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Solving the Income Data Puzzle

Solving the Income Data Puzzle

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Published by: Umesh Thanai on Feb 24, 2011
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Solving the Income Data Puzzle The problem with Income Data in India Income data in India has always been a contentious issue. There is a lot of intuitive discomfort that we have with the numbers, especially when you have to explain them to someone from overseas who is evaluating the potential of the Indian market with a view to investing in it. "How can any one who earns so little, afford to buy so many things, and still manage the living expenses of a family of five?", they ask, puzzled! We can definitely vouch for the fact that the income data is generated by reputed, world class organizations, using rigorously designed, huge sample size surveys that would satisfy any survey data excellence standard, anywhere in the world. So, there is no "survey science" flaw on which to hang our discomfort with the data. Obviously something isn't adding up. For example, consider the NCAER data (2001-02, the latest they have available). They describe a lower middle tier of consumers that they call the climbers, earning between Rs.2-5 lakhs a year, 70% of whom have basic durables like TVs and refrigerators, a little less than one third of whom have entry level cars and 13% have ACs. Take their next category - the upper middle class that they call the strivers. The survey data shows them as having a annual income between Rs.5 -10 lakhs a year and on that income, one in two have cars, and others luxuries. Since the number of rich households earning Rs.10 lakhs or more a year is a mere 8 lakh households in 2001-02 (and about 11 lakh households now), they alone cannot be contributing to all the consumption increase that we are seeing from the supply side. And we are not that much of a credit driven society in any case. So the consumption data must be correct. Consumption data, is like maternity. A certainty. Income data is like paternity. A matter of opinion. Various people have changed survey income data to suit their logic comfort levels. For example, a presentation made by one of the big consulting firms, arbitrarily moved all the income categories upwards by about 40%, claiming that "team analysis" had led them to conclude that this is the extent of understatement of income that people give in surveys, to save themselves from income tax. But these are fact free analyses which are high on conjencture. But, income data has its pluses Interestingly, as we will show later in this article, all survey income data produces more or less the same results of income distribution ie what income percentile has how much of the income. There is very consistent lying (under-reporting) from the people of India when asked the question on income no matter which agency does the survey. We are forced to conclude that the income data we are getting is what, in statistics-speak, we would call 'reliable' but not 'valid'. 'Not valid' because it does not measure what it is supposed to. But reliable because it repeatedly identically gives you the same result on whatever it is, that it is measuring. Obviously, the survey income data is some measure of exactly under reported income or expenditure data, which is on an interval or a relative scale, where the distance or difference between Rs.500 000 and Rs.530 000 on the scale, is the same as the distance or difference between Rs.60,000/and Rs.90,000/-. However purchasing power has to be an absolute number, which can be compared with other such numbers from around the world. So the relative scale of income distribution doesn't really help; except to make comparisons between people or between periods of time. And GDP per capita data its minuses And so business leaders, economists, politicians, equity researchers - in short everyone other than marketing folk who think of markets as made of people and not macro statistics - prefer to use the GDP per capita or related number as the real income number. Yes this is a reliable and hopefully a valid number. So Indian GDP per capita in 2003-04 is US $ 550, and we know exactly where this stands relatively to any other country. And with the notion of Purchasing Power Parity, at least intellectually, the concept is clear even if not intuitively or strategically! The only trouble with per capita GDP or any such macro number is that you cannot identify people

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and band then together. administrative departments) + (Other net current transfers from rest of the world) + (Net factor income from abroad) • Personal Income: (Private income) .73 6.59 6. We have included this article in the BW White Book because we felt that this academic detour could form the necessary lens with which to look at the rest of the data in this book. However we do not know whether this magic number.782 23.77 3.447 2. This number ranges from US $1200 to US $2000. And is used often to determine the size of the consuming class in India.php?filename=dsds_inco.. Therefore we decided to get together as a team and look at all available income constructs and see how they relate to each other.860 518 2.41 6.(Saving of private corporate sector net of retained earnings of foreign companies) .789 2.com/printerfriendly.477 20. the endeavour is to be able to establish some consonance between GDP per capita and survey data on income or expenditure.57 9.624 2.585 5.600 22.Ramabijapurkar http://www. definition) Billion Gross Domestic Product National Income Net National Disposable Income Private Income Personal Income Personal Disposable Income Domestic Saving of Household Sector 27.690 449 2.971 25. and then study each band (or per capita GDP consumer segment) in further detail. Components of National Income at Current Prices.219 23.036 25. administrative departments) • Domestic Saving of the household Sector: Financial saving and saving in fixed assets by the household sector.664 22.2003-04 Economic Indicators (Refer Box 1 for Rs.ramabijapurkar. 2 of 6 24/2/2011 1:40 PM . Therefore we do not know what people in each per capita GDP category own. there is a magic number that people use of GDP per capita above which. no doubt empirically validated from other economies around the world.(Corporation tax) • Personal Disposable Income: (Personal Income) . Further.250 483 2.55 6..856 23. makes sense for this market because a market's potential in terms of how many can afford to consume depends on (a) income levels and (b) cost of goods.520 25. recognizing that given the limitations of each.276 2.383 586 Annualized Growth Rate between 1993-94 and 2003-04 6. We have seen 2 wheelers and telecom take off at well below the magic number because price thresholds were discontinuously lowered but performance maintained.328 116 Box 1: Definitions • Gross Domestic Product: Total value of goods and services produced by a nation. but to enable a more informed choice.667 470 638 5. (consumers) based on their per capita GDP.240 504 2. multiple measures will need to be used.556 2. they say consumption will 'take' off. where they live (in terms of town class and so on).356 550 2. The purpose of doing this is not to arrive at a single measure of affluence for all to use. and how this is changing over time.18 6.799 Total US$ Billion 599 489 563 549 525 512 126 $ PPP terms Rs. SECTION 1: THE MACRO NUMBERS OF INDIA'S INCOME Table 1. Most of all.296 24. including goods and services produced abroad at market prices) + (Other net current transfers from rest of the world) • Private Income: (Income accruing to private sector from domestic product) + (Interest on public debt) + (Current transfers from govt.594 21. Per Capita US$ $ PPP terms 2.(Direct taxes paid by households and miscellaneous receipts of govt. • Net National Disposable Income: (Net value of all goods and services produced in a nation's economy.

Even though India's total household income and saving can be known from National Accounts Statistics.Market Information Survey of Household and Indicus Estimates. simply asking a question on income can yield poor results as respondents may confuse revenues with incomes.5 9.3 4.5 20. thus measuring household income as belonging to an income band. overseen by lowest India Economic Foundation and conducted by AC Nielsen.7 7.2 21. In 2004-05.com/printerfriendly. Reforming Personal Income Tax in India. for self-employed. Moreover.000 in each half of any year with the data reported on a rolling basis. Oxus Research & Investments. between them form the holy grail of income / affluence data.details of which are available on the individual websites.Ramabijapurkar http://www. with different users consistencies being partial to one of these. the pattern of distribution of total income and saving across households with different economic status is not known.2 15.000 each year.7 Income Shares * % 20. the survey tool specifically queried respondents on the revenues from their business and expenditures related to business. farmers. "What share of India's total personal disposable income comes from the richest 10% of the households?" or "Do the poorest 10% of the households save anything at all?" ..8 4. etc.9 10. it does not provide the same information across economic groups.6 22. New Delhi. IRS Per Capita income shares for NCAER. the IRS (originally christened the Indian Readership Survey). Incomes for wage earners are easy enough to ascertain. Comparison of Results Pattern of Income Distribution 1999 / 2004 NDSSP adj 2004 NSS 1999 NCAER MISH 1999 IRS 2005 4.2 12. conducted for the Ministry of Finance. Thus. In our knowledge the NDSSP is the only all India survey in recent times that has a specific method for ascertaining the incomes of the respondents. The NCAER MISH covers about 300 000 households and also asked the respondent his or her perceived income the way the IRS does.0 6.3 45. fisherman. NDSSP: National Data Survey on Saving Patterns. it is an expenditure survey but also collects data on income and wages but does not include self employed and businessmen.4 52.7 51. Surjit Singh.000 households and a thin sample of 40. Therefore. (2004).8 55. NSS. NCAER-MISH: National Council for Applied Economic Research . rather than eliciting a specific number.3 13. conducted by Hansa Research for the Media Research User's Council. These are the NSSO expenditure survey (National Sample Survey Organisation) of the Government of India. India. the NCAER (National Council for Applied Economic Research) household survey called MISH and the marketing world's favourite. The IRS covers 240 000 households 120. For non-wage earners of all types.0 13. All these surveys have an all India sample . entrepreneurs.these questions remain unanswered. NSS: National Sample Survey. IRS: Hansa Research conducted for MRUC * Household income shares for NDSSP. NACER. The income was then specifically derived. however. 3 of 6 24/2/2011 1:40 PM . we added another interesting survey called the National Data Survey on Savings Patterns of Indians (NDSSP). It however has a straight and simple income elicitation measure using a show card with different income categories written on them. per household income or saving for households with different economic status is also not known..ramabijapurkar. This paper tries to find out how India's total personal income and saving differs across different economic groups.1 Quintile 1 (lowest) Quintile 2 Quintile 3 Quintile 4 Quintile 1 (Highest) Source: Bhalla.. This measurement of income is sharper than the IRS.8 8.php?filename=dsds_inco. The NSSO covers a thick sample of 120. which asks respondents to indicate which income category their household falls into. SURVEY BASED INCOME DATA Overview of surveys There are three surveys that.

not deciles.3 7.3% of the savings comes from the richest 10% of the households. 4 of 6 24/2/2011 1:40 PM . and NCAER data is too dated. 2003 -4. it is found that as high as 45.1 16.4 11.4 100 45.0 3.9 12.1 100 49. and expenditure distribution from NSS Deciles 1 (lowest) 2 3 4 5 6 7 8 9 10 (highest) Total Top 20% Top 5% Top 1% Income Distribution(%) Saving Distribution(%) Expenditure Distribution(%) 2. For details. to derive income and savings of the total household.8 4.9 15.ramabijapurkar. and the less valid survey numbers which have a distribution available.3 The higher the income per capita per household.2 15. from NDSSP (adjusted).8 9.4 2.5 30. 34% of total income is earned by top 10% of the households. Household income and savings distribution.2 4. thus showing the data to be reliable and robust in percentage distribution terms.Ramabijapurkar http://www. minus: provides in valid absolute numbers) and macro data on income and savings (plus: valid absolute numbers. so that we can have the best of both worlds. only 2% of the savings come from these households..4 12.1 31.1 5.8 45.1 11.8 8.9 22. The poorest 20% of the households contribute just 5% to India's total personal disposable income.6 2. When we look at the saving pattern across economic status. have almost identical percentage distributions of what the income share of each income quintile is.com All sources of survey data. In case of household saving also.indicusanlytics. using the survey data of members interviewed with similar profiles in other households.2 8.php?filename=dsds_inco. ** NDSSP adjustments have been made based on Indicus Analysis..7 6.5 7. see www.3 100 62.0 6.thus bridging the gap between the more valid macro numbers with no distribution available. and the demographic profile of other members of the household. we have decided to adopt the NDSSP survey distributions on income and savings as the standard survey data to use and not the IRS or NCAER. APPLYING SURVEY DISTRIBUTION TO MACRO NUMBERS TO GET THEIR DISTRIBUTION As we said earlier.3 8.9 7. because IRS data is available only by quintiles.8 34. the endeavour of this exercise is to create a bridge that can link survey data (plus: provides a reliable distribtution. even if not comparable on the absolute incomes. minus: no distribution available). and to apply these distributions to all macro data.6 1.4 6.com/printerfriendly.6 4.2 3.7 8. For the rest of this analysis.5 3.6 0. so that we can get a distribution of macro indicators across income deciles .9 19. the higher their savings as well. especially the NDSSP adjusted and IRS. based on the data of one earning member.

809.602 88.93 1.799.185 1.365.799.8 32.8 108.910 37. a population of 220 million or so. while the lowest 10% have a GDP of USD 12 billion translating into a per capita GDP of USD 109.503 crore.29 1.19 1.thus bridging the gap between the more valid macro numbers with no distribution available.99 971. 2.6 296.33 209. 2003-04 Deciles Personal Disposable Income (Rs.8 108.09 263.6 37.813 6.090 124.php?filename=dsds_inco.627.78 2.437 8. the size of the consumer base is a bit over 20% of India.237 92.992. the top 10% of Indian households have a GDP of USD 204.041 264 691 1.003 42.2 24.371 6.3 billion.ramabijapurkar. Billion) 32.2 176.44 Saving (Rs.352 19.1 47.8 110.17 3.21 968.31 3.463 4.28 8.8 108.061 26. so that we can get a distribution of macro indicators across income deciles .Ramabijapurkar http://www.940 21. For those who prefer to think in terms of US Dollars GDP per capita. and the domestic savings of the household sector were approximately Rs.41 2.767 62.8 108. billion) 471.7 5 of 6 24/2/2011 1:40 PM .3 225.034 21.12 5.465.599.65 413.318 India's total personal disposable income during 2003-04 was Rs.281.56 423.083.7 439.12 Per Capita Income(Rs.809 29.03 11.085 5. We now apply these survey data distributions to all macro data. and the less valid survey numbers which have a distribution available.9 50. Household Sector Saving and GDP across Deciles.3 340.750 17.25 2.806 2.. Personal Disposable Income .12 732.038.84 5.818.8 108. All India.) Per Household Income (Rs) 22806 36167 49537 59909 75990 89123 115168 137889 183476 395551 115981 289544 527731 1017456 Per household savings (Rs) 1579 3885 6668 9776 13667 18118 23903 31707 47862 129351 28518 88618 178832 365425 1 (lowest) 2 3 4 5 6 7 8 9 10 (highest) Total Top 20% Top 5% Top 1% 3.585.com/printerfriendly.725. translating into a per capita GDP of USD 1857. Deciles 1 (lowest) 2 3 4 5 6 7 8 GDP (USD billion) Population (mn) GDP Per Capita (USD) 12 19.25 752.035.8 108.9 461.00 crore.51 645.806 11.8 108.473 3.188 9. For those who do believe that USD 1200 per capita GDP is indeed the magic number at which consumption takes off.642 257.62 80.3 71.61 1.33 2.761.7 654.358.80 130.) Per Capita Saving(Rs..5.3 108.066 13.84 23.

(www.3 599 298.php?filename=dsds_inco.. linking consumption / ownership to GDP Per Capita Now that we have established the robustness of the survey data like the IRS in terms of getting income shares of income percentiles right.Ramabijapurkar http://www.com) IRS Analysis.6 204. and applied those shares to GDP per capita.ramabijapurkar.com) Back Print 6 of 6 24/2/2011 1:40 PM .5 108. 9 10 (highest) Total Top 20% Top 5% Top 1% 94.indicus.. courtesy Vineet Sodhani.9 868.8 108.7 1876 550 1373.4 10.com/printerfriendly.6 54. Rama Bijapurkar is an independent market strategy consultant. Hansa Research (www.8 1088 217.. (www.6 136 4733 Finally. now the last step is to link the GDP per capita to the extent of consumption that happens at each level of GDP per capita.hansaresearch.9 2500 51.bijapurkar.com) Laveesh Bhandari is the founder and head of Indicus Analytics.

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