Why in the News?

A recent study by Thomas Piketty and colleagues highlights a dramatic rise in wealth and income inequality in India over the past few decades, with a sharp increase particularly from 2014 to 2022.

The analysis from ” Gallup World Poll (GWP) Survey (2019-23)” for India  

• Income Inequality: The survey data indicates a significant rise in income inequality, with the top 1% controlling over 40% of total wealth in India, a stark increase from 12.5% in 1980.
  • The top 1% of income earners now receive 22.6% of the country’s total pre-tax income, up from 7.3% in 1980.
• Rent-Seeking Behavior: The persistence of rent-seeking behavior among wealthy investors, which diverts resources from productive uses to securing unwarranted gains from government entities.
• Judicial Trust and Corruption: Trust in the judiciary can play a significant role in curbing corruption. Higher trust correlates with lower perceived corruption levels.
• Mutual Fund vs Fixed deposits: Speculative investments, such as mutual funds, largely drive income inequality, while savings in fixed deposits and post offices help curb it.
• Inequality promotes corruption: The study finds that higher income inequality causes widespread corruption, while greater confidence in the judiciary helps reduce it.

What is our present methodology for counting inequality?

• Piketty’s Measure: Thomas Piketty’s measure compares the income share of the top 1% to that of the bottom 50%. This highlights the growing disparity in income distribution effectively.
• Consumption vs Income Inequality: Inequality is traditionally measured using consumption expenditure surveys by the National Sample Survey Office (NSSO). However, consumption inequality tends to be lower than income inequality.
• Use of Multiple Data Sources: Researchers often combine data from various sources, including national accounts, tax data, and recent surveys like the Periodic Labour Force Surveys (PLFS) and Consumer Pyramid Household Survey (CPHS).
• Gini Index and Other Metrics: The Gini index is frequently used to quantify inequality, but it has limitations, being less sensitive to changes at the income distribution extremes.

Issues Associated with measuring income inequality:

• Data quality and availability: There has been a noted decline in the reliability of household surveys since 2011-12, making it difficult to obtain accurate and comparable data. For example, The 55th NSS round showed a dramatic decline in poverty estimates, which many experts deemed misleading due to the survey’s methodological flaws.
• Underreporting of wealth: Surveys may underreport wealthier households’ consumption, leading to inaccurate inequality assessments. For example, the Household Consumption Expenditure Survey (HCES) 2022-23 reported a significant drop in rural and urban poverty levels. However, critics argue that these figures may not accurately reflect the reality of wealthier households
• Comparability with other countries: India’s reliance on consumption data rather than income data can result in mischaracterization as a low-inequality country in international comparisons.
• Focus on labor income: Some reports focus only on labor income, ignoring other income sources and skewing the understanding of overall inequality. For example, studies have shown that the income share of the top 10% in India has grown significantly, while labour income alone does not reflect this concentration adequately
• Complexity of income dynamics: Accurately assessing inequality is challenging due to the influence of economic policies, globalization, and market forces. For instance, Researchers have noted that the absence of comprehensive tax data beyond 2017-18 adds uncertainty to the analysis of income inequality trends

Way forward: 

• Improve Data Collection and Methodologies: There is an urgent need to enhance the quality and reliability of household surveys and other data sources.
• Broadening Income Metrics Beyond Labor Income: To better capture the full spectrum of income inequality, it’s essential to include non-labor income sources, such as capital gains, property income, and speculative investments.

Mains PYQ:

Q It is argued that the strategy of inclusive growth is intended to meet the objective of inclusiveness and sustainability together. Comment on this statement. (UPSC IAS/2019)

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