Consumption inequality fell to a near-four-decade low in FY21, shows data

IMF study attributes it to free foodgrain supply to 800 million beneficiaries

This may come as a surprise. Consumption inequality in India during pandemic-hamstrung 2020-21 (FY21) fell near its lowest level in 40 years, primarily because of free food supply to 800 million people, revealed a recently published International Monetary Fund (IMF) working paper.  

However, consumption inequality rose somewhat in FY21, compared with the previous year, if food transfers are not taken into account, showed the paper titled ‘Pandemic, Poverty, and Inequality: Evidence from India’.

Moreover, inequality in wages of casual and daily-wage workers declined drastically in 2019-20 (FY20), compared with 2011-12 (FY12), but rose from 2018-19 (FY19).

The inequality is measured by the Gini coefficient. A Gini index of zero represents perfect equality and 100, perfect inequality (in percentage terms).

The Gini coefficient in consumption declined to 29.4 per cent in FY21 — close to its lowest level of 28.4 per cent in 1993-94 — said the paper. The score on this parameter stood at 30.4 per cent in FY20 — also lower than 30.6 per cent in the previous year.

“The effect of the (food) subsidy adjustments on poverty is striking. Real inequality, as measured by the Gini coefficient, has declined to near its lowest level reached in the last 40 years," said the paper.

However, if subsidised food transfers are not taken into account, the coefficient rose slightly to 31.5 per cent in FY21, from 31.4 per cent in FY20.

These numbers are calculated on the basis of real private final consumption expenditure growth beyond FY12. The working paper used the consumer expenditure survey by the National Statistical Office for its calculations. The last such survey came in FY12. The latest survey of 2017-18 was junked by the government.

The IMF has clarified that the views expressed in the paper are of the authors — Surjit Bhalla, executive director for India at the Fund, Arvind Virmani, former chief economic advisor, and Karan Bhasin, a policy researcher — and do not necessarily represent those of the multilateral agency.

The paper used another methodology on the basis of real state gross domestic product growth to gauge the numbers beyond FY12.

On the basis of this methodology, Gini declined to 30.3 per cent in FY21, from 31.3 in FY20, if food transfers are taken into account. The inequality was the lowest since FY12.
 

However, if food transfers are not taken into account, the coefficient remained constant at 32.4 per cent during FY21 and FY20. This way, the inequality was the highest in 12 years during FY20 and stayed there during FY21. The paper also shows that wage inequality (for casual and salaried workers) shows a larger decline in Gini from 49.89 per cent in FY12 to 43.04 per cent in FY20.

“This is a very large improvement, suggestive of both inclusive growth and healthy income growth amongst a large fraction of the poor (casual daily-wage workers),” said the paper.

However, wage inequality rose, compared to the Gini coefficient of 42 per cent in FY19. It seems surprising that consumption inequality was almost the lowest in FY21 in 40 years when everyone is talking about K-shaped recovery, jobs being below 2019 levels and wage growth below inflation. Responding to this, Virmani said there is confusion between the effects of the pandemic on savings, wealth in different categories, income, employment, and their recovery over time. He clarified that the study measures the Gini coefficient of consumption expenditure, not of income or of wealth.

“We have measured the consumption distribution in the first year of the pandemic, when the lower middle class and the poor had some savings that they drew on and also had some capacity to incur debt to maintain their consumption. These savings may have run out during the second wave in 2021-22,” he further clarified.

There is also evidence from the periodic labour force quarterly urban surveys (2020) that regular wage employees suffered more job losses than casual labour and the self-employed, and secondary workers suffered more job losses than tertiary, while agriculture gained jobs. “These two facts do not suggest a worsening income distribution during 2020,” he said.

The study shows that the real Gini coefficient un-adjusted for ‘in-kind’ subsidies worsened marginally in FY21, from what it was in FY20. These were marginally more unequal than in 2004-5 and FY12, said Virmani.