagen Business School 2015

International Business & Politics

Philosophy of Social Science and Applied Qualitative Methods

Income Inequality in India A Critical Realist Approach

Alexander Chen, Karl-Henrik Smith and Kirstine Møller Jensen Income Inequality in India

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Table of Contents 1. Introduction ......................................................................................................................................................... 3 2. Methodology ....................................................................................................................................................... 5

2.1. Philosophy of Social Science ........................................................................................................................ 5 2.2. Naturalism .................................................................................................................................................... 5 2.3. Constructivism ............................................................................................................................................ 6 2.4. Critical Realism ........................................................................................................................................... 7

2.4.1. Ontology ................................................................................................................................................ 7 2.4.2. Epistemology ........................................................................................................................................ 9 2.4.3. Methods and empirical material .......................................................................................................... 11

2.5. Delimitations .............................................................................................................................................. 12 2.5.1. Income inequality and institutions ...................................................................................................... 12 2.5.2. Analytical focus: Rural communities and the federal government .................................................... 12 2.5.3. Kohli’s framework of Just Growth ...................................................................................................... 13

3. Theory ................................................................................................................................................................ 14 3.1. Choice of theory .......................................................................................................................................... 14 3.2. Growth and democracy: Kuznets’ hypothesis of income inequality ........................................................ 14 3.3. Equity: The Soft State ................................................................................................................................ 15 3.4. Historical Institutionalism ........................................................................................................................ 16 3.5. SWOT analysis ........................................................................................................................................... 17

4. Case: Income Inequality in India ..................................................................................................................... 18 4.1. Empirical data and case setting ................................................................................................................. 18

4.1.1. Economic growth ................................................................................................................................ 19 4.1.2. The caste system ................................................................................................................................. 20 4.1.3. Democracy ........................................................................................................................................... 22 4.1.4. Land distribution ................................................................................................................................ 22 4.1.5. Five Year Plans .................................................................................................................................... 23 4.1.6. Inclusive Growth ................................................................................................................................ 24

4.2. Analysis of interaction between mechanisms producing income inequality .......................................... 24 4.2.1. Economic growth and the caste system ............................................................................................. 25 4.2.2. Democracy and patron-client relationships ...................................................................................... 26 4.2.3. Equity and the soft state ...................................................................................................................... 28

4.2.3.1. Land reforms ............................................................................................................................ 28


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4.2.3.2. Rural development programs ................................................................................................. 29 4.2.4. Sub-conclusion: what mechanisms are at play in India and how do they interact? ......................... 31

5. How is Inclusive Growth an attempt to change institutional mechanisms? .................................................. 33 5.1 Agency's role in changing the mechanisms and structures via critical junctures ...................................... 33 5.2 Assessing the Inclusive Growth strategy .................................................................................................... 35

5.2.1 The Indian federal government and SWOT ....................................................................................... 35 5.2.2 Counteracting the weakness of the soft state in the Inclusive Growth strategy ................................ 36 5.2.3 Leveraging the opportunity of growth in the Inclusive Growth strategy .......................................... 38 5.2.4 Counteracting the threat of the patron-client relationship in Inclusive Growth .............................. 39

5.3 Sub-conclusion ............................................................................................................................................ 40

5.3.1. Suggestions for action .......................................................................................................................... 41

6. Conclusion ........................................................................................................................................................ 42 7. List of references ................................................................................................................................................ 45


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1. Introduction The manifestation of income inequality is a widespread concern that has intensified in many

countries over the last few decades. Many scholars have analysed this phenomenon. According to Müller (1988), the danger of high income inequality levels is that it potentially threatens democratic

stability (Müller, 1988; 50). Myrdal (1972), on the other hand, argues that it obstructs sustainable

economic development as it underutilizes labour capital (Myrdal, 1972: 201). Despite rapid economic growth since independence in 1947, India has struggled with accelerating levels of

national income inequality. This growth, in tandem with rising levels of income inequality, suggests

that increased affluence has been unevenly distributed in favour of certain segments of society. In particular, a growing wage differential between rural communities and urban centres reveals two

diametrical sides of India: a burgeoning ‘tiger’ economy in the urban centres and marginalised rural

communities afflicted by sluggish growth (Dholakia, Pandya & Pateriya, 2014: 16). A sizeable aspect of national income inequality follows from this differential gap, for which reasons the

government has introduced Five Year Plans directed towards raising the livelihood of the rural

communities. The puzzle is how the federal government has consistently promoted redistributive

and pro-poor policies within the Five Year Plans, but has failed to bring about any substantial change in income inequality. In 2007, the federal government adopted the Inclusive Growth

strategy, a renewed effort to combat this pressing problem. This raises the question of whether this

new strategy is an effective solution or merely a reproduction of past mistakes. We aim to answer the following research question:

What are the main institutional mechanisms that perpetuate income inequality in India, and to what extent does India’s pursuit of Inclusive Growth engage with these institutional mechanisms?

The purpose of this paper is to identify and examine institutional mechanisms, defined as mechanisms within both formal and informal institutions that perpetuate income inequality in India

from a critical realist approach. The institutional mechanisms investigated in this report are the

caste system, patron-client relationship and the soft state. The findings in this report are aimed towards the federal government as it has attempted to combat income inequality since its

independence, but, so far, with diminutive success. The findings in this report will thus lead to

suggestions for further actions the federal government should pursue. Critical realists hold that


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social reality is open and differentiated, meaning that income inequality is contingent upon the

coexistence and reciprocal relationship between many complex objects (Danermark et al., 2002: 67).

This encourages us to move beyond studying income inequality as a dyadic relationship between two variables, but to offer a more encompassing understanding of the interdependent relationship

thereof. We do this by introducing mechanisms of growth, democracy and equity, which should,

according to theory, mitigate income inequality. However, in this paper we will discover that these mechanisms have been counteracted by institutional mechanisms. This will allow us to assess if the

recent Inclusive Growth strategy is a breach from previous actions and if it can be viewed as an

attempt to engage with the identified institutional mechanisms.

The primary focus of this paper is national income inequality and its relation to institutions. By

income inequality, we perceive it as an indicator of how and to what extent income is distributed across society (OECD, 2011: 66). Institutions, on the other hand, are broadly understood as policy

regimes, rules and standard operating procedures that influence and affect income inequality in

various ways (Ashbee, 2014: 21). These include both formal institutions, e.g. policies, and informal institutions, e.g. culture and clientelistic norms (Helmke & Levitsky, 2003: 4). Following this definition, income and the distribution thereof are governed by institutions: they are natural

necessities for both income and its distribution, as the rules and norms that underpin institutions

dictate the significance we attach to income and the principles with which we distribute it (Chong & Gradstein, 2007: 463). This is why the relation between income inequality and institutions is

important to analyse.

This paper will analyse income inequality in India in four steps. First, we clarify the philosophical

assumptions of critical realism that underpin our research of income inequality while also explaining

the delimitations for this report. Second, we introduce the Kuznets hypothesis, Myrdal’s soft state, historical institutionalism (HI), and the SWOT framework within the economic, political and

managerial pillars respectively. Third, we make a heuristic case study on income inequality by

introducing empirical material from a historical, political and economic perspective from which we tease out institutional mechanisms that perpetuate income inequality by counteracting the

mechanisms within growth, democracy and equity. Lastly, we analyse the most recent policy

initiative in India, Inclusive Growth, to assess how it engages with the institutional mechanisms


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that have been found to perpetuate income inequality. On this basis, suggestions for further action

are made for the federal government, in the pursuit of eradicating income inequality.

2. Methodology

2.1 . Philosophy of Social Science Philosophy of social science refers to the body of metatheories that engages directly with the

foundational assumptions and preconditions of social science, building upon different ontological

and epistemological assumptions (Danermark et al., 2002: 118). By ontology and epistemology, we are referring to, respectively, the philosophical study on a) the nature of reality, and b) the nature

and scope of knowledge (Moses & Knutsen, 2012: 4) The social sciences revolve predominantly

around three philosophical positions: naturalism, constructivism and critical realism. Each position subscribes to a different conception of reality, characterised by a variety of epistemological and

ontological commitments. For scientists and scholars, these assumptions will serve as the

foundation upon which they do their research, that is, their methodology (Moses & Knutsen, 2012: 2; Buch-Hansen & Nielsen, 2014: 11).

The various philosophical positions in philosophy of social science will yield different conceptions of

income inequality and institutions in relation to our research question. Elucidating the implications of studying income inequality from a critical realist approach allows us to clarify the assumptions

that underpin our research. This section will proceed in the following way. Firstly, we account for

the epistemological and ontological assumptions that are held by proponents of naturalism and constructivism. Secondly, we raise objections against constructivism and naturalism, followed by an

account of critical realism. Lastly, we assess how a heuristic case study of India is in line with, and

complementary to, critical realism.

2.2. Naturalism Ontologically, naturalists are realists in the sense that the world exists independently of our

knowledge thereof. Epistemologically, naturalism adheres to foundationalism, claiming that it is possible to obtain true knowledge about the world by conducting observations and experiments.

The modes of inference, that is, the ways in which we obtain knowledge about the world, have been


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subject to significant refinements by different naturalists throughout time. Prior to naturalism,

knowledge was produced through deduction by producing knowledge about particular events from

general statements through logical inference. Early naturalists contended that knowledge should mainly be acquired through induction, that is, observing the particular and then build general

claims about reality, conferring deduction a secondary role (Moses & Knutsen, 2012: 23). Today, a

common understanding among naturalists is that knowledge can be obtained through the inductive-deductive model. This model has been advanced by Lakatos and represents a balance

between the inductive and the deductive approach to knowledge (Lakatos, 1999: 115). Based on this

model, people study observations in order to engender established claims about an object. These claims are then subject to further testing, which can lead to a revision of the original claim (Moses &

Knutsen, 2012: 46-47). The way in which naturalism approaches the social world, and how it

acquires knowledge about it, is thus similar to how they would approach the natural world, resulting in a methodological holism (ibid.: 164).

2.3. Constructivism Constructivism opposes itself to naturalism, as they do not hold that a world exists independently of our perception thereof. However, there is no consensus among constructivists with respect to their

ontological commitments: whereas some are idealists and do not hold that a world exists

independently of the conscious mind, others recognise an external reality nonetheless (Moses &

Knutsen, 2012: 200). Their epistemological commitment to anti-foundationalism and relativism implies that all knowledge we acquire about the world is socially constructed, and that it is

impossible to reach an unequivocal, objective truth (ibid.: 11). This relativism implies that the world

does not have fixed attributes, as human consciousness of reality constantly changes the way we perceive different phenomena (Kukla, 2000: 3). Our knowledge is socially constructed as different

factors influence the processes through which we establish knowledge: our interaction with other

people, the way in which we order our sense perceptions, and our role in society (Moses & Knutsen, 2012.: 180). Constructivism employs the method of hermeneutics to explain how we can obtain

knowledge about the world. This implies that we analyse how the individual phenomenon relate to

the whole. This enables constructivists to analyse social phenomena as a part of socially constructed


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patterns in the world. Hence, the focus of social scientific enquiry has changed from the natural

world to the human consciousness (ibid.: 187).

2.4. Critical Realism

2.4.1. Ontology

The definitive criticism against both naturalism and constructivism that unequivocally separates them from critical realism is that both positions commit an epistemic fallacy. This is so as they fail to

acknowledge that the real world consists of several domains, and knowledge of the world can thus

not be solely generated by empirical laws, nor by analysing the discourses and language that revolves around the object of study. In his work Realist Theory of Science (1975), Roy Bhaskar developed a

position in the social sciences that did not commit this epistemic fallacy and acknowledged the

complex nature of reality. Although this position is committed to a realist ontology as well, it incorporates four new characteristics of reality: it is deep, differentiated, open, and stratified.

Reality is described as deep because it is characterised by three domains, namely the real, the actual and the empirical (Benton & Craib, 2011: 125):

1. The real is the domain in which structures wherein mechanisms reside, operate. These

structures and mechanisms are the proper object of study according to critical realists.

2. The actual pertains to the sequence and totality of events that occur either under experimental conditions or in the reality.

3. The empirical domain is the small subset of the actual domain to which the scientist has

access.

The critical realist position concedes that the only domain to which the scientist has access is the

empirical domain, but the purpose of scientific enquiry is not to study empirical events. Instead, scientific work is to “investigate and identify relationships and non-relationships, respectively, between what we experience, what actually happens, and the underlying mechanisms that produce the events in the world" (Danermark et al., 2002: 21). The purported empirical regularities of income inequality that are studied by naturalists are, in fact, underpinned by so-called mechanisms and

structures that populate the domain of the real. These are the proper objects of scientific enquiry. By


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structures, we refer to the nature of an object in virtue of which it derives its mechanisms and causal

powers to generate income inequality. The causal powers of an object are triggered once its

mechanisms are provided with the right input. That is to say, the mechanisms that possess the causal powers to generate or mitigate income inequality are not always triggered or in operation.

The inputs that are capable of triggering a mechanism are as well determined by the structures of an

object; hence, mechanisms and structures between objects can interact and influence each other. Because of this contingent relationship between structures, mechanisms and inputs, we describe

these causal powers as tendencies (ibid.: 55).

Reality is differentiated because it is characterised by the existence of, and interaction between, a

multitude of complex objects whose causal powers interact and counteract each other (Buch-

Hansen & Nielsen, 2014: 25). As critical realists, we perceive income inequality as a complex social phenomenon that is contingent upon the coexistence and reciprocal relationship between many

complex objects. Because the phenomenon cannot and should not be studied in isolation, we

further describe reality as an open system (Benton & Craib, 2011: 130). This illustrates one of the merits of critical realism in studying income inequality: it embraces idiographic studies and does not

neglect the interdependence between the complex objects that might be conducive to the

generation of the phenomenon.

Finally, reality is also stratified in the order of a hierarchy, the layers of which are referred to as

strata. The complex constitution of income inequality can be examined by looking at its subcomponents of which it is composed. As we reduce the phenomenon into simpler components,

such as repressive institutions that give uneven socio-economic opportunities, we enter the lower

strata (Benton & Craib, 2011: 126-127). Although not absolute, natural sciences constitute some of the lower strata, whereas the social sciences constitute the higher and thereby also the more

complex strata. Reductionism, however, has its limits, as the interaction between objects in each

respective stratum can produce emergent properties that permeate into higher strata. This means

that some properties of income inequality cannot be reduced to its simpler components; instead, an explanation has to be found in the strata in which the phenomenon resides (Danermark et al., 2002:

61). When we thus refer to institutional mechanisms, as opposed to mechanisms more generally, we

actually mean the mechanisms that emanate from institutions and institutional arrangements, which


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can be both formal and informal, residing in higher strata. We make this distinction because

institutional mechanisms are the products of emergent properties that would lose their distinctive

causal powers if reduced into their substrata.

2.4.2. Epistemology

According to critical realism, scientific enquiry has two dimensions that proceed from its ontological and epistemological commitments: the intransitive and transitive (Buch-Hansen &

Nielsen, 2012: 21). The intransitive dimension refers to the domain of the real, in which the

institutional mechanisms and structures that underpin income inequality resides. This follows from the realist ontology of critical realism. However, an ontological gap separates social scientific

enquiry from its intransitive dimension, because we do not have direct access to these mechanisms

and structures that produce income inequality (Danermark et al., 2002: 22). This gap is bridged by the transitive dimension, which connects scientific enquiry with reality through the use of theories,

models and concepts with which we capture the contents of reality (Buch-Hansen & Nielsen, 2014:

21-22). This dimension reflects the epistemological commitments of critical realism. The transitive dimension has far-reaching implications: since we only have access to the empirical domain of

reality, theories on income inequality will always remain fallible, as they never reflect the true

contents of the intransitive dimension, that is, the real world (ibid.: 34). This gap signals that all facts we establish about the intransitive dimension are theory-dependent and conceptually

mediated, characterised by a continuous social process of production and transformation

(Danermark et al., 2002: 15).

Critical realism adheres to methodological pluralism in scientific practice, meaning “the method must suit the object of investigation as well as the purpose of it” (Danermark et al., 2002: 27). An open and differentiated understanding of reality suggests that causal powers are triggered in

response to their interaction between objects; this gives a distinctly relational character to reality.

Because of the relational character of reality, the purpose of scientific enquiry, according to critical

realists, is to uncover these relationships between objects by way of abduction and retroduction (ibid. 43).


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Abduction is a mode of inference which contextualises facts such that they are rendered intelligible

within a framework of ideas. Examining income inequality as the outcome of institutional

mechanisms exemplifies the use of abduction, as we offer a “frame of interpretation for theories” (ibid.: 93) that enables us to engage with the phenomenon in a bounded context. It is within this

specified context that the relation between objects will be studied. Abduction is thus an

indispensable tool, as objects in an open and differentiated reality have a multitude of relationships that penetrate across the different strata of reality. Without contextualization, it is impractical to

study a phenomenon as an object can be related to everything in one way or another. Retroduction,

on the other hand, is the mode of inference that can be used to establish the substantial relations of an object that must exist in order for a particular phenomenon to exist (ibid.: 44-45). Since the

purpose of this process is to uncover ‘relations’, we can label the product of retroduction as a

structural analysis. Retroduction is thus in agreement with the ontological commitment to a deep reality, as it tries to gain access to the domain of the real through a rigid application of abstraction

(Buch-Hansen & Nielsen, 2014: 61).

In order to utilize abduction and retroduction, and obtain knowledge about the institutional mechanisms that perpetuate income inequality, critical realists draw upon the method of

abstraction. Since reality is differentiated and open, abstraction involves the way of separating or

isolating one particular aspect of a concrete object or phenomenon (Danermark et al., 2002: 42). Abstraction can, in other words, be described as a process of thought experiment with which we

examine the mechanisms of each phenomenon counterfactually. This use of “what if” and “if this

were the case” is a practical method to tease out the relations that underpin income inequality. Critical realists draw upon two main types of abstraction; structural analysis and causal analysis: A

structural analysis teases out the substantial relations between objects that are necessary for a

phenomenon to occur. That is, by way of structural analysis, we are able to uncover the mechanisms that are constitutive of income inequality (ibid.: 46). Causal analysis involves a more complex

process of abstraction by explaining, “why what happens actually does happen”. This is done by

analysing how the interaction between the substantial relations of various institutional mechanisms that have been elicited through structural analysis affects the causal powers and tendencies of each

other (ibid.: 52).


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2.4.3. Methods and empirical material In this report we make use of a heuristic case study method, with which we look into a single case,

India, to uncover the underlying structures and mechanisms that generate income inequality. This type of case study involves hypothesis building in which a given phenomenon is explored in order to

generate new knowledge. This is in line with critical realism as new knowledge can always be

generated about a phenomenon, due to its fallible character (Moses & Knutsen, 2012: 140) By analysing underlying structures wherein mechanisms reside to generate new knowledge about

income inequality in India, it will also be possible to perform a causal analysis to see how the

interactions between the respective institutional mechanisms have perpetuated income inequality. It is also important to consider the limitations of only focusing on India, as a single case does not yield

representative outcomes that are applicable or possible to extrapolate (Danermark et al., 2002: 119).

This is to say that our study is idiographic rather than nomothetic.

We draw upon a heuristic case study to understand income inequality in the particular case of India.

Positing, however, that income inequality is determined by institutional arrangements is an

abstraction from these concrete circumstances, which does not offer us any explanations on the particular institutions and the features thereof. If nothing concrete is known about these

institutions, and how they actually contribute to income inequality in India, it is not possible to offer

any advice on how to mitigate it. The use of a heuristic case study begins by looking at the concrete circumstances of India, from which we elicit the mechanisms and structures that underpin the

relationship between income inequality and institutions. Once knowledge of these mechanisms and

structures that populate the domain of the real are uncovered, we recontextualise it to understand their practical implications.

Our choice of empirical material, including both primary and secondary sources, is based on the possibility of drawing upon the method of retroduction. We thus mend the shortcomings of the

limited availability of primary sources and the diminished reliability of secondary sources compared

to if we had only relied on one type of source (Moses & Knutsen, 2012: 122). The purpose of studying the data on India, quantitatively and qualitatively, is to analyse what particular institutional

mechanisms are necessary for the mitigation and intensification of income inequality and what the

outcome is from the interaction thereof (Danermark et al., 2002: 100). Data collection within a case


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study method from a critical realist perspective is eclectic: we have chosen our data by what we

deem necessary in order to make a sufficient claim about the relationship between institutional

mechanisms and income inequality (Easton, 2010: 124). Our choice of empirical material is thus based on the intensive research of the constituent features of India and the type of institutions we

consider relevant in the case of income inequality, in order to build and present a coherent and

consistent argument (Danermark et al., 2002: 195).

2.5. Delimitations

2.5.1 . Income inequality and institutions Since this report analyses the relationship between income inequality and institutional mechanisms, it

only deals with the strata that is placed in the top of the hierarchy, that is, the social sciences. This

means that we will not be analysing the lower strata, i.e. biology or physics, even though they might also be conducive to income inequality, as critical realism opposes reductionism (Benton & Craib,

2011: 127). Our focus on the relationship between income inequality and institutional mechanisms is

an abductive mode of inference, in which we have related our phenomenon of interest to a pre-existing claim of a relationship between income inequality and institutions (Danermark et al., 2002:

91). Our report allows us to analyse this relationship with the aim of acquiring new knowledge about

income inequality. This means that we are not pursuing quantitative method reasoning, and take

income inequality as given. We will thus not delve into the way in which income inequality is measured and the veracity thereof, but instead analyse the underlying institutional mechanisms

causing this phenomena.

2.5.2. Analytical focus: Rural communities and the federal government

Our analytical focus on income inequality will be on rural communities. As India has a high wage differential between rural and urban communities, increasing the income level in rural communities

will contribute to decreasing the national income level (Dholakia et al., 2014: 16). This does not imply

that income inequality is not present in urban areas. We argue that since 68.84% of the population live in the rural communities, targeting this part of the population is of crucial importance to decrease


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national income inequality in India (Chandramouli, 2011). This does not in any way rule out the

significance of urban income inequality, but has to be addressed on another occasion.

With respect to increasing income in rural communities, our focus is the set of initiatives advanced in

the Five Year Plans (FYPs), for which the federal government responsible. The FYPs are important,

because they provide the groundwork for the implementation of policies by individual states. This means that this report will not assess the implementation of policies, as the implementations vary

between states and is not wholly determined by the aptitude of the federal government and the

initiatives put forward in the FYPs (Deshpande, 2003: 157). Our argument for this focus is that a proper functioning of the federal government is a necessary condition in mitigating income inequality

as it provides guidelines states can follow (Myrdal, 1972). However, it is also an insufficient condition,

as we concede that emphasizing on a single factor clearly cannot solve the problem of inequality in its entirety. Nonetheless, a sacrifice has to be made between our commitment to theoretical parsimony

and analytical complexity (Esping-Andersen, 1999: 73).

2.5.3. Kohli ’s framework of Just Growth In focusing on how the federal government attempts to combat national income inequality, we draw

on Kohli’s framework of Just Growth as our analytical framework. This is in accordance with the critical realist position that reality is open and differentiated, thus it is more rewarding to draw upon

an eclectic approach rather than focusing on national income inequality in isolation. With this

framework, we highlight the reciprocal relationship between growth, equity and democracy and how their mechanisms contribute to decreasing income inequality. These three facets are enmeshed and

exert significant influence upon each other through an intercurrence of mechanisms (Kohli, Moon, &

Sørensen, 2003: 6).

This framework informs our choice of theory and empirical material. In our analysis of the

institutional mechanisms that perpetuate income inequality, this framework allows us to analyse income inequality from a joint perspective of how formal and informal institutional mechanisms

interact and produce income inequality. To this end, we draw upon different theoretical explanations

to analyse how the mechanisms of growth, democracy and equity, which should decrease income


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inequality, are circumvented by the institutional mechanisms of the caste system, patron-client

relationship and the soft state, which, in turn, generates income inequality. The framework will have

further application once we examine how the recent Inclusive Growth strategy engages with these institutional mechanisms identified, in view of which we offer further suggestions for possible avenues

of change and windows of opportunities.

3. Theory

3.1 . Choice of theory Kohli’s Just Growth framework posits that there is a reciprocal relationship between equity

(redistributive policies), the attainment of growth, and democracy to decrease income inequality. We

draw upon theoretical explanations to identify and examine the mechanisms that underpin these reciprocal relationships. Part one of the research question is concerned with the mechanisms that

should have mitigated income inequality in the first place, but have been counteracted by the

presence of institutional mechanisms. This causal analysis draws upon the mechanisms identified in a) Kuznets’ hypothesis on economic growth, democracy and income inequality, and b) Myrdal’s

notion of the soft state. The Kuznets hypothesis showcases the mechanisms that are triggered by

economic growth and democracy that, in theory, should mitigate income inequality. Myrdal’s theory of the soft state, on the other hand, pertains to the mechanisms within the state that generate income

inequality due to the inadequate enforcement of policies and a dysfunctional legal system that

obstructs redistributive measures. Part two of our research question is concerned with the actor-

oriented approach with a focus on how the Inclusive Growth strategy engages with the institutional mechanisms we have identified in part one of our research question, while also providing suggestions

for further actions. When analysing the Inclusive Growth, we will draw upon historical

institutionalism in order to identify establish the breach of previous actions. We will then draw upon a SWOT framework, which allows us to highlight what possible actions the federal government can

pursue to counteract the mechanisms that currently result in the persistent income inequality in India.

3.2. Growth and democracy: Kuznets ’ hypothesis of income inequality Simon Kuznets’ (1901-1985) work is known as the inverse U-shaped pattern of income inequality,

according to which a country during its initial stages of industrialisation and economic growth will


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experience an increase in income inequality due to the wage differentials between agriculture and

industry. However, once the wage differential starts to soar, workers from lower-income industries,

usually from rural communities, start to migrate to the cities in the pursuit of higher-earning jobs; this, in consequence, results in a decrease in income inequality (Acemoglu & Robinson, 2002: 183;

Kuznets, 1955: 11). From this theory, we can elicit that the mechanism that triggers this relationship

between economic growth and income inequality is migration. We establish through retroduction that a necessary condition for migration to occur is the presence of social mobility. If there are some

forces that prevent people from moving freely, then migration will not occur to the same extent. We

can posit that migration has the tendency, or causal power, to mitigate income inequality, but this is only provided that social mobility permits individuals to make such a decision.

Later developments of the Kuznets curve incorporate a perspective on democracy (Acemoglu & Robinson, 2002: 184). The process of industrialisation leads to an acceleration of income inequality

that is met with discontent and social unrest by the marginalised parts of the population.

Industrialisation enables these poorer segments of society to mobilise by concentrating them in the

urban centres and factories, affording them with the political leverage to put pressure on political elites. The threat of revolution forces the political elite to undertake social reform, such as pro-poor

redistributive policies, that will mitigate income inequality (ibid: 184). The relationship between

democracy and the mitigation of income inequality is triggered by the interaction between two mechanisms: a) mobilization of poorer segments affords them with increased political leverage, with

which they b) reorient the state towards pro-poor policies that will mitigate income inequality.

Through retroduction, we establish two substantial relations to mobilization and pro-poor policies. Firstly, mobilization presupposes likewise the existence of social mobility, because people need to

be able to assemble and amass influence. Secondly, for pro-poor policies to mitigate income

inequality, a necessary condition is the presence of functional legislation, which has to ensure that policy initiatives produce their intended effects of mitigating income inequality (Myrdal, 1972: 230).

3.3. Equity: The Soft State Equity involves implementing policies that will make society more equal, placing particular

emphasis on the role of the state (Kohli et al., 2003: 1). In line with this view, Gunnar Myrdal (1972)


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introduced a theory on the developmental process of Asian countries. The aspiration of fostering

economic and social development requires that the growing disparity between classes is mitigated

or removed altogether, as the underutilization of human capital in lower segments of society inhibits growth (Myrdal, 1972: 376). This aspiration is met with difficulty due to the ‘soft state’ of a country,

defined by Myrdal as “the lack of social discipline the manifestation of which is the failure of legislation and law observance and enforcement” (ibid.: 201). Two mechanisms are involved with the concept of this soft state: formulation and implementation of policies. When laws and policies are

poorly formulated and unenforced, it will give rise to exploitation and other forms of civil

disobedience that subvert the initiatives of the state to foster socio-economic development (Leftwich, 1993: 58). The soft state, in other words, has the tendency, or causal power, to foster

exploitation and civil disobedience.

A significant problem with the soft state is corruption, where the rich and powerful take advantage of the soft state by circumventing regulations and policy initiatives. This circumvention of laws

results in reinforced social stratification, the consequence of which is persistent income inequality

(Myrdal, 1972: 154). The lack of discipline to obey laws thus translates into the inability to establish sufficiently strong ties with the dominant classes of civil society; cooperation from the actors in

society is then less likely to take place, resulting in the diminutive likelihood of successful policy

implementation. Since the soft state consists of mechanisms that subvert efforts to formulate and implement policies, these tendencies, or causal powers, can be counteracted by restoring functional

legislation, in the form of more coherent laws and efficient sanctions for disobedience, which would

act as a deterrent to policy avoidance (ibid.: 201 & 230).

3.4. Historical Institutionalism Historical institutionalism (HI) defines institutions as both formal and informal routines and norms

in society that can influence outcomes and behaviour. Formal and informal institutions can influence

political outcomes, such as reforms or policies, as is the case of India (Amenta et al., 2012: 48). This influential role of institutions in HI is referred to as path dependency, where institutions generate

pattern-like behaviour due to their constraining and enabling effect. The reproduction of existing

institutions that results from path dependency occurs via a feedback mechanism where positive


17

feedback from existing institutions results in their reproduction (e.g. in the form of decreasing

income inequality). Change is thus locked into a particular path, until it is dislocated by a critical

juncture of crises and failures that discredit the status quo, which allows for the establishment of new institutions (Amenta et al., 2012: 51). Policy changes can be analytically separated in three

degrees, from routine adjustments of existing policies (1st degree), to changes in policy instruments

to achieve existing policy objectives (2nnd degree), to shift in policy objectives (3rd degree) (Hall, 1993: 278). The degree of change depends on the level of discredit of the established institutional path.

This means that once a policy area has been sufficiently discredited, a critical juncture, depending

on the level of discredit, takes formation. Whereas first order changes take place regularly, only extreme circumstances bring about paradigmatic third order changes (Baumgartner, 2013: 14).

This view of institutions also carries theoretical import for critical realism with respect to the agency-structure dualism. Social structures, like institutions, constrain and enable agency as well

(Danermark et al., 2002: 181-182). Individuals are embedded within a structural (institutional)

context that is reproduced, until agents become reflexive about their undesirability. An important

concept is explanatory critique, which describes the process through which knowledge and reflexivity of undesirable structures enables actors to actively transform them into more desirable

structures (ibid.: 195). It perceives agency as a source of emancipation despite the constraining

influence of structures - namely, that it is possible to escape the oppressive structures (ibid: 193).

3.5 SWOT analysis The SWOT analysis allows organizations to assess their current strategy according to internal

strengths and weaknesses of the organization, while also taking into account threats and

opportunities present in the external environment and how they affect the attainment of the strategy’s objective. In the case of India, the organization of interest is the federal government. The

internal environment, that is, the organization’s weaknesses and strengths, is the aspect over which

the organization has control. The external environment cannot be directly controlled by the federal government, but must be taken into consideration in the process of developing a strategy as the

threats and opportunities present in the external environment might be conducive to the objective of

the strategy. The strategy must attempt to limit external threats, such as counteracting mechanisms,


18

that obstruct the organization’s objectives and purposes, while trying to draw upon opportunities

that can facilitate the attainment of the objectives (Henry, 2011: 121-122). In order for the strategy to

be successful, it must use its strength to engage with the external environment by drawing upon opportunities and mitigate threats (Grant, 2010: 13). It is thus important to assess their strategy in

view of the current situation the federal government is facing, while also reassessing how this

strategy interacts with the external and internal environment (ibid: 122).

SWOT acknowledges that structures are either reproduced or transformed by actors; if the

structures are reproduced, this also implies that the mechanisms that generate income inequality are triggered (Benton & Craib, 2011: 137). Hence, when actors change their actions, the mechanisms

that should have triggered the causal powers of the social object might not be generated

(Danermark et al., 2002: 56). By drawing upon the notions of strengths, weaknesses, opportunities, and threats, this allows us to analyse if the politicians have sufficiently changed their course of

actions. This would imply that the generative mechanisms encountered in the first part of our

analysis might be weakened with the Inclusive Growth strategy, suggesting a mitigation of income

inequality (ibid.: 68).

4. Case: Income Inequality in India

4.1. Empirical data and case setting The income disparity between rural and urban communities in India has been increasing since

independence in 1947. Despite increases in the overall income level in India, the rural-urban income

differential, defined as the ratio of income in urban cities to rural communities, continues to be persistently high with the urban population earning an income that is more than twice as high than

the income earned by the rural population. This indicates how wealth throughout the years has

been unevenly distributed (Dholakia et al., 2014: 16). The rural-urban income differential has increased since 1970, at which point it was 2.3, to a level of 2.59 in 2011 (see figure below). This

corroborates the importance of raising the income level of the rural communities in order to

decrease national income inequality. By increasing the income level of the rural communities, the rural-urban income differential will decrease and contribute to a decrease in income inequality in

India.


19

Figure 1 - Rural-urban income differential, 1970-2011 (Bucci, 2006: 1179; Dholakia et al., 2014: 16)1

In order to analyse the mechanisms behind India’s income inequality, we will introduce empirical

material and highlight how it relates to income inequality. The empirical material has been chosen

based on our delimitations within growth, democracy and equity. On growth, we address economic growth indicators and the caste system. On democracy, we address India’s democracy and its

development. On equity, empirical material on land distribution and policies on land distribution

and rural development in India’s Five Year Plans will be introduced. This empirical material revolves around the FYPs leading up to the Inclusive Growth. Subsequently, we introduce the

Inclusive Growth strategy with which we address in our second part of the analysis. The empirical

material will allow us draw upon the theories introduced and tease out what institutional mechanisms have counteracted the mechanisms that should have decreased income inequality in

India.

4.1.1 . Economic growth Since independence, India has witnessed increasing economic growth. During the 5th FYP (1974-

1979), India experienced an average GDP growth of 4.8%. In comparison, during the 7th FYP (1985-

1 All numbers in the graph are real values. The income differentials are not evenly spaced, as more recent data is not available.

1970 1993 1999 2004 2011

Income differential 2.38 2.3387 2.8251 2.6912 2.5929

0

0.5

1

1.5

2

2.5

3

Inco

me

Dif

fere

ntia

l

Rural-urban income differential


20

1990), this growth had increased to an average of 6% annually (Ministry of Statistics and

Programme Implementation, 2014: section 7.3). The economic growth in this period also sparked a

process of industrialisation in India, which is defined as a decrease in agrarian sector growth and an increase in industrial sector growth. As agriculture is predominantly situated in rural communities

this decrease in growth in the agrarian sector contributed to increasing income inequality (Kochhar

et al., 2006: 7). The increased emphasis on industrialisation during this period of economic planning, which resulted in the channelling of resources to industrial sectors, resulted from the

breaking of colonial ties and the aspiration of self-sustenance (ibid.: 3). As a result, during the 5th FYP

India’s industry experienced an annual growth rate of 6.2% and, in contrast, an annual growth rate of 8.5% during the 7th FYP (Indiastat: 2000). Due to this industrialisation, the following decade

experienced a GDP growth during the 9th FYP (1997-2002) of 5.4% and most recent data indicates a

GDP growth in the 11th FYP (2007-2012) on 8% (Ministry of Statistics and Programme Implementation, 2014: section 7.3). This pattern of growth also corroborates the rising income

differential displayed earlier, as the urban centres, in which manufacturing took place,

disproportionately captured the benefits of industrialisation (section 4.1; Bucci, 2006: 1169).

4.1.2. The caste system

The caste system in India is a hierarchical endogamy system within the Hindu religion, which is the most dominant religion in India with 80.5% of the population identifying themselves as Hindu; this

system divides the population into hierarchical groups to which one belongs from birth (Olcott,

1944: 648). The caste system leaves very little room for social mobility due to the system of endogamy, which divides the population into four castes. The highest caste is Brahmins, followed

by the Kshatriya, the Vaishya, and lastly the Dalits (Sana, 1993: 3-9). In practice, the enforcement of

the caste system is more prevalent and entrenched among the rural communities, as rural communities holds more onto traditions and have higher dependency between villages, mirroring

the dependence between the castes (Olcott, 1944: 649). The strict enforcement of the caste system

in rural communities implies that these areas have low social mobility, as people do not move away from the castes to which they belong. Migration that takes place is predominantly between rural

communities (rural-rural), as the enforcement of the caste system is more prevalent among rural


21

communities; this explains why a diminutive fraction of the migration is from rural communities to

urban areas (see figures below).

Figure 2 - Distribution of total migration by gender (Indiastat, n.d.; NSS 64th Round, no. 533: 30)2

The comprehensiveness of the caste system enables it to pervade all facets of social life, in part by

determining the allocation and organization of occupations (parent-dependent), but also since 2 The migration statistics are not evenly spaced, as more recent data is not available.

1961 1971 1981 1991 2000 2008

rural-rural 81.3 77.7 73.3 72.2 70.3 70

rural-urban 9.7 10.5 12.5 13.5 5.2 4.9

urban-urban 5.8 6.7 8.7 8.8 14.4 14.8

urban-rural 3.2 5.1 5.5 5.5 10.1 10.3

0 10 20 30 40 50 60 70 80 90

Per

cent

age

Distribution of total migration (female)

1961 1971 1981 1991 2000 2008

rural-rural 56.7 53.5 45.6 43.4 32.3 27.2

rural-urban 25.7 26 30 31.6 10.7 8.9

urban-urban 13 14 17.4 17.8 34.4 39

urban-rural 4.6 6.5 7 7.2 22.6 24.8

0

10

20

30

40

50

60

Per

cent

age

Distribution of total migration (male)


22

people are tied to the land they were born in (Munshi & Rosenzweig, 2009: 1). The caste system

thus provides fixed social and economic positions for Indians at the outset of their birth, which

predetermines both social- and occupational status (Olcott, 1944: 649). As high-income occupations are consistently assigned to upper castes, a continuous system of income inequality is maintained

and consolidated.

4.1.3. Democracy India has been a democratic state since it gained independence from British colonial rule in 1947.

The presence of a democracy is said to bring about more redistributive measures, due to the

political concern regarding egalitarianism by which a democracy is governed. It is due to these redistributive measures and political mobilization within democracy that income inequality is often

said to be lower in democratic states (Müller, 1988: 59). However, India’s democracy is struggling

with undemocratic characteristics inherited from its historical, cultural and political legacy (Kohli, 2001: 6). These ‘undemocratic’ characteristics concern the influence of the caste system on the

democracy. This influence has established patron-client relationships, forming a vertical tie of

dependency between upper and lower castes in India’s democracy. The influence of these relationships on India’s democracy is twofold. First, with respect to clients, the patron-client

relationship limits mobilisation and representation of interests of lower castes. Secondly, this

patron-client relationship translates into political influence, such that patrons are aligned with the political elite (Kohli et al., 2003.: 196).

4.1.4. Land distribution According to the World Bank, the growing disparity in land distribution in rural communities is

one of the constitutive factors perpetuating income inequality, as poverty is correlated with access to land (World Bank, 1999: 1). Land distribution largely mirrors the caste system, because large

landowners often belong to upper castes, whereas lower castes hold diminutive amounts of land or

are landless altogether (Besley, Leight, Pande & Rao, 2011: 3). Among lower castes (the Dalits) that are not landless, more than 50% own less than 2 hectares of land. In comparison, among the rural

population belonging to higher social castes, the majority owns above 4 hectares (Deshpande, 2003:

195). Thus, the unequal distribution of land rooted in the caste system does not only contribute to


23

social inequality by assigning social positions according to a hierarchy, but is also conducive to

income inequality by giving uneven access to land.

4.1.5. Five Year Plans

The Planning Commission, an institution of the federal government, has been carrying out Five Year Plans (FYPs) since 1947, which serves the purpose of developing the economy as well as

distributing the benefits thereof to the public at large (Cohen, 1953: 379). The FYPs assume a

central role in our analytical focus, as they are responsible for the implementation of federal policies aimed at decreasing income inequality. As a large share of the population continues to reside in the

rural communities, a series of policies within the FYPs have been implemented to raise their

income. We address two policy areas: land reforms and rural development programs (RDPs).

Land reforms have been a central feature of FYPs since the implementation of the first plan in 1950

(Deshpande, 2003: 171). These reforms profess that: “agriculture is an instrument for income and employment generation” (Planning Commission, 1980: Section 9.15). Land reforms within FYPs have the aim of implementing land ceilings and redistribute surplus land to the landless, as land is an

important income generating asset (Deshpande, 2003: 155). The implementation of land ceilings and

redistribution of surplus land relies upon records of landholdings of the individual households in the rural communities (ibid.). The land records are conducted by a patwaris, a village record keeper, in

each rural community. Hence a single unified land record is not in place throughout India (World

Bank, 1999: 30).

Many different RDPs have been implemented in India. One of the most comprehensive is the

Swarnajayanti Gram Swarojgar Yojana (SGSY) initiated in 1999, which was merged from all previous RDPs (9th FYP). This program revolved around providing aid to families living below the

poverty line (BPL), spending less than 32 Indian rupees (0.45€) per day (Ministry of Rural

Development, 2006: 38; Singh, 2014: 1). To reach its 3-year goal of assisting poor families out of chronic poverty, the SGSY created self-help groups (SHG), groups of persons in rural areas that

live BPL. The purpose of these groups is for people to allocate their savings into a common fund, in

which loans are provided (Budela, Dubey & Pande, 2013: 38). The members of the SHGs are


24

formally selected in a transparent manner by their respective villages (Shylendra & Bhirdikar, 2005:

211). SGSY is mostly funded through government subsidies. These features of the employment

program shows how they attempt to mitigate income inequality by empowering the marginalised, rather than merely through static redistributive measures, or passive provision of income (Mehta,

2012: 2).

4.1.6. Inclusive Growth Acknowledging the widening disparities between rural and urban populations, the federal

government initiated the Inclusive Growth (IG) strategy with the 11th FYP in 2007. The IG strategy

has three overarching objectives in decreasing income inequality: good governance, multisectoral growth and financial inclusion (Planning Commission, 2007: 2). The objective of good governance

is achieved via demand-driven policies and public-private partnerships (PPP). Whereas previous

FYPs actively targeted the groups whose income needed to be increased, IG relies upon a demand-driven approach, whose purpose is to give a more distinctive role to agency in increasing their

income (Planning Commission, 2012: 287). With PPPs, private actors have a greater role in the

implementation and facilitation of policies, divesting the role of the federal government from initiatives that it hitherto was unable to realise. The role of the federal government has thus been

modified and reoriented towards improving its governance by way of better formulation and

implementation of policies that can decrease income inequality (Planning Commission, 2007: 5). The objective of multisectoral growth aims to create employment opportunities in all economic

sectors. Hence, this also allows for higher job growth in the agrarian sector, which is dominant in

rural communities, and allows for increased income in these areas (Planning Commission, 2012: 3) The focus on financial inclusion has placed increasing emphasis on providing easier access to credit

for low-income earners. This, for instance, allows for the purchase of assets, which can improve

productivity and thus increase income (Planning Commission, 2007: 3).

4.2. Analysis of interaction between mechanisms producing income inequality The purpose of this section is to perform a two-step causal analysis of the respective mechanisms we

have uncovered in the theory and empirical sections. Firstly, we examine how the mechanisms of

growth, democracy and equity that should have mitigated income inequality have been


25

counteracted by institutional mechanisms that we will elicit from our empirical material. For

analytical clarity, we start our causal analysis by analysing the interactions between the respective

mechanisms as a dyadic relationship, which allows us to focus on the immediate effects from their interaction. Secondly, in our sub-conclusion, we relax our assumptions to assess how the

institutional mechanisms examined in the preceding section collectively produce income inequality.

We argue that the tension between theory and empirical facts demonstrates the implications of an open and differentiated reality, in which the coexistence of a host of mechanisms makes it difficult to

capture empirical regularities (Danermark et al., 2002: 57). A causal analysis reconciles this tension

by examining how the respective mechanisms and institutional mechanisms can trigger or suppress the tendencies that should otherwise have mitigated income inequality.

4.2.1. Economic growth and the caste system Kuznets’ hypothesis on decreasing levels of income inequality as a result of economic growth has not

been evident in India (figure 1). The Kuznets curve attributes decreasing levels of income inequality

to industrialisation, which trigger internal migration from the rural communities to urban areas (section 3.2). While the Indian economy has experienced industrialisation, which would otherwise

result in decreasing income inequality, income disparity has instead reached unprecedented levels

(section 4.1.1). This economic growth has not triggered the mechanism of internal migration as showcased in figure 2 where rural-urban migration has persistently constituted a lower share of total

migration compared to rural-rural migration (section 4.1.2). We argue that the stifling effects of the

mechanism of the caste system on social mobility are counteracting migration. Thus, internal migration does not take place to the extent anticipated, and favourable effects of industrialisation, in

terms of increased income, is enjoyed unevenly across the various strata of society.

The curbing effects on migration from rural to urban can be attributed to several structural features

of the caste system: Firstly, marriage ties within the caste system increase intra-caste interactions,

which serves a natural mechanism to sustain cooperative behaviour in the caste system. Social mobility is then restricted since you are only allowed to marry a small pool of the population who

reside in the same area as yourself (Munshi & Rosenzweig, 2009: 2). Secondly, the caste system

involves a comprehensive transfer system. This involves a number of transfers in the form of gifts


26

and loans. The caste loans are received on more favourable terms than commercial alternatives with

respect to both interests rates and collateral agreements (ibid.: 7). These networks of transfer

encapsulate values of solidarity and self-sufficiency, which are constitutive features of caste systems (Namboodiripad, 1979: 1). Finally, it has the structure of a punitive system in which individuals that

act beyond the stipulated norms of the caste to which they belong are collectively punished (Munshi

& Rosenzweig, 2009: 4). These structures collectively give rise to the mechanism of the caste system that suppresses social and spatial mobility, in consequence of which the mechanisms of

migration is prevented from triggering. This explains why income inequality is accelerated: while

the rapid industrialization has made the urban areas more affluent, the rural population has been deprived of the opportunity to pursue higher-earning jobs, as they are hindered in migrating to the

cities.

4.2.2. Democracy and patron-client relationships According to the democratic dimension of the Kuznets hypothesis, two mechanisms within

democracy should contribute to mitigating income inequality: a) the political mobilization of poorer

segments of society affords them the political leverage to pressurise the state, and b) reorientation of the state’s priorities towards pro-poor redistributive policies, as a response to mobilization (section

3.2). A characteristic of India’s democracy, patron-client relationships, which results from the caste

system, counteracts these mechanisms. The significance of the patron-client relationship is contingent on the dependence of the client (lower caste) to the patron (upper caste) (section 4.1.3).

This dependence, in turn, mirrors the unequal power relationship in the form of wealth, power and

social status between the members of upper and lower castes. The patron-client relation and its counteracting effect on the inequality-mitigating mechanisms of democracy is then embedded in the

caste system that causes this patron-client relationship to emerge (Kohli, 2001: 7).

With this patron-client relationship, upper castes are in a position to unilaterally supply goods and

services to the client, upon which they are dependent for their livelihood; this frequently involves a

source of protection, employment opportunities and access to credit (Scott, 1972: 93). As the clients are perceived as recipients, these relationships also embody elements of obligation, since this patron-

client relationship forms bonds of affection and loyalty towards the patron (Olcott, 1944: 648). This

forms a pattern of reciprocity by which “the high-status members furnish instrumental assistance to


27

the low-status ones in exchange for their respect and compliance” (Scott, 1972: 94), which

rationalises and naturalises their inferior position. In effect, despite the clients’ disadvantageous

position, their dependence on the patrons’ beneficence discourages the client from mobilising and thereby counteract the mechanism of social revolt. These conditions altogether reflect the

undemocratic facets of the democratic system, due to the legacy of the caste system explained in the

empirical material; it produces a patronage-based bureaucratic system through which lower castes are dependent on upper castes to have their interest represented (section 4.1.3).

Due to increasing income inequality, however, clients have mobilised to a marginal degree since independence in 1947. Redistributive policies of the FYPs (e.g. land reforms) are implemented by

the government under elite influence in response to increased mobilisation (Kohli, 2001: 7). As

leaders often prioritise political ahead of economic goals, promises to cater to the interests of the masses appeases social unrest. This allows for policies with a populist character, the consequence of

which is ineffective policies, since policy-makers fail to realise their ambitions due to the lack of

effective economic policies (Kohli, 2001: 7). These populist policies have a twofold explanation.

Firstly, from the point of view of the patrons, they fear that the implementation of redistributive policies will force them to forgo their advantageous economic positions, hence they have an interest

to service their own sectional interests (ibid.: 8). Secondly, from the point of view of the clients, their

lack of mobilization affords them with diminutive political leverage to demand effective change. Combining these two explanations, the proliferation of populist policies would then demonstrate

that the diminutive mobilisation of lower castes has triggered a reaction from the elite, but that

these policies are not extensive enough to have any decisive effect on mitigating income inequality. This is due to the fact that these populist policies that are implemented should not jeopardise the

patron’s favourable economic position (ibid.: 8). In consequence, the implementation of

redistributive policies, which is an essential mechanism to mitigate income inequality in a democracy, is counteracted by the institutional mechanism of the patron-client relationship (section

4.1.3). Democracy as a political system does not facilitate socio-economic democracy a priori, but

presupposes that the mechanism of political mobilization is in place to promote mobilization, affording them with the political leverage to demand substantial redistributive policies (Pellissery &

Bergh, 2007: 283). However, this mechanism is missing in India due to the presence of patron-client

relationship.


28

4.2.3. Equity and the soft state

Equity refers to implementation of policies that will result in more fairness in society (section 2.5.3).

The way in which the federal government achieves this purpose is through the FYPs, under which land reforms and rural development programs (RDPs) are subsumed (section 4.1.5). The federal

government has recognised the importance of targeting policies towards rural communities and

agricultural sectors, since a majority of the Indian population remains tied to the traditional economy (Planning Commission, 2012). Land and rural development programs each have their own

mechanisms that facilitate the mitigation of income inequality. The ownership of land is an

important mechanism, as this asset provides access to income, once land is cultivated and crops are sold (World Bank 1999: 1). The mechanism within the previously mentioned RDP, the SGSY, that

mitigates income inequality consists of self-help groups enabling participants to access funding with

which they can initiate job-generating projects with the prospects of earning an income (Pellissery & Bergh, 2007: 299).

4.2.3 .1 . Land reforms As found in the empirical material, land holdings in rural India are largely skewed in favour of upper

castes (section 4.1.4). The purpose of land distribution is to provide income-generating assets to the landless in rural India. Furnishing the landless with land will increase their income level as it enables

them to make use of their latent labour capital. By raising the income level of those who had a low or

no income in the past will raise the overall income of the rural communities, hence the wage differential will decrease as well (World Bank, 1999: 1). However, the implementation of land

ceilings and redistribution of surplus land has not provided the anticipated ameliorations: “the steps taken by the government have not made any significant impact on the agrarian structure to reduce (...) the inequality in the distribution of land or income” (Venkatasubramanian, n.d.: 4). We attribute

the failure of the land reforms to the mechanism of the soft state. The emergence of the soft state is

attributed to the poor implementation of land ceilings, which is responsible for the inept redistribution of identified surplus land (World Bank, 1999: 10).


29

The first way in which land reforms failed to bring about decreasing income inequality was the

mechanism of improper implementation of land ceilings. This poor implementation implies that the

land ceilings are not properly enforced, making it possible for households with large landholdings to circumvent the reforms (Deshpande, 2003: 163). This was done via benami transactions, whereby

village-record keepers are bribed into registering surplus land to an inexistent individual in order to

avoid redistribution (World Bank, 1999: 10). As a result of the soft state and the poor implementation of land ceilings, this civil disobedience enables households who already have

significant landholdings to circumvent land ceilings for their own personal gain (Myrdal, 1972: 201).

The poor implementation of these reforms is thus an obstacle for decreasing income inequality.

As an effect of the improper implementation, the land that was reported in surplus was not

redistributed efficiently enough. This was due to incomplete land records, which made the targeting

of landless households, who are supposed to receive this surplus land, difficult (World Bank 1999: 30). The mechanism of improper implementation of the land reforms is responsible for the inability

to target those who have a deficit or surplus in land. Consequently, we argue that the entire policy

initiative becomes a futile attempt to mitigate income inequality. We describe this manifestation of the soft state in India as state failure, because it reflects a general gap between the state’s ambitions

and its actual capacity to effect change - the soft state counteracted its ambitions by weakening its

capacity (Myrdal, 1972: 201). This soft state circumvents the mechanism of equity in which effective policies should be implemented in order to decrease income inequality. As argued when the soft

state was introduced, another mechanism within the soft state is the poor formulation of policies, a

mechanism that was present in the RDPs (section 3.3).

4.2.3 .2 . Rural development programs The SGSY, like land reforms, has failed to mitigate income inequality. We argue that this is due to

the poor formulation of policies, another mechanism constitutive of the soft state (section 3.3). As

argued, the primary focus of the SGSY is the use of self-help groups (SHGs), in which members have to pool their wealth into a common fund. Since personal wealth is involved, this presupposes

that participants can display a high degree of proactive engagement, as they would otherwise not

partake in the program. The SHGs can mitigate income inequality, because it provides members


30

with access to credit, with which they can acquire and produce income generating assets (Planning

Commission, 2002: 303). We argue, however, that the prerequisite engagement from the rural

households has been missing. We attribute this lack of engagement to the improper formulation of policies, characteristic of the mechanisms of the soft state. This improper formulation, failing to

convey ideas into proper policies, gave rise to two main problems resulting in persistent income

inequality.

Firstly, the SHGs role in the SGSY was to provide funds to members by collecting savings.

However, system was deemed to be inefficient. Above all, the process of accessing funds to income-

generating projects was troublesome and time consuming, since the loans would be paid in installments that would only be received when the recipient provided evidence for the use of the

loans. Moreover, the interest rates on these loans were also high (Bundela et al., 2013: 40). The

SHGs comparatively offered less favourable interest rates and conditions than the loans of the caste system (section 4.2.1), which explains why the rural population feel disinclined to draw upon the

SHGs (Munshi & Rosenzweig, 2009: 4). The mechanism of the SHGs that was supposed to

mitigate income inequality is counteracted by the lack of motivation and social mobility to actively participate in the SHGs, as the SGSY does not effectively provide supplants to the caste system.

The mechanism that counteracts the SGSY is thus the poor formulation of policy, an attribute of

the soft state, in which the policy formulated was not responsive enough to the local environment (Munshi & Rosenzweig, 2009: 3; Myrdal 1972: 211).

Secondly, the self-help groups (SHGs) have not always target the intended recipients that are below the poverty line (BPL), where those who are actually in need - and should have benefited from the

policies - remain marginalised (Shylendra & Bhirdikar, 2005: 213). The problem can be traced back

to the way in which individuals or groups are deemed eligible to participate in SHGs, referring back to the way in which the policy is formulated. The default way is for the applicant to be approved and

admitted by the local committee to BPL lists (Bundela et al., 2013: 38). But as noted earlier, there

was a lack of motivation to actively partake in the SHGs. This prevented many eligible BPL households from registering and partaking in the SHGs, thereby giving up an opportunity to

increase their income (Shylendra & Bhirdikar, 2005: 211). Consequently, “two common errors


31

observed in the BPL lists are those of inclusion of the non-poor and exclusion of the poor” (ibid.).

This problem exemplifies how the mechanism of the soft state has counteracted the intended effects

of RDPs by misdirecting a significant proportion of the funds to unintended recipients. This mechanism is a constitutive mechanism of the soft state, counteracting the intended effect of equity

to mitigate income inequality (Myrdal, 1972: 201).

4.2.4. Sub-conclusion: what mechanisms are at play in India and how do they

interact? The limitations made within this report narrowed the focus of the analysis to the mechanisms of

three factors in mitigating income inequality: growth, democracy and equity. The theories within

these three pillars highlighted different positive mechanisms that would facilitate the mitigation of income inequality. In the first pillar on growth, we found that growth would trigger the mechanism

of intra-industry migration in virtue of which income inequality would be mitigated (section 4.2.1).

Within the second pillar, democracy, the mechanisms of political mobilization and redistributive

policies would facilitate the mitigation of income inequality (section 4.2.2). The mechanisms within the third pillar, equity, involved policies of which we identified land reforms and SGSY, both of

which would facilitate access to income generation and thereby mitigate the socio-economic

stratification of society (section 4.2.3).

The preceding analysis uncovered the institutional mechanisms that counteract the positive

mechanisms mentioned in the preceding paragraph. These mechanisms are a) the caste system, which counteracts the mechanism of intra-industry migration during industrialisation, b) the

patron-client relationship embodied in India’s democracy which limits political mobilization,

enabling politicians to get away with the implementation of ineffective redistribution policies, and c) the soft state, with its improper formulation and implementation, counteracts the land reforms and

SGSY aimed at achieving equity. The positive mechanisms, and how they are counteracted, are

illustrated in the model below.


32

Figure 3 - National income inequality: Interaction between positive and negative mechanisms

Critical realists argue that reality is open and differentiated, contingent upon the coexistence and

interaction between multiple complex objects and mechanisms that interact with each other (section 2.4.1). For these reasons, empirical reality cannot be understood by only studying the respective

mechanisms in isolation. Instead, we must consider how the negative institutional mechanisms collectively contribute to income inequality in India. Through retroduction, we argue that these negative institutional mechanisms have substantial relations with income inequality - that is,

without these mechanisms, the particular character of income inequality in India would not have

been the same. Evidenced by the model above, the different institutional mechanisms reinforce the causal powers of each other, the consequence of which has resulted in a 'vicious cycle' that generates

and maintains income inequality. The caste system, defined by its hierarchical system, gave rise to

and was mirrored by the patron-client relationship (section 4.1.2). The patron-client relationship, in turn, brings about the soft state since it affects the formulation of redistributive policies: the patron

is unwilling to implement policies that could jeopardise his socioeconomic position, and the client

does not have the political leverage to make greater demands from the political elite. This reinforces the soft state as the formulation and implementation of policies will not bring about significant

changes in income inequality. The soft state will, in turn, reinforce the social and economic

stratification of the caste system, because redistributive policies that should have benefitted the lower castes are circumvented by the upper castes, e.g. land reforms (section 4.2.3.1). In sum, the


33

reciprocal relationship between the institutional mechanisms that have reinforced each other

constitutes a vicious cycle, which has contributed to persistent income inequality in India.

5. How is Inclusive Growth an attempt to change institutional mechanisms? The preceding analysis uncovered the reciprocal relationship between multiple institutional

mechanisms that produce income inequality. These mechanisms are responsible for the acceleration

of income inequality, but have hitherto been unsuccessfully addressed by the policy initiatives of the federal government. In pursuing the same ineffective approach, the federal government has

indirectly allowed the existing social structures and mechanisms of the caste system, patron-client

relationship and the soft state, to perpetuate (Amenta et al., 2012: 50-51). Within historical institutionalism (HI) we can describe this as path dependency, where actors are constrained from

escaping the existing structures and institutions. This is not to say that no policy changes have

occurred, but that these changes have only been 1st order, namely routine adjustments to existing policy instruments. The subsequent question, which we will address now, is whether the Inclusive Growth (IG) strategy has successfully broken this path beyond 1st degree changes, such that they no

longer reproduce the structures and mechanisms that cause income inequality (section 3.4). This

means analysing the suggestions for policies made in the IG strategy and not assessing the implementation of these policy suggestions in particular states (section 2.5.2). This analysis will be

conducted in three steps. Firstly, we examine the role of agency in the form of explanatory critique

during the formation of a critical juncture to explain what gave rise to IG. Secondly, by drawing upon SWOT, we assess the potency of this strategy by focusing on the three main objectives within

IG - good governance, multisectoral growth, and financial inclusion - and how these objectives

engage with the negative institutional mechanisms identified in part one of the analysis that generated income inequality (section 4.2.4). Lastly, in view of our assessment, we offer suggestions

for change of action in order to decrease income inequality.

5.1 . Agency’s role in changing mechanisms and structures via critical junctures The reproduction of negative social structures and mechanisms that perpetuated income inequality resulted in increasing discredit of policies, the result of which enabled the formation of a critical

juncture, resulting in the IG strategy (Planning Commission, 2007: 1). Land reforms are examples


34

of policies that have become discredited: as stated in the preceding analysis, land reforms failed in its

goal of equitably distributing land (section 5.2.3.1). Only few states, such as Uttar Pradesh, have

been able to successfully redistribute landholdings. This entails that land reforms have only maintained a high income inequality due to the failure in redistributing this income-generating asset

(Planning Commission, 1997: 2.1.69). The path dependency will reach a tipping point in view of the

increasing discredit of existing policies; once income inequality reached a certain level in India, the positive feedback mechanism of decreasing income inequality was undermined. This is evidenced by

the intensified income inequality since the 1990s (section 4.1). We argue the lack of feedback

mechanism discredited the reestablishment of existing policies allowing for a critical juncture.

When a critical juncture takes formation, a strategic terrain emerges in which politicians face the

possibility of rearticulating existing policy strategies. This allows for societal restructuration via

actions by an assessment of how past strategies have reproduced negative structures leading to income inequality. We argue that it is within this strategic terrain that individuals and policy-makers

can exercise their agency by pursuing new avenues of policy strategies. This is what led to Inclusive Growth (Torfing, 1999: 391). We can label this societal restructuration as the use of explanatory critique, that is, a situation in which agents become knowledgeable and conscious of the negative

structures of the old path, in response to which they find ways to avoid reproducing them again,

illustrating the emancipatory role of agency (Danermark et al., 2002: 194). The use of explanatory critique is illustrated by the case of RDPs, in which it was recognised that the supply-driven

approach of past policy initiatives is responsible for the repeated failure of these policies. Ultimately,

the planning commission moved towards a demand-driven approach in the IG strategy (Planning Commission, 2012: 298). This example also illustrates how Inclusive Growth constitutes a 2nd

degree of policy change, in which the objective of redistributing the benefits of economic growth

equitably is unchanged, but the policy instruments used to achieve this objective have changed in approach (section 4.1.6). This supports our argument that Inclusive Growth breaks with previous

path dependent policies.

Depsite the strategic terrain and the use of explanatory critique, the chosen path might lead to an evolutionary dead end, regressing to the initial path to reproduce the old structures anew; this


35

implies that the new actions undertaken by the federal government might not be able to change the

existing structures. It is, however, a signal that agents have the capacity to effect change. We thus

draw upon SWOT analysis to analyse how IG engages with the negative institutional mechanisms identified in the preceding analysis, namely the caste system, soft state and patron-client

relationship.

5.2. Assessing the Inclusive Growth strategy We operationalise the SWOT analysis with two sets of variables: positive/negative mechanisms and internal/external environment (section 3.5). As stipulated in the theory section, the positive/negative

distinction concerns the mechanisms that either enable or prevent the federal government from

reaching its objective of mitigating income inequality. This dichotomy allows us to analytically separate what, on the one hand, should be pursued and leveraged, and what, on the other hand,

should be avoided and circumscribed in the strategy. We further operationalise the SWOT analysis

by distinguishing between the internal and external environment. The environment over which it

has direct control is the internal, whereas the environment over which it has only indirect control is external (section 3.5). This has clear implications for the ways in which the federal government can

engage with the mechanisms we identified in part one of the analysis (section 4.2.4). Whereas the

federal government can leverage some mechanisms immediately, others can only be indirectly leveraged. We can now assess how the respective mechanisms correspond to these operationalised

distinctions.

5.2.1 . The Indian federal government and SWOT

The government’s strengths reside in its internal environment, which we identify as the Five Year

Plans within equity, with which it can facilitate the attainment of Inclusive Growth; it is a mechanism over which it has direct control that allows it to mitigate income inequality, as clarified

in the empirical section (section 4.1.5). The opportunities reside in the external environment and

include growth and democracy, since they were identified in the theory section to constitute mechanisms that can decrease income inequality, albeit the federal government does not have direct

control over these, as it is a condition, not an instrument, upon which they can draw (section 3.5).

They are argued to be opportunities because they consist of mechanisms that decrease income


36

inequality if they are triggered, but can only be leveraged through policies facilitating the

development thereof (Kohli et al., 2003: 1). The weaknesses are those mechanisms preventing the

federal government from achieving its objectives. We align it with the soft state, which counteracts the federal government’s strength, thus turning the federal government’s strength into a weakness

by rendering the FYPs ineffective as identified in part one of the analysis (section 4.2.4). Finally, the

threats , over which the federal government has no direct control, are mechanisms of the caste system embedded in society and the patron-client relationship embodied in the Indian democracy;

these mechanisms subvert the objectives of the government in mitigating income inequality (section

5.2.4). It is only possible to influence them indirectly, as they are embodied in informal institutions (i.e. culture); not the formal institutions upheld by law (section 3.5)

Figure 4 - SWOT Analysis

5.2.2. Counteracting the weakness of the soft state in the Inclusive Growth

strategy The weakness of the soft state was identified as an institutional mechanism that counteracted policy

initiatives within the FYPs (section 4.2.3.1). The soft state has thus rendered policies defective; for

instance, in the case of land distribution, the implementation of policies to solve the issue of landless labourers and rising inequalities became a failure, as influential people have means to circumvent the

law (section 4.2.3). The objective of good governance in the IG strategy, we argue, can be


37

interpreted as a direct engagement with the negative mechanism of the soft state. According to the

federal government, the pursuit of good governance “ensures effective use of resources and deliverance of services to citizens and also provides social legitimacy to the system” (Planning Commission, 2012: 286). India, long viewed as unstable by way of its incapacity to govern in an

efficient way, could reap the benefits of equity by lessening the effects of the soft state. To promote

good governance, IG focuses on different changes, two of these being a demand-driven approach and public-private partnerships.

The success of demand-driven policies in India is made clear by rural development programs (RDPs) within IG. It was argued in part one of the analysis that a target-based approach was

unsuccessful at targeting families below the poverty line, which we attributed to the improper

formulation of the policy initiative as a result of the soft state (section 4.2.3.2). A demand-driven approach avoids the problem of implementation, as the provision of job is now granted upon

request, rather than being targeted; the initial difficulty of identifying and targeting those eligible for

the RDPs is thus avoided as the responsibility is delegated to the job-seeking portion of the

population (Planning Commission 2012: 286-287). An example of the use of a demand-driven approach in IG is the MGNREGA, an employment guarantee act, which attempts to generate

awareness among potential wage-seekers and set up systems that facilitate the provision of work

(Planning Commission, 2012: 292). The demand-driven nature of policies within IG is thus an effective way to counteract the soft state by not having to rely on redistribution by the state, which

so far has not been successful - but instead supply services based on demand.

Another way the federal government has pursued the objective of good governance is through an

increasing number of public-private partnerships (PPPs). These are agreements between the federal

government (public sector) and the private sector to provide public services such as rural development programs (EY: Agarwal & Kanoria, 2012: 7). India, having the largest number of

PPPs in emerging-market countries, also has significant untapped potential in other fields, i.e. e-

governance, education, health or urban infrastructure. The collaboration with other actors is, once again, an attempt for the government to decrease the soft state’s significance. By delegating

responsibilities to other actors, the government effectively avoids policy responsibilities in areas


38

where its lacks capabilities, and can thus avoid making inefficient policies (Planning Commission,

2012: xiv).

Demand-driven policies and PPPs are thus successful measures in minimising the weakness of the

soft state. Comparatively, this means that as less harm is done, the measures are conducive to good

governance. However, these improvements only take the internal environment into account. In order for the strategy to be successful, it must also be responsive to the external environment,

despite the fact that the government does not have direct control over it (Henry, 2011: 122). We now

turn to the aspects of IG that engage with the external environment, namely opportunity and threats.

5 .2.3. Leveraging the opportunity of growth in the Inclusive Growth strategy

We identified growth as an opportunity as it gives rise to a migration mechanism that results in decreasing income inequality (section 3.2). The aim of multisectoral growth in IG was developed in

response to lagging growth in the agrarian sector relative to the industrial and service sectors, which

should also in part explain the rising income differential between urban and rural areas over the years (Planning Commission, 2007: 2). By drawing upon their strength in the form of policies, the

federal government thus attempts to exploit the opportunity of economic growth and decrease

income inequality (Planning Commission, 2012: 3). Also encapsulated in the objective of multisectoral growth is the purpose of curbing labour migration - policy-makers have viewed

migration as a sign of socio-economic distress that coerces people to move (Solinski, 2012: 23-25).

We highlight that limiting labour migration is in direct tension with the growth opportunity, as

continued residency in rural communities does not actively decrease the threat of the caste system

that was found to counteract the opportunity of growth. Limiting labour migration strengthen the pervasiveness of the caste system, since individuals remain tied to it. When people in lower castes do

not migrate to urban areas, they fail to break with the ties of the caste system, which allows for its

continued dominance (ibid.: 27). The aim of multi-sectoral growth is thus to draw upon the opportunity of growth in the external environment, but this initiative concurrently consolidates the

threat of the caste system by encouraging people to stay in the rural communities. The paradox is


39

that we identified the caste system as curbing migration, but the objective of multisectoral growth

also facilitates this decreasing migration, which was otherwise identified to be a necessary condition

for mitigating income inequality. As a result, it reproduces the problem of the caste system counteracting the mechanism of growth (section 4.2.1).

5 .2.4. Counteracting the threat of the patron-client relationship in the Inclusive Growth strategy The threat of the patron-client relationship was identified as an institutional mechanism that

counteracts political mobilization within the democracy. Because of its stifling effect on political

mobilization and thus also democracy, effective redistributive policies would not be implemented (section 4.2.2). Financial inclusion is defined as increasing access to financial services, including

banking and credit, at an affordable cost to disadvantaged and low-income groups who tend to be

excluded (Kelkar, 2010: 57). The most significant initiatives advanced have been the increased availability of banks in rural areas, opening 7459 branches in rural communities between 2010-2013,

and a number of initiatives to reduce costs and charges. One such initiative includes low-service

bank accounts with minimum charges that would encourage even those in the poorest segments to draw upon banking services (Singh, 2014). The objective of financial inclusion within the IG can be

interpreted, we argue, as an attempt to engage with this threat of patron-client relationships by

severing the tie of dependency between the patron and client. The initial threat was that patrons (upper castes) were identified to be in a position to unilaterally supply clients (lower castes) with

socio-economic security and loans through their transfer system, on which clients are dependent

(section 4.2.2). We argue that increasing financial inclusion is one way in which the federal government can counteract the patron-client relationship by supplanting its socio-economic

functions through substitutes. The argument would be that if financial services become more

affordable and gain wider availability, it would serve as a viable substitute and thus weaken the tie of dependency.

Despite the objective of financial inclusion, lower castes are still struggling with financial illiteracy.

This involves lack of information and understanding about the use and functioning of the financial services provided by this initiative (Chandran & Manju, 2010: 6). Lower castes are thus the most


40

financially vulnerable as they are unable to draw upon the benefits of financial services. Financial

illiteracy poses a challenge to the objective of financial inclusion when the client does not have the

awareness of the financial services upon which they can draw. The client will, then, still be dependent on the patron for financial services. This hinders the possibility of financial inclusion that

was anticipated to weaken patron-client ties (ibid.: 9). In fact, there are many cases in which lower

castes have excluded themselves from the formal financial system due to illiteracy, because “they are heavily [dependent] on the informal credit sources [the caste system] which cater according to their convenience” (ibid.: 7). Although the objective of financial inclusion has the prospects of

counteracting the patron-client relationship, this proves unsuccessful as long as financial illiteracy is pervasive among the rural communities.

5 .3. Sub-conclusion Based on the assessment of the Inclusive Growth strategy above, it was found that with the main objectives of good governance, multisectoral growth, and financial inclusion, the federal

government has tried to change their previous course of actions in order to hinder the reproduction

of structures (institutions) that facilitate income inequality. The objective of good governance has been an attempt to actively combat the soft state to prevent its presence from rendering policies

ineffective. The soft state’s significance has been reduced by delegating responsibilities to private

actors while also making its initiatives demand-driven, divesting it from its involvement in the implementation of policies. Decreasing the involvement of the soft state will then allow the federal

government to draw upon its strength of equity, namely formulating and implementing

redistributive policies that can decrease income inequality. IG also attempted to leverage opportunities and counteract threats in the external environment, but it was argued that the

objectives of multisectoral growth and financial inclusion do not sufficiently, nor effectively, engage

with the threats of the external environment. The result has been an inability to effect change in the status quo of the caste system and patron-client relationship. This provides barriers for leveraging

the opportunities of growth and democracy. It is the failure of effectively engaging with the external

threats that provides the backdrop for our suggestions for actions.


41

5.3.1 . Suggestions for action As the federal government fails to counteract the external threats of the caste system and the patron-

client ties, the Inclusive Growth strategy does not engage sufficiently with the external environment, which is necessary for effective strategies (section 3.5). The federal government has attempted to

mitigate income inequality by promoting growth, democracy and equity through IG. Democracy

and growth, however, are very likely to be subverted by the caste system and the patron-client relationship. That is, they might be subverted by mechanisms that reside in the external

environment. That means the federal government is unable to draw upon these opportunities

because they are overshadowed by the threats.

Our use of the SWOT analysis demonstrates the use of explanatory critique, to uncover knowledge

about the potential harms and shortcomings that are contained in IG. In view of this explanatory critique, we suggest that the federal government engages with the mechanisms of the patron-client

ties and caste system more effectively, that is, avoid reproducing them again. Consequently, in the

following FYP (forthcoming: 2017) the federal government must take into account its external

threats (section 5.2.3 & 5.2.4).

In leveraging the growth opportunity, the threat of the caste system must be mitigated, as it hinders

migration, which is a prerequisite for decreasing income inequality during economic growth. However, the federal government failed to take into consideration how constraining migration

during multisectoral growth reinforces the caste system, as the population will continue to reside in

the rural communities. In this way, it draws upon both the opportunity of growth and simultaneously counteracts it by reinforcing the threat of the caste system (Solinski, 2012: 18). To

mitigate this threat, and still draw upon the opportunity of growth, we suggest that the federal

government should not strive to withhold people in rural communities, but instead allow them to migrate to cities in search for higher paying jobs, as the mechanism was found to decrease income

inequality (section 3.2). Ultimately, the federal government should not aspire to maintain the size of

the population residing in the agrarian sector (currently 57%) but should promote a more general shift towards industry and services. As agriculture is more land intensive, this reflects the structural

constraint on the income levels that can be reached in the agrarian sector in comparison to the

industrial and service sector (Chaudhuri & Mukhopadhyay: 2009: 190).


42

In leveraging the opportunity of democracy, the threat of the patron-client relationship must be

mitigated in order to implement effective redistributive policies. Financial inclusion is a potentially good initiative to engage with this threat by attempting to sever the tie of dependency between the

client and the patron. Our concern, however, is that the initiatives have been undermined by the

aspect of financial illiteracy, since this creates a barrier for the client (lower caste) to use the financial opportunities provided by the federal government, regardless of the (physical) availability and

affordability. We thus suggest that the federal government should focus upon increasing the

financial awareness among clients, in order to make them more reliant on the financial opportunities facilitated by the federal government. This would enable an effective break with the patron-client

ties. To increase the financial awareness the federal government is recommended to focus on

financial education in rural areas, enabling these communities to make informed financial choices. With increased financial awareness, the financial opportunities facilitated by the federal government

become viable substitutes for patron-client ties, allowing rural communities to break with these ties.

6. Conclusion

The purpose of this paper was to critically assess increasing wealth disparity, despite actions by the federal government in promoting redistributive and pro-poor policies. This was done by uncovering

the main institutional mechanisms (based on Kohli’s framework of Just Growth) that are

responsible for perpetuating income inequality in India, and to what extent the federal government’s pursuit of the Inclusive Growth strategy has engaged with these mechanisms. The model we have

developed entails that democracy, equity and growth constitute mechanisms that can facilitate

decreasing income inequality, but these are counteracted by various negative institutional mechanisms entrenched in Indian society (the soft state, patron-client relationships, and the caste

system).

In the first part of our research question, our causal analysis delved into how mechanisms, that

should have mitigated income inequality, have been counteracted by institutional mechanisms of the

caste system, patron-client relations embodied in the Indian democracy, and the soft state. On growth, we found that a necessary condition to mitigate income inequality was migration, but we

discovered that the caste system stifles social and spatial mobility, which hinders this migration. On


43

democracy, the mechanism of political mobilization that, in turn, instigates the mechanism of pro-

poor policies should have mitigated income inequality. However, we found that the patron-client

relationship, which derives from the caste system, have counteracted political mobilization due to ties of dependency, hence the pro-poor policies that did take place became populistic and ineffective.

On equity, the federal government’s redistributive policies that should have decreased income

inequality, has been adversely affected by the soft state. Two examples of redistributive policies, land reforms and rural development programs, were proven unsuccessful due to their improper

formulation and implementation. In effect, the intended redistributive effects never came to fruition.

The causal powers and tendencies we identified that should have mitigated income inequality (growth, democracy and equity) are thus not triggered because they are suppressed by institutional

mechanisms.

The second part of the research question aimed at incorporating the role of actors and how they can

prevent the reproduction of structures, in which the negative institutional mechanisms are

embodied. We argued that the critical juncture of the previous path-dependent political strategy

emerged because previous policies had not been able to mitigate income inequality. This discredit led the federal government to initiate IG. By drawing upon SWOT in the assessment of the

Inclusive Growth (IG) strategy, we found that the objective of good governance (demand-driven

policies and PPPs) effectively weakened the soft state’s presence, indicating that IG took its internal environment into account. However, it was also found that it failed to effectively engage with the

external environment because: a) the objective of multi-sectoral growth reinforces the caste system,

discouraging migration with its emphasis on generating job opportunities in all sectors, b) the objective of financial inclusion was attempted to lessen the significance of patron-client relations but

it was found that since the credit options available were not affordable, it failed to effectively break

with the patron-client relations. Finally, we argued that the federal government should engage more with its external environment in the forthcoming FYP. To do so, the federal government must

initiate policies that does not aspire towards maintaining the population size in the agrarian sectors

but promote industry-shifts and provides financial education in order to break with the caste system and patron-client ties.


44

The answer to our research question is then that institutional mechanisms perpetuating income

inequality in India are threefold: the caste system, the patron-client ties and the soft state. Moreover,

IG does not effectively engage with all of these institutional mechanisms, as it does not combat the mechanisms of the caste system and patron-client ties. Despite the result of our research question,

this report also has its limitations. Our analytical focus has been on the federal government, but not

the actual implementation of policies that takes place in the individual states. Hence, we have only been able to establish the policy intentions of the Five Year Plans and Inclusive Growth strategy

and how IG engages with the institutional mechanisms identified in our analysis. Various states

have had different degrees of success in implementing the respective policies (Planning Commission, 1997: 2.5.1.69). What explains this variation requires further investigation. A further

research area would thus be to analyse how the individual states have implemented the policies put

forth in individual Five Year Plans, and assess the way in which these policies are best implemented in order to decrease national income inequality. Moreover, as reality is open, differentiated and

stratified, we readily concede that there is a plurality of mechanisms that have not been addressed in

this paper, that have contributed to income inequality in India.


45

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