INCOME INEQUALITY IN INDIA

-Group A3

Income inequality refers to the unequal distribution of income and wealth among individuals and
households in society. Income inequality is considered a problem for several reasons:
• Decreased economic growth: Income inequality can hinder economic growth by
limiting the purchasing power of a generous portion of the population, reducing demand
for goods and services. This can also lead to higher levels of household debt, as people
borrow to maintain their standard of living.
• Social instability: When a sizable portion of the population feels that they are not
benefiting from economic growth, it can lead to social unrest, protests, and even violent
uprisings. This can create instability, which can negatively impact the economy and the
overall functioning of society.
• Political polarization: Income inequality can lead to political polarization, as people
who are struggling financially may feel that the political system is not working for them.
This can lead to a breakdown of trust in institutions, including the government and the
media.

Income inequality can have negative effects on economic growth, social stability, health and education
outcomes, political polarization, and social cohesion.
Economists use a variety of measures to quantify income inequality. Here are some commonly used
measures:
• Palma ratio: The Palma ratio is a measure of inequality that compares the share of
income held by the top 10% of earners to the share of income held by the bottom 40% of
earners. A ratio greater than 1 indicates high inequality.
• Relative poverty: Relative poverty measures the percentage of the population living
below a certain income threshold relative to the median income. For example, the
European Union defines relative poverty as living on less than 60% of the median income
in each country.

Each measure provides a distinct perspective on income inequality and may be appropriate depending
on the context and policy goals.

India has one of the highest levels of income inequality in the world, as per various measures.
According to the World Bank's Gini coefficient, which is a commonly used measure of income
inequality, India had a Gini coefficient of 35.7 in 2021. This places India among the countries with
elevated levels of income inequality, with a rank of 121 out of 195 countries.

The trend in income inequality in India has been mixed in recent years . The Gini coefficient for India
has remained stable over the last decade, with a slight increase from 34.3 in 2010 to 35.7 in 2021.
However, this stability masks significant regional and social disparities within the country.
India does have an official estimate of income inequality, which is based on the Gini coefficient. The
National Statistical Office (NSO) of India publishes estimates of the Gini coefficient in its reports on
household consumption expenditure and income.

However, there has been some criticism of the methodology used by the NSO to calculate the Gini
coefficient. For example, some analysts have argued that the NSO's methodology may not fully
capture income inequality at the top end of the distribution, where data is more limited. Others have
raised concerns about the quality and reliability of the data used to calculate the Gini coefficient.
In response to these concerns, some policymakers in India have called for the development of
alternative measures of income inequality that consider the full range of income and wealth, rather
than just consumption expenditure. Overall, while there have been some criticisms of the official
estimates of income inequality in India, there is still a recognition among policymakers of the need to
monitor and address income inequality in the country.

Economists in India have extensively studied income inequality in the country and have found that
it is a major issue that has significant implications for economic growth, social welfare, and political
stability. Here are some key findings from recent research:
• Negative impact on economic growth: Several studies have found that income
inequality in India has a negative impact on economic growth. One study found that a 1%
increase in the Gini coefficient leads to a 0.08% decrease in the annual growth rate of GDP
per capita.
• Implications for social welfare: Income inequality in India has significant implications
for social welfare, including access to education, healthcare, and basic services. For
example, a study by Oxfam India found that the top 10% of Indian households spend 50
times more on healthcare than the bottom 10% of households.

There are several factors that contribute to income inequality in India. Here are some of the key
factors:
• Regional disparities: Regional disparities in economic development and infrastructure
also contribute to income inequality in India. Some regions, such as the southern states,
have higher levels of economic development and income than others, such as the eastern
and northeastern states. This can create disparities in access to economic opportunities
and income.
• Caste and gender discrimination: Discrimination based on caste, gender, and other
social identities can also contribute to income inequality in India. For example, individuals
from historically marginalized communities, such as Scheduled Castes and Scheduled
Tribes, may face discrimination in access to education, employment, and other
opportunities, which can limit their earning potential.

Addressing income inequality in India will require a comprehensive and multi-faceted approach that
targets the underlying causes of inequality. Here are some potential policy suggestions to mitigate
income inequality in India:
• Investing in education and skills: Improving access to quality education and skills
training can help reduce income inequality by providing individuals with the knowledge
and skills needed to access higher-paying jobs.
• Encouraging formalization of the workforce: Encouraging the formalization of the
workforce can help reduce income inequality by promoting job security and social
protection for workers.
• Other dimensions to consider are progressive taxing, social spending and
privatization.