Introduction

A recent report by the State Bank of India (SBI) has illuminated a significant decline in income inequality in India over the past decade.
This report, which analyzes taxpayer data, indicates a substantial reduction in the Gini coefficient, a widely accepted measure of income inequality.

What is the Gini Coefficient?

The Gini Coefficient, often referred to as the Gini Index or Gini Ratio, is a measure of income or wealth inequality within a specific population, region, or country.
It assigns a numerical value between 0 and 1.
0 represents perfect income or wealth equality (everyone has the same income or wealth), and 1 signifies perfect inequality (one person or household has all the income or wealth, and everyone else has none).
To calculate the Gini Coefficient, income or wealth data is typically arranged in ascending order, from the poorest to the richest individuals or households.
A Lorenz curve is plotted, which is a graphical representation of the actual income or wealth distribution. It compares the cumulative income or wealth of the population to the cumulative share of the population.
The Gini Coefficient is calculated by measuring the area between the Lorenz curve and the line of perfect equality. This area is then divided by the total area under the line of perfect equality.

Gini Coefficient: The Gini coefficient measures income inequality, ranging from 0 (perfect equality) to 1 (perfect inequality).
Reported Decline: The Gini coefficient has dropped from 0.472 in 2014-15 to 0.402 in 2022-23, marking a nearly 15% reduction in income inequality.

Taxpayer Data Limitation: The SBI report focuses on taxpayer data, potentially excluding a significant portion of income earners.
Significant Majority below Tax Threshold: Approximately 80% of income earners earn less than ₹2.5 lakh per annum, the minimum taxable amount.

Preliminary Analysis: Data from the 2017-18 and 2022-23 Periodic Labour Force Surveys (PLFS) is analyzed to evaluate changes in income inequality among various employment categories.
Gini Coefficient Trends: While the Gini coefficient decreases slightly from 0.4297 to 0.4197, the changes are minimal.
Disaggregated Gini: The Gini coefficient falls for regular wage and casual wage workers but rises for the self-employed, though the shifts are modest.

Beyond the Gini Coefficient: Income polarization becomes evident when examining the top 10% compared to the bottom 30% of income earners.
Divergence in Income Growth: The top deciles witnesses’ faster income growth (around 7.23%) compared to the bottom 20% and even the third decile. In contrast, the bottom decile experiences the slowest growth (approximately 1.67%).
The 90/10 Ratio: The ratio of incomes between the 90th percentile (top 10%) and the 10th percentile (bottom 10%) rises from 6.7 in 2017-18 to 6.9 in 2022-23, indicating increased income disparity.
Variation among Employment Types: The 90/10 ratio falls for wage earners but significantly increases for the self-employed, particularly among top earners.

Preliminary Assessment: While this analysis offers initial insights, further research is needed to comprehensively understand these trends.
Impact of Women’s Participation: The rise in women’s labor force participation, primarily in low-paid self-employed roles, may explain the increased polarization among income earners.
Tax Data Limitations: Taxpayer data might not capture the pace of inequality reduction among the broader population.
Complex Inequality Dynamics: Reduction in the Gini coefficient conceals income divergence, and future growth may either mitigate or exacerbate this disparity.

The SBI report’s revelation of declining income inequality in India is a positive development.
However, a deeper examination of income distribution across employment types and deciles unveils a more complex picture.
Income polarization, particularly among the self-employed, challenges the overarching narrative of reduced inequality.