The Great Indian Inequality Debate: Is India's income inequality declining?

With the latest HCES showing a fall in Gini coefficient between FY12 and FY23, has India been able to reduce the income inequality?

The household consumption expenditure survey (HCES), released by the National Statistical Office (NSO) after a gap of 11 years, reveals that the value of Gini Coefficient for consumption expenditure in the country declined from 0.283 in 2011-12 to 0.266 in 2022-23 for rural areas, and from 0.363 to 0.314 for urban areas. 

Developed by Italian statistician Corrado Gini, the coefficient has been a measure of income inequality in an economy for more than a century. It measures inequality on a scale of 0 to 1, with higher values indicating higher inequality. This can sometimes be shown as a percentage from 0 to 100 per cent as the Gini Index.

The HCES also shows that the top 10 per cent of rural and urban households account for 22.7 per cent and 25.7 per cent of overall consumption expenditure in the country, down from 24.6 per cent and 29.7 per cent, respectively. The share of the bottom 50 per cent in 2022-23 stood at 31.8 per cent and 28.6 per cent in rural and urban areas. This has increased from 30.9 per cent and 25.9 per cent in 2011-12.

The decline in the Gini coefficient value and the proportionate change in the consumption share of the top and bottom income quartiles over the last decade or so suggest that income inequality has decreased in the country. However, it contradicts independent studies claiming that inequality in India has increased in the past few decades and the economy has had a K-shaped post-pandemic recovery – an uneven growth pattern that follows two diverging lines, with one section prospering but the other continuing to struggle.

In the absence of an official income survey, the HCES has become the most reliable indicator of income inequality.

But there is another side.

The other side

TCA Anant, former chief statistician of India, believes the decline in consumption inequality is not related to a decline in income inequality. "The decline in Gini Coefficient has a natural element to it. Once the income increases, the consumption expenditure does not rise much. Hence, the consumption starts flattening out,” Anant said at a conference organised by the Ministry of Statistics and Programme Implementation on Wednesday.

This, he said, could be seen in the flattening of the Engels curve. “So, consumption inequality may fall over time, income inequality may not fall and, in fact, it may be rising at the same time.”

Pronab Sen, Chairperson, Standing Committee on Statistics says the HCES showing a decline in consumption or income inequality at the national level is an outlier, as an increase in income inequality in India is a widely accepted and corroborated phenomenon of the past three decades.

“It (Gini Coefficient) is overly sensitive to certain income quartiles. It does not explicitly capture changes in the affluent quartiles,” says Sen. “That has been a problem with data collection techniques in the NSO surveys for a long time, especially in urban areas. So, to conclude with this set of data that spending inequality has come down in the past decade is not correct.”

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The caste of money

Earlier this year, based on an analysis of the income tax return data, a State Bank of India report said income inequality had declined in India between FY14 and FY22 due to an increase in the tax base and a shift in taxpayers from lower to higher income tax brackets.

This “Great Migration” of taxpayers has resulted in 36.3 per cent of taxpayers moving from lower to higher income tax brackets between FY14 and FY21 and generated an additional income of 21.3 per cent for them. The top 2.5 per cent of taxpayers’ contribution in income declined from 2.81 per cent to 2.28 per cent.

However, in March, a paper by the World Inequality Lab signalled an increase in income inequality in India. Co-authored by economists Nitin Kumar Bharti, Lucas Chancel, Thomas Piketty, and Anmol Somanchi, it showed that by 2022-23, the top 1 per cent working population had an income share of 22.6 per cent and the top 1 per cent accounted for 40.1 per cent of wealth. This compares with the bottom 50 per cent getting only 15 per cent of national income in 2022-23.

The paper advocated a “super tax” of 2 per cent on the net wealth of the 167 wealthiest families in 2022-23 as a tool to fight inequality that would yield 0.5 per cent of national income in revenues and create valuable fiscal space to facilitate such investments. 

The World Inequality Lab sent additional data to Business Standard, which shows that more than 85 per cent of all billionaires in the country are from the upper-castes. People from Scheduled Castes comprised merely 2.6 per cent of billionaires in 2022, while the share of Other Backward Classes was 9 per cent. There were no billionaires among Scheduled Tribes.

The data suggests that OBC billionaires’ wealth has declined, while those from the upper castes became richer. “This is driven by the fact that new billionaires that have been added in recent years were largely only from the upper castes,” says Somanchi, one of the co-authors of the paper.

Missing the middle? 

Chief Economic Advisor V Anantha Nageswaran said in a newspaper article that the World Inequality Lab’s report missed the large emerging middle class by singularly focussing on the top 1 per cent, and that poverty reduction, not inequality, was the litmus test of inclusive growth.

However, Surajit Mazumdar, Professor at Jawaharlal Nehru University, says the results from the periodic labour force survey indicate that between 2017-18 and 2022-23, the real earnings from all forms of employment -- self, regular or casual – declined, and employment share of agriculture increased. Thus, an increase in consumption expenditure across all classes between these two points of time is a strange outcome. 

“According to National Accounts data, the real per capita consumption expenditure increased by 67.5 per cent between FY12 and FY23, which is significantly higher than the increase in both rural (40.0) and urban (33.5) consumption expenditure emerging from the Consumption Survey results. This suggests that under coverage of the highest expenditure brackets has had a more pronounced effect on the FY23 survey than in the past,” he says. 

The Annual Survey of Industries data, too, indicates a growing income inequality. In 1991-92, the total emoluments paid to workers constituted around 38 per cent of net value added, of which 24.7 per cent constituted wages to workers, while factory owners and shareholders gained 20.4 per cent as profits. However, the latest 2021-22 ASI data shows that 32 per cent of NVA constitute emoluments of workers and merely 15.1 per cent is paid as workers’ wages, while profits have surged to 54.3 per cent. 

Santosh Mehrotra, a visiting professor at the University of Bath, says nearly 190 million workers (FY22) in India are earning just up to Rs 100 per day (in real terms at 2010 prices), which can be categorised as absolutely poor, as compared to just 106.1 million workers in FY12. 

(Shikha Chaturvedi contributed to this article)