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Context

• In India, the Periodic Labour Force Survey for the years 2017-18, 2018-19 and 2019-20 shows that the top 10% earn approximately equal to the bottom 64%. The top 10 account for one-third of the incomes earned.

 

Economic Inequality

• Economic inequality is the unequal distribution of income and opportunity between different groups in society.

 

Types of Economic Inequality

There are three main types of economic inequality:

Income Inequality

• Income inequality is the extent to which income is distributed unevenly in a group of people.

Income

• Income is not just the money received through pay, but all the money received from employment (wages, salaries, bonuses etc.), investments, such as interest on savings accounts and dividends from shares of stock, savings, state benefits, pensions (state, personal, company) and rent.
• Household income before tax that includes money received from the social security system is known as gross income. Household income including all taxes and benefits is known as net income.

 

Pay Inequality

• A person’s pay is different to their income. Pay refers to payment from employment only. This can be on an hourly, monthly or annual basis, is typically paid weekly or monthly and may also include bonuses. Pay inequality therefore describes the difference between people’s pay.

 

Wealth Inequality

• Wealth refers to the total amount of assets of an individual or household. This may include financial assets, such as bonds and stocks, property and private pension rights. Wealth inequality therefore refers to the unequal distribution of assets in a group of people.

 

Measures of Economic Inequality in India

Kuznets Curve

• Kuznets Curve is used to demonstrate the hypothesis that economic growth initially leads to greater inequality, followed later by the reduction of inequality. The idea was first proposed by American economist Simon Kuznets.
• As economic growth comes from the creation of better products, it usually boosts the income of workers and investors who participate in the first wave of innovation. The industrialization of an agrarian economy is a common example. This inequality, however, tends to be temporary as work ers and investors who were initially left behind soon catch up by helping offer either the same or better products. This improves their incomes.

 

Lorenz Curve

• The Lorenz curve is a way of showing the distribution of income (or wealth) within an economy. It was developed by Max O. Lorenz in 1905 for representing wealth distribution.
• The Lorenz curve shows the cumulative share of income from different sections of the population.
• The further away from the bisector the curve is, the greater the inequality.
• If there was perfect equality – if everyone had the same salary – the poorest 20% of the population would gain 20% of the total income. The poorest 60% of the population would get 60% of the income.
• The Lorenz Curve can be used to calculate the Gini coefficient – another measure of inequality.

 

• In this Lorenz curve, the poorest 20% of households have 5% of the nation’s total income.
• The poorest 90% of the population holds 55% of the total income. That means the richest 10% of income earners gain 45% of total income.

• In this example, there has been a reduction in inequality – the Lorenz curve has moved closer to the line of equality.
• The poorest 20% of the population now gain 9% of total income
• The richest 10% of the population used to gain 45% of total income but now only get 25% of total income.

 

Gini Coefficient

• The Gini-coefficient is a statistical measure of inequality that describes how equal or unequal income or wealth is distributed among the population of a country.
• It was developed by the Italian statistician Corrado Gini in 1912. The coefficient ranges from 0 (or 0%) to 1 (or 100%), with 0 representing perfect equality and 1 representing perfect inequality.
• Values over 1 are theoretically possible due to negative income or wealth.

The Atkinson Index

• Like the Gini index, the Atkinson index varies between 0 and 1, with 0 representing perfect equality and 1 representing perfect inequality.
• The Atkinson index answers the following question: "If society could move towards a perfectly egalitarian distribution of income, what fraction of income would it be willing to give up to do so? This fraction is the Atkinson index.
• In other words, an Atkinson index of x% means that people would be willing to give up x% of their current income to make the distribution more equal.

 

Palma Ratio

• The Palma index is the sum of the income earned by households in the top decile (the top 10%) divided by the sum of the income earned by the 40% most vulnerable households. This indicator is based on the assumption that inequality is largely due to economic dynamics at the extreme ends of the resource distribution (earned income, accumulated savings). Unlike the Gini coefficient, the index excludes from the calculation the middle class.
• The Palma thus measures inequality between the extremes of the distribution, i.e. between households at the top and the bottom.
• The Palma ratio is calculated by dividing the richest 10% of the population's share of gross national income (GNI) by the poorest 40%'s share.

 

Status of inequality in India

World Inequality Report 2022

• India stands out as a “poor and very unequal country, with an affluent elite”, where the top 10 per cent holds 57 per cent of the total national income while the bottom 50 per cent’s share is just 13 per cent in 2021, according to the latest World Inequality Report 2022.
• The average annual national income of the Indian adult population is Rs 2,04,200 in 2021. The bottom 50 per cent earned Rs 53,610, while the top 10 per cent earned over 20 times more (Rs 11,66,520), the report states.

• In India, the top 10% and top 1% hold 57% and 22% of the total national income respectively while the share of the bottom 50% has gone down to 13%.

Periodic Labour Force Survey

• In India, the Periodic Labour Force Survey for the years 2017-18, 2018-19 and 2019-20 shows that the Top 10% earn approximately equal to the bottom 64%. The top 10 account for one-third of the incomes earned.
• Basic needs become luxuries, spilling over in the form of resources becoming inaccessible.
• The income profiles have highlighted a vast pay gap between men and women, calling attention to gender-based inequities in the labour market that further marginalize women and reduce their labour force participation rate.
• Unemployment had reached a 45-year high in 2017-18, as revealed by NSO’s Periodic Labour Force Survey (PLFS).

 

Oxfam International Report

• Inequality has been rising sharply for the last three decades. The richest have cornered a huge part of the wealth created through crony capitalism and inheritance.
• They are getting richer at a much faster pace while the poor are still struggling to earn a minimum wage and access quality education and healthcare services, which continue to suffer from chronic under-investment.

• These widening gaps and rising inequalities affect women and children the most.

Reasons behind Inequality in India

• Failure of Labour Intensive Manufacturing in India.
• Jobless Growth in India.
• Regional and Inter-state disparities.
• Lack of skill development.
• Rigid social institutions like Caste.
• Tax Evasion- undue concentra­tion of incomes in a few hands.
• Regressive Tax- indirect taxes give maximum revenue to the government.
• Unemployment and underemployment and the consequent low productivity of labour.
• Failure to develop Export oriented industries.
• Corruption
• Administrative Bottleneck: Certain government policies favour one sector over the other. Also, there is a lack of rule of law and enforcement of laws such as the Minimum Wages Act.
• Nature of jobs: Approximately 56% of the total working population is in the agricultural sector. Which is marked by poor landholding, low productivity and disguised unemployment
• Inadequate public infrastructure: Lack of accessibility to primary health care centres, quality public schools, research institutions, roads, waterways, rural markets, etc. act complementary to the rise and sustenance of inequality in India.

 

What can India do to reduce inequality?

• Governments can start to reduce inequality by rejecting market fundamentalism, opposing the special interests of powerful elites, and changing the rules and systems that have led to where we are today. They need to implement reforms that redistribute money and power and level the playing field.
• Specifically, there are two main areas where changes to policy could boost economic equality: taxation and social spending.

1. Progressive taxation, where corporations and the richest individuals pay more to the state in order to redistribute resources across society, is key. The role of taxation in reducing inequality has been clearly documented in OECD and developing countries. Tax can play a progressive role, or a regressive one, depending on the policy choices of the government.
2. Social spending, on public services such as education, health and social protection, is also important. Evidence from more than 150 countries – rich and poor, and spanning over 30 years – shows that overall, investment in public services and social protection can tackle inequality. Oxfam has for many years campaigned for free, universal public services.
3. Free up women's time by easing the millions of unpaid hours they spend every day caring for their families and homes.
4. Invest in public services including water, electricity and childcare that reduce the time needed to do this unpaid work. Design all public services in a way that works for those with little time to spare. 
5. Increase the employment opportunities in the country.
6. Free high school education and an increased number of functioning health centres.
7. There is a need for Universal Income Support. Economic Survey 2016-17 has suggested replacing all current cash transfers with universal basic income. The survey wants UBI to replace and not supplement the existing social welfare, and anti-poverty schemes like MGNREGA, PMJSY etc.
8. Investments in human capital and public goods have significant positive impacts on private-sector productivity, with estimated rates of return ranging from 15% to upwards of 45%. The enhanced productivity of human beings or human capital contributes substantially not only towards increasing labour productivity but also stimulates innovations and creates the ability to absorb new technologies.
9. Measures should be taken to bridge the immense gap that remains in the distribution of wealth among different levels of society. A 99% one-off windfall tax on the wealth gains of the 10 wealthiest men in Covid19 alone will generate $ 812 billion.
10. Tax ranging from 1 per cent of wealth owned over $1 million to 3 per cent for global billionaires can generate 1.6 per cent of global income.
11. Wealth taxation in unequal societies
12. Eliminate caste discrimination.
13. Policymakers should focus on making technology cheaper and deepening its penetration.
14. Investing in women: IMF - If women’s participation in the workforce matched men’s, Japan could grow at 9 per cent per annum and India at 27 per cent. Stop the blame game: Instead of addressing the actual causes of inequality, we indulge in a blame game.
15. Reduce asset inequality through redistributive land reforms but also through inheritance taxes, preventing monopoly of control over water, forests and mineral resources and reducing financial concentration.
16. Investing in agriculture: As per the World Bank, agriculture can help reduce poverty for 80 per cent of the world’s poor who live in rural areas and work mainly in farming.
17. Create opportunities for youth and disadvantaged communities.
18. Encourage domestic resource mobilization and stimulate public and private sector development.
19. Support sectoral training, apprenticeships, and earn-while-you-learn programs.
20. Raise the minimum wage and index it to inflation.

 

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