Relevance and Application of Trickle-down Theory of Development in the Context of India

Abstract:

The Trickle-down Theory proposes that as a country develops, there is a natural cycle of economic inequality driven by market forces which at first increases inequality, and then decreases it after a certain average income is attained. For, wealth trickles down from the rich to the poor. According to the Theory when the rate of capital accumulation is sufficiently high, the economy converges to a unique invariant wealth distribution. In other words the process of capital accumulation initially has the effect of widening inequalities but in later stages it reduces them. Further the theory says that the process of industrialization, democratization and the rise of the welfare state allow for the trickle-down of the benefits from rapid growth, and increase the per capita income. But according to a recent research done by the International Monetary Fund (IMF) this is not true. In fact, researchers found that when the top earners in society make more money, it actually slows down economic growth. On the other hand, when poorer people earn more, society as a whole benefits. During the Presidency of Ronald Reagan this theory got more legitimacy in the United States of America (US henceforward). In fact, the theory linked to Reagan’s economic policies came to be known as “Reagonomics”. However, the social problems, especially racism, partly due to the economic gap between the Whites and the Blacks, in the US were spreading concerns about the economic growth based on the theory. Similarly, at the international level despite substantial transfers of capital and technology from the developed nations to the Third World, the gap between per capita incomes between the two blocs was growing. It would seem that the economic policies of both the major political parties in India – Bharatiya Janata Party and Indian National Congress – are partly based on this theory. During the UPA rule, led mainly by the Congress, it was stoutly defended that higher economic growth will ultimately help the poor. In other words, the benefits of economic growth will trickle down to the poor. But what has actually happened are these: income inequality has risen sharply; unemployment rates have been refusing to go down in spite of impressive growth rates of nearly 9 percent during the first UPA rule; power has been increasingly concentrated among an elite coterie who benefited from the growth, who then used that power to preserve the inequality in the society besides controlling the policies and programmes of the government; other economic indicators (for instance Human Development Index) that were equally important, besides per capita incomes and GDP, are being given a short shrift.

 

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