Income Inequality in India

Name- Bhoomika Rustagi

Class- BMS 1 A
Roll Number- 17178
Title: Income Inequality in India

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 TABLE OF CONTENTS

1. Abstract………………………………………………………………..3
2. Introduction……………………………………………………………3
3. Literature Review……………………………………………………...4
4. Objective of the Study…………………………………………………5
5. Research Methodology...………………………………………………6
a. Lorenz Curve……………………………………………………….7
b. Gini Coefficient…………………………………………………….7
c. Income Mobility……………………………………………………7
6. Data Theories Available……………………………………………….8
a. Tracking Income Inequality in India……………………………….8
b. World Gini Index…………………………………………………..9
c. Past Trends………………………………………………………..10
d. Key Economic Indicators…………………………………………12
7. Analysis and Discussion……………………………………………..13
8. Shortcomings…………………………………………………………14
9. Assumptions………………………………………………………….15
10. Conclusion…………………………………………………………..16
11. References…………………………………………………………...16

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ABSTRACT:

Income differences are a major issue prevalent in India with 1% of the richest holding about 53%
of our country’s wealth. These income differences have seen an upward trend since the past
decades. Several factors contribute to this disparity, more over having an impact on the
functioning of the economy. Therefore this study aims to know the working of Income
Distribution, and find the causes for the Income Gap including a focus on the public policies
undertaken for the same. The study also is an attempt towards finding how income inequality
affects various economic indicators as well as health indicators of the nation.

INTRODUCTION:

Income distribution refers to four different topics in economics.

See also the related College Economics Topic, Income Inequality. When you look around you,
it's obvious that some people are richer than others. How many are rich and how many are poor?
How did it get to be that way? Does it change overtime, and if so, how and why? What is the
difference between income and wealth? Not all happiness comes from having a lot of money, so
why is there so much emphasis on making money, anyway? These are some of the many
questions economists ask when they talk about income distribution. It is impossible to talk about
the distribution of income without triggering strong feelings about wanting to help those less
fortunate than you. It is equally hard to talk about the distribution of income without feeling
some envy for those who are more fortunate than you. Economists recognize both of these
feelings. Economists also recognize that not all happiness derives from being financially well
off. We call these questions about fairness, the economics of well-being, or welfare economics.
Is the difference in income because some people are just born into wealthy families or are just
born with exceptional natural talents? Is it because some cultures or countries have social or
government laws or institutions that encourage education, savings, social mobility, etc.? Is it
good luck, hard work, free markets, property rights, government intervention, or some
combination?

*WHAT IS INCOME INEQUALITY?

Income includes the revenue streams from wages, salaries, interest on a

Savings account, dividends from shares of stock, rent, and profits from
Selling something for more than you paid for it. Income distribution is the smoothness or
equality with which income is dealt out among members of a society. If everyone earns exactly
the same amount of money, then the income distribution is perfectly equal. If no one earns any
money except for one person, who earns all of the money, then the income distribution is
perfectly unequal. Usually, however, a society's income distribution falls somewhere in the
middle between equal and unequal.
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SOME CAUSES OF INCOME INEQUALITY:

• Education is known to affect equality in societies. Certain social economic groups of people do
not have access to quality education in India. In countries that provide higher-quality secondary
education across the economic spectrum, there is much less income disparity.
• Competition for talent creates a salary divide. There is much more competition for high-quality
executive talent, which has driven salaries for executives higher relative to the level of generated
productivity. Big bonuses and other incentives have led to an inflation of executive salaries.
• Stagnant wages play a big role in inequality. The median income for low-to middle- income
workers has been mostly flat since 2007, while executive compensation has increased. The
diminished influence of labor unions has also led to flat or declining wages among workers.
• Family and social interactions impact earning potential. Social and emotional skills critical to
leading a quality life is not sufficiently developed in economically distressed areas with a high
percentage of unstable families.
• Increased demand for high-skilled workers adds to a widening wage gap. Companies are
investing more heavily in developing a high-skilled workforce, driving wages up for high-skilled
workers. This leads to de-emphasizing or automating
low-skilled functions, pushing wages for low-skilled
workers down.

LITERATURE REVIEW:
The project is constructed more on the content that was
available in a few research articles and general media
articles apart from various general knowledge sources.
The main focus of the study is derived from the below
two research articles:
• http://www.india-
seminar.com/2015/672/672_himanshu.htm
In most discussions on global inequality, India is often
referred to as a low inequality country. This is largely a
result of the fact that while inequality in India is
measured on consumption expenditure, the comparator
for other countries is income inequality. In general,
consumption inequality measures are lower than
similar measures of inequality based on income.
Further, there is also some evidence, although weak,
that consumption as measured by the National Sample
Survey Office (NSSO) in India tends to underestimate the consumption of the rich. Nonetheless,
SUMMARY POINTS
Income inequality has generally been associated
with differences in health
------------------------------------------------------------
A psycho social interpretation of health inequalities,
in terms of perceptions of relative disadvantage and
the psychological consequences of inequality raise
several conceptual and empirical problems
------------------------------------------------------------
Income inequality is accompanied by many
differences in conditions of life at the individual and
population levels, which may adversely influence
health
-------------------------------------------------------------
Interpretation of links between income inequality
and health must begin with the structural causes of
inequalities, and not just focus on perceptions of
that inequality
-------------------------------------------------------------
Reducing health inequalities and improving public
health in the 21st century requires strategic
investment in neo-material conditions via more
equitable distribution of public and private
resources

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the fact remains that on comparable measures of consumption inequality across countries, India
remains a high inequality country.

For the record, the gini of consumption expenditure as measured by the National Sample Survey
(NSS) consumption expenditures surveys report arise in consumption inequality from 0.32 in
1993-94 to 0.38 in 2011-12 for urban areas. Corresponding estimates of gini of consumption
expenditure in rural areas were 0.26 in 1993-94 to 0.29 in 2011-12. On income inequality, the
limited information that is available suggests that inequality in India maybe very high. The latest
data on income inequality, which is available from the India Human Development Survey
(IHDS) reports, shows income inequality in India in 2005-06 at 0.532 puts India among the high
inequality countries.

• http://search.proquest.com/openview/99eec322e63e86fa4391d2
d4d323280a/1?pq-origsite=gscholar&cbl=2040978
Income inequality and mortality: importance to health of individual income, psycho social
environment, or material conditions John W Lynch, George Davey Smith, George A Kaplan,
James S House Studies on the health effects of income inequality have generated great interest.
The evidence on this association between countries is mixed, 1–4 but income inequality and
health have been linked with in the United States, 5–11 Britain, 12 and Brazil. 13 Questions
remain over how to interpret these findings and the mechanisms involved. We discuss three
interpretations of the association between income inequality and health: the individual income
interpretation, the psycho social environment interpretation, and the neo material interpretation.
Methods were viewed the literature through traditional and electronic means and supplemented
this with correlational analyses of gross domestic product and life expectancy and of income
inequality and mortality trends based on data from the World Bank,14 the World Health
Organization,15 and two British sources. 16-17 the individual income interpretation. According
to the individual income interpretation, aggregate level associations between income inequality
and health reflect only the individual level association between income and health. The
curvilinear relation between income and health at the individual level.

OBJECTIVES OF THE STUDY:

This research project is based on knowing Income Inequality and how it is an important
challenge for the nation, how it is measured and what are its causes.
Special information about influential statements, public policy and possible measures are also
included.
A statistical research work is also portrayed with analysis of the same.
The whole study is done with India in the view point.

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RESEARCH METHODOLOGY:
MEASURES OF INCOME INEQUALITY:

Economists often measure income equality by measuring how much income is earned by
different segments of the population. For instance, if we break down all workers into five
segments in terms of how much money they make: the top 20%, the second 20%, the third 20%,
the fourth 20%, and the bottom 20%.

Let's say that the average monthly incomes for five segments in a society are Rs.10,000,
Rs.24,000, Rs.50,000, Rs.80,000,and Rs.1,10,000.

In order to look at income distribution, we need to see what percentage of total income each
segment makes.

Total Income= 10000+ 24000+ 50000+ 80000+ 110000

Total Income= 274000

Next we find the percentage of total income that each segment of the population earns, by
dividing their income by the total income:

Bottom segment percentage= 10000/274000 = 0.036 = 3.6%

Second segment percentage= 24000/274000 =0.088= 8.8%
Third segment percentage= 50000/274000= 0.182= 18.2%
Fourth segment percentage= 80000/274000= 0.292= 29.2%
Top segment percentage= 110000/274000= 0.401= 40.1%

What these figures indicate is that the bottom fifth of the population gets less than 4% of the total
income, while the top fifth of the population gets over 40% of the total income, indicating a large
degree of income inequality.

SEGMENT % INCOME CUM % INCOME

BOTTOM 20% 3.6% 3.6%

SECOND 20% 8.8% 12.4%

THIRD 20% 18.2% 30.6%

FOURTH 20% 29.2% 59.8%

TOP 20% 40.1% 99.9%

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• Lorenz Curves

We can get a visual sense of income equality. To do this, plot out how much each of the
population segments earns (cumulatively), and compare the resulting curve to a perfectly equal
income distribution, which would be a straight-line graph:

• GINI Coefficient

Using the Lorenz curve, we can also generate a numerical representation of income equality
called the Gini coefficient. The Gini coefficient, which ranges between 0 and 1, is equal to the
area between the actual and equal distribution curves divided by the total area under the equal
distribution curve. In the figure above, the Gini coefficient is equal to the area of A divided by
the area of (A+B). The greater the Gini coefficient, the greater the degree of income inequality.
A perfectly equal income distribution will have a gini coefficient of 0, while a perfectly unequal
distribution will have a Gini coefficient of 1.

• Income Mobility

Income mobility refers to the ease with which workers can move up and down in the hierarchy of
earning power. If the rich always stay rich and the poor always stay poor, then an unequal
income distribution is a permanent and serious problem. If workers easily shift from middle class
to upper class or from lower class to middle class, however, then the degree of inequality
becomes less serious, since the inequality is fluid and temporary.

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DATA AND THEORIES AVAILABLE:
TRACKING IN COME INEQUALITY IN INDIA:

• The primary source of tracking inequality in India, despite its non-comparability with other
countries, is the consumption expenditure surveys of the National Sample Survey Office
(NSSO). These are available for a long period of time starting from the1950s and provide
estimate of consumption expenditures.

It is obvious from the table that inequality as measured by the GINI of consumption expenditure
declined between 1983 and 1993-94 but has seen a rising trend since then. The trend of
increasing inequality is also obvious from other measures of inequality.

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WORLD GINI INDEX:

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 FACTS

• In India, the richest 1% own 53% of the country’s wealth, according to the latest
data from Credit Suisse.

• This is far ahead of the United States, where the richest 1% own 37.3% of total
wealth. But India’s finest still have a long way to go before they match. Russia,
where the top 1% own a stupendous 70.3% of the country’s wealth.

• The richest 5% own 68.6%, while the top 10% have 76.3%. At the other end of the
pyramid, the poorer half jostles for a mere 4.1% of national wealth.

• 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%.

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PAST TRENDS:

Preliminary evidence from the Annual Survey of Industry (ASI) data also shows a consistent
decline in the wage share in net value added (see Chart1). The share of wages, which was 30% in
the early 1980s, declined to 20% by the end of the 1990s and further declined to only around
10% by the end of the last decade (2000-10). On the other hand, the share of profits in net value
added increased during the same period from less than 20% in the 1980s to more than 50% in the
last decade. Further, while the share of profits was lower than the share of wages until 1993- 94,
it is now almost six times that of wages.

Using the Central Statistical Organization (CSO) data of national accounts along with the
employment data from the NSSO suggests that growth of workers in the private organized sector
and the public organized sector has been higher than that of agricultural labourers or cultivators.
Chart3 gives the index number of workers income by various class of workers (1993-94 = 100).
While income of wage workers and cultivators increased by 4-5 times between 1993-94 and
2011-12, the corresponding increase in case of salaried workers in private and public sector was
10 times their earnings in 1993-94. The gini coefficient of workers income also follows an
upward trend, increasing from 0.39 in 1993-94 to 0.48 to 2009-10 before falling to 0.44 by 2011-
12 (see Chart 4).

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KEY ECONOMIC INDICATORS:

Leading Indicators

• Because leading indicators have the potential to forecast where an economy is headed, fiscal
policy makers and governments make use of them to implement or alter programs in order to
ward off a recession or other negative economic events.
Eg. Stock Market, Manufacturing Activity, Housing Market etc.

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Lagging Indicators

Unlike leading indicators, lagging indicators shift after the economy changes. Although they do
not typically tell us where the economy is headed, they indicate how the economy changes over
time and can help identify long-term trends.

Changes in the Gross Domestic Product (GDP)

GDP is typically considered by economists to be the most important measure of the economy's
current health.

• Income and Wages.

• Unemployment Rate.

• Consumer Price Index (Inflation)

• Currency Strength.

• Interest Rates.

• Corporate Profits

• Balance of Trade.

ANALYSIS AND DICUSSION:

Correlation b/w income inequality & Consumer price index

Considering several economic indicators, we choose CPI (Consumer

Price Index) to be correlated with Income Inequality in this study:

 CONSUMER PRICE INDEX

Consumer Price Index: The Consumer Price Index (CPI) is a measure that examines the
weighted average of prices of a basket of consumer goods and services, such as transportation,
food and medical care.
CPI thus serves as a measure of inflation.

 INFLATION

Inflation is the rate at which the general level of prices for goods and services is rising and,
consequently, the purchasing power of currency is falling.

Correlation b/w income inequality & mortality rate

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Income inequality has generally been associated with differences in health. Therefore we decided
to determine what correlation holds between Income Inequality & Mortality Rate.

 MORTALITY RATE

Mortality rate, or death rate, is a measure of the number of deaths (in general, or due to a specific
cause) in a particular population, per unit of time.
Mortality rate is typically expressed in units of deaths per 1,000 individuals per year.

INCOME INEQUALITY & INFLATION:

1. Correlation b/w Rural GNI &CPI is positive yet low, thus we can’t establish a strong
correlation b/w them.

2. Correlation b/w Urban GNI & CPI is moderately negative which indicates that as the
Urban Income Gap increased, the inflation was decreasing. Decrease in the price rise can
be correlated with an increase in the income gap.

(This could mean that with the fall in prices, the purchasing power of the rich increased to a
greater extent as compared to the purchasing power of the poor)

INCOME INEQUALITY & MORTALITY RATE:

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 1. Correlation b/w Rural GNI & Mortality Rate is moderately positive which indicates that
as the Rural Income Gap increased, the inflation was increasing. The increase in the
average prices can be correlated with an increase in the income gap.

(This could mean that with the rise in the rural income gap between the rich & the poor, the
mortality rates also increased.)

2. Correlation b/w Urban GNI & Mortality Rate is highly negative which indicates that as
the Urban Income Gap increased, the mortality rates decreased sharply.

(This could mean that with the rise in the urban income gap, the mortality rates declined.)
SHORTCOMINGS:

My experiment does not offer any feasible conclusion. Certain reasons would be:

1. Statistical Shortcomings

i. Only establishing correlation between the data.

ii. No regression could be drawn
iii. Lack of credibility of the correlation that was established

2. Pre-requisite shortcomings

I. Lack of awareness on the true relation b/w Income Inequality &

Consumer Price Index.
II. Lack of research done on the true relation b/w Income Inequality & Mortality Rates.

ASSUMPTIONS:

I. GINI serves as an accurate indicator for Income Inequality.

II. Other factors that may affect the experiment in general are constant

E.g. the decrease in mortality rate could be caused by Improvement in Health care structure, but
that is not kept in consideration here for the purpose of correlation.

NEWS
N.C. Saxena, a member of the National Advisory Council, suggested that the widening
income disparity can be accounted for by India’s badly shaped agricultural and rural
safety nets. “Unfortunately, agriculture is in a state of collapse. Per capita food
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production is going down. Rural infrastructure such as power, road transport facilities
are in a poor state,” he said. “All the safety net programmes are not working at all, with
rural job scheme and public distribution system performing far below their potential. This
has added to the suffering of rural India while market forces are acting in favour of urban
CONCLUSION:

Oxfam has calculated that if India stops inequality from rising further, it could end extreme
poverty for 90million people by 2019. If it goes further and reduces inequality by 36%, it could
virtually eliminate extreme poverty.

India– along with all the other countries in the world– has committed to attaining the Sustainable
Development Goals by 2030, and to ending extreme poverty by that year. But unless we make an
effort to first contain and then reduce the rising levels of extreme inequality, the dream of ending
extreme poverty for the 300million Indians– a quarter of the population– who live below an
extremely low poverty line, will remain a dream.

REFRENCES AND SOURCES:

1. INVESTOPEDIA

2. WIKIPEDIA

3. SPARK NOTES

4. INDIAN EXPRESS ARTICLES

5. PLANNING COMMISSION (DATA BOOK DECEMBER_2014)

6. WEFORUM.ORG {WORLD ECONOMIC FORUM}

7. INFLATION.EU (WORLD’S INFLATION DATA}

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