Inequality and poverty

Trends in poverty and inequality have been subjects of lively debate in recent times. While the experts don't agree on what exactly the trends are, one factor to bear in mind is that there are problems in accurately measuring both, and there may be a case for some new definitions. In so far as the all-India distribution of personal incomes is concerned, India is relatively equal, with a Gini coefficient of 32.5 in 1999-2000 (China's is much higher at about 45). More accurately, this is expenditure inequality, since the National Sample Survey does not collect data on incomes. This 32.5 compares favourably with many other countries and has been relatively stable. Nor do indicators like the share of the richest 10 per cent in total consumption (28.5 per cent), or the consumption of the richest 10 per cent in relation to the poorest 10 per cent (7.3 times) show remarkable inequality. So it is not a bad story to tell, except that the numbers are based on expenditure, not income, and income inequality is greater than expenditure inequality. Second, there is a tendency to under-report income in the upper income reaches, and perhaps over-report somewhat lower down. Third, the highest bracket is an open-ended interval and, for statistical reasons, the imputation of an average income for that interval may result in under-estimation of the highest incomes. For all these reasons, income inequality in India may be more than officially reported, though by how much would be difficult to guess.

In discussions on inequality, one often fails to distinguish between stock variables like wealth and flow variables like income. On the latter, Business Standard's Billionaire Club survey shows monthly salaries of over Rs 1 crore, whereas minimum wages, which are usually not enforced, are around Rs 90 a day and lower. The question will be asked at some point as to whether corporate salaries reflect greed, and are unrelated to performance, as seen with CEO salaries in the US. However, focusing on the numbers at the extremes can distort the over-all picture on inequality.

Inequality is a relative concept, while poverty is an absolute one. It is possible for the poor to be absolutely better off, although inequality increases, as often happens in a period of reforms. When reforms lead to income growth, inequality will increase if growth in incomes for the poor is not proportionate to growth for the rich. Even if reforms lead to absolute improvements in living standards for the poor, as they have, there will be resentment if inequality increases, or is perceived to increase. This makes further reforms difficult to implement.

Exploitation of market-based opportunities by the poor requires transport connectivity, access to better education and better health, as a bare minimum of prerequisites. However, since 1991, the public delivery of these services has collapsed""as documented in reports done by organisations like Pratichi Trust. Consequently, there has been increased private expenditure on items like health and education. At the Economic Editors' Conference, Montek Singh Ahluwalia said that by the end of the Tenth Plan, the poverty ratio should drop to 21 per cent, and decline to 7 per cent or 8 per cent by the end of the Eleventh Plan. Notwithstanding the debate about NSS' methodology, this may well turn out to be true. But there is a fundamental question about the definition of the poverty line, meant to capture a minimum level of personal consumption. Eighty per cent of this is accounted for by food. When the poverty line was first thought of, in the early 1960s, health and education were deliberately excluded because it was felt that these would be provided by the state and should not figure in personal consumption. Since that is not in fact the case, the poverty line should itself be re-defined to reflect reality. This will have the inevitable result of showing more people below the poverty line, but it may be a more accurate number.