Analysis of Income Inequality in India

• In the recent years, India has joined the club of most unequal countries.
• Based on the new India Human Development Survey (IHDS), which provides data on income inequality for the first time, India scores a level of income equality lower than Russia, the United States, China and Brazil, and more egalitarian than only South Africa.
• According to a report by the Johannesburg-based company New World Wealth, India is the second-most unequal country globally, with millionaires controlling 54% of its wealth.
• In India, the richest 1% own 53% of the country’s wealth, according to the latest data from Credit Suisse.
• The richest 5% own 68.6%, while the top 10% have 76.3%.
• At the other end of the pyramid, the poorer half held a mere 4.1% of national wealth.
• The Credit Suisse data shows that India’s richest 1% owned just 36.8% of the country’s wealth in 2000, while the share of the top 10% was 65.9%. Since then they have steadily increased their share of the pie. The share of the top 1% now exceeds 50%.
• The most obvious conclusion to be drawn is that economic reforms have relatively benefited a tiny group at the top of the Indian income pyramid.
• The increase in income inequality coincides with the sharp rise in Indian economic growth after 1980.
• This points to the famous hypothesis put forth by Simon Kuznets—that inequality tends to rise during periods of rapid growth thanks to the uneven pace at which people move from low productivity to high productivity activities.
• The big difference between India and China is in the fact that the middle 40% in India got 23% of the increase in national income since 1980 while the same group in China got 43%—a massive gap of 20 percentage points. This difference of 20 percentage points was largely captured by the top 1% in India.
• The Indian top 1% has done extremely well, the Chinese middle has benefited far more than the Indian middle, and the bottom half in both countries has had broadly similar experiences.

Causes of Income Inequality in India.

How to reduce Inequalities

Promotion of Labour Intensive Manufacturing: The failure to promote labour-intensive manufacturing like; Construction, Textile, Clothing, Footwear etc. is the single most reason of rising inequalities. The Labour-intensive manufacturing has the potential to absorb millions of people who are leaving farming.

The proportion of the labour force in agriculture has come down, but the workers who have left farms have not got jobs in modern factories or offices. Most are stuck in tiny informal enterprises with abysmal productivity levels. If India could somehow reverse this trend and promote labour-intensive manufacturing than inequality could fall.

More Inclusive Growth: The promotion and adoption of an Inclusive Growth Agenda is the only solution to rising inequality problem. Economic growth which is not inclusive will only exacerbate inequality.

Skill Development: The development of advanced skills among the youth is a prerequisite if India wants to make use of its demographic dividend. The skilling of youth by increasing investment in education is the only way we can reduce inequality. India needs to become a Skill-led economy.

Progressive Taxation: Higher taxes on the Rich and the luxuries will help reduce income inequalities.

Equal Opportunity for all: The Government may devise and set up some sort of machinery which may provide equal opportunities to all rich and poor in getting employment or getting a start in trade and industry. In other words, something may be done to eliminate the family influence in the matter of choice of a profession. For example, the government may institute a system of liberal stipends and scholarships, so that even the poorest in the land can acquire the highest education and technical skill.

Consequences of Inequality

By
Himanshu Arora
Doctoral Scholar in Economics & Senior Research Fellow, CDS, Jawaharlal Nehru University