How has India's consumption inequality come down to a four-decade low?

A recently published IMF working paper said that 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.

The report, in a way, hailed the implementation of the free ration scheme while pointing out that it was marred by problems earlier.

It said that just seven years after the expansion of PDS policy, the then Prime Minister, Rajiv Gandhi, had described the PDS system in 1985 as corrupt and/or inefficient, and concluded that only 15 % of funds meant for redistribution to the poor reached the poor. India announced an expansion of this already large food subsidy program in 2013.

The report pointed out that one of the differences with past policy was a decline in coverage. Instead of near universal access it was now limited to support for the bottom half of the urban and bottom two-thirds of the rural population.

The food support was increased during the pandemic. The food grain ration was doubled for each recipient from 5 kg of wheat (or rice) per month to 10 kg in 2020.

The report claimed that consumption inequality during the Covid-affected 2020-21 in India fell to near the lowest level in the last 40 years, primarily because of free food supply to 800 million people among other factors, the working paper said.
 

However, the consumption inequality rose a bit during 2020-21 compared to the previous year if food transfers are not taken into account, showed the paper, titled ‘Pandemic, Poverty, and Inequality: Evidence from India’.

Besides, inequality in wages of casual and daily wage workers declined dramatically during 2019-20 compared to 2011-12, but it rose from the previous year of 2018-19.

The inequality is measured by the Gini coefficient. The Gini coefficient of 100 means perfect inequality and zero means perfect equality.

The Gini coefficient in consumption declined to 29.4 during 2020-21, which is very close to its lowest level of 28.4 in 1993-94, said the paper,  The score on this parameter stood at 30.4 in 2019-20 which was also lower than 30.6 in the previous year.

However, if subsidised food transfers are not taken into account, the coefficient rose a bit to 31.5 during 2020-21 from 31.4 in 2019-20.

These numbers are calculated on the basis of real private final consumption expenditure growth beyond 2011-12. The working paper used the consumer expenditure survey by the National Statistical Office (NSO) for its calculations.

But the last such survey came in 2011-12. The latest survey of 2017-18 was junked by the government.

The paper used another methodology on the basis of real state gross domestic product (SGDP) growth to gauge the numbers beyond 2011-12.

On the basis of this methodology, the Gini declined to 30.3 during 2020-21 from 31.3 in 2019-20 if food transfers are taken into account. The inequality was the lowest since 2011-12.

However, if food transfers are not taken into account, the coefficient remained constant at 32.4 during 2020-21 and 2019-20. This way, the inequality was the highest in the past 12 years during 2019-20 and stayed there during 2020-21.

The paper also shows that wage inequality (for the casual and salaried workers) shows a larger decline in Gini from 49.89 in 2011-12 to 43.04 in 2019-20.

"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 in 2018-19.

It seems surprising that consumption inequality was almost lowest in 2020-21 in 40 years when everyone is talking about K-shaped recovery, jobs were below 2019 levels and wage growth below inflation.

Responding to this query, Virmani clarified that the study measures the Gini coefficient of consumption expenditures, not of income or of wealth.
 

There is also evidence from periodic labour force quarterly urban surveys (2020) that regular wage employees suffered more job losses than casual labour and self employed and secondary workers suffered more job losses than tertiary, while agriculture gained jobs.

But Virmani said that these two facts do not suggest a worsening income distribution during 2020.

“The working paper notes that the social safety net given to the poor by way of expansion of the country's food subsidy program absorbed a major chunk of the pandemic shock.”

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