Has inequality come down? Here’s what data reveals

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Updated: January 29, 2020 7:48:48 AM

In the last six years, there has been a rather sticky movement in pay packets for the class earning higher incomes.

Third, the next two categories of Rs 10-20 lakh and Rs 20-50 lakh accounted for 5.2% of assesses and 20.9% of income in 2012-13. BY2018-19, their share was 9.5% in the former and 26.1% in income.

The issue of equality has been debated for quite some time, and it is hard to get comprehensive data given the very large presence of the unorganised sector. One dataset that has a limited coverage, though nonetheless is very pertinent, is the one pertaining to income tax returns as it covers all tax assesses. This has limitation insofar as it looks at only income tax assesses and excludes a large part of the community such as agriculture or the gig workers who do not pay tax. But it is still indicative of income levels at the organised level of employment.

For FY19, there were 55.08 million tax assesses, which can amount to around 150-200 million of population depending on whether these tax assesses are single family income earners or dual income families. This number was 28.77 million in FY13, which is the earliest year for which data is available and hence grew at a CAGR of 11.4%. The total income of all assesses increased from Rs 12.14 lakh crore to Rs 34.14 lakh crore, implying a CAGR of 18.8% for the six-year period. GDP in nominal terms increased by around 11.5% during this period, which indicates that those paying taxes had a more robust growth in income over the national average during this period. The average income of tax assesses hence increased from Rs 4.2 lakh to Rs 6.2 lakh, which is a CAGR of 6.6% as against growth of per capita GDP of 10%. Therefore, income tax assesses had a lower growth in average income compared with the national average.

To gauge the level of inequality in this sample of individuals, the following is examined. The income brackets are classified as under less than Rs 5 lakh, Rs 5-10 lakh, Rs 10-20 lakh, Rs 20-50 lakh, Rs 50-100 lakh, Rs 1-10 crore and above Rs 10 crore. The share of taxpayers in these groups are juxtaposed with the share in total income as per the returns that were filed. The two points chosen are 2012-13 and 2018-19. The matrix will then throw light on how different classes of people control the flow of income in the six-year period.

The accompanying table presents interesting results. The first is that the number of tax assesses who earn less than Rs 5 lakh has come down sharply during this period and, accordingly, the share in income has gone down. This implies that there has been a good movement up the ladder as a large population that was in this bracket has witnessed improvement in income levels and moved up. It is more likely that the new entrants into the organised workforce are in this bracket. Further, several organisations have increased their base salary, which has put employees in higher income categories.

Second, the above explanation fits well when the bracket of Rs 5-10 lakh is looked at, where the share in total assesses has doubled from 13.8% to 26.7%. The share in income has been more modest by 2.7% points. This has been also the typical spending class in the economy where the younger population tends to be concentrated in the early years of the career.

Third, the next two categories of Rs 10-20 lakh and Rs 20-50 lakh accounted for 5.2% of assesses and 20.9% of income in 2012-13. BY2018-19, their share was 9.5% in the former and 26.1% in income. Here too, there is reason to believe that this is more of upward mobility where the existing workforce has witnessed relatively higher pay revisions and increments, and this has increased their income. This was also the most productive class with 5-10 years’ of experience.

Fourth, the next three categories, which are actually very high income groups with over Rs 50 lakh income, show a contrasting picture. These are the groups that are subject to the special income tax surcharge, which goes up further once the Rs 1 crore threshold is breached. For the Rs 50 lakh-Rs 1 crore bracket, the share in both the parameters has increased from 0.23% to 0.38% in number and 3.7% to 4.2% in total income, which is modest. But for those earning above Rs 1 crore, the overall share in the number of assesses has gone up from 0.123% to 0.18%, but the share in income has come down from 8.2% to 7.9%.

The shifts in the highest three brackets are indicative of the fact that in the last six years there has been a rather sticky movement in pay packets for the class earning higher incomes. This can be linked with the economic slowdown, where the corporate sector has not performed too well on the top line and has compensated for the same by controlling costs, which include compensation. Hence, while the number of people who earn above Rs 1 crore has increased from 936 to 2,764, their share in the overall income has come down marginally.

Putting these numbers together, the impression we have is that for this sample of tax assesses, there is no evidence of income equality increasing, and that both of the corollaries hold. First, the people in the lower income brackets have migrated to higher levels, and with more people joining the workforce have had an increased share in the total pie.

Second, those at the highest income levels have witnessed more entrants, but the share in total has reduced marginally. Part of the reason is the economic slowdown where the salary component of senior executives becomes sluggish in the upward direction while there could be compensations in the form of stock options.

However, this analysis does not hold for wealth, as income is not reflective of wealth on which comparable data is not available. The income earned here is based on the returns filed by individuals on which there would be exemptions and hence make the taxable income of a lower order. This is also not a complete picture of inequality as it does not include the poorer people, which include farmers, daily wage earners, domestic help, self-employed with no taxable income and, more importantly, the unemployed.

But it does indicate that once people join the organised sector (defined as those that involve paying income tax), a sense of equality has built up, with there being more competitive opportunity for individuals. Also, the fact that high income earners are financially more onerous to companies has meant that there has been a preference to hire at the mid-level and provide more attractive compensations. Those at the high level will have problems in leaving their jobs even if their pay packages do not increase, as the amount earned is relatively on the upper scale. These may be considered to be the factors that have led to this phenomenon of narrowing the distance between the lower and the higher income groups.

The author is chief economist, CARE Ratings. Views are personal

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