Between 2004-05 and 2013-14, when economic growth increased dramatically, income inequality fell, though a lot less in rural areas. This is counter-intuitive, since the general view is that, in developing countries, inequality rises along with economic growth in the initial years.
Given the annual onslaught of Richest-100 or Richest-500 wealth surveys, it is easy to believe the Piketty or World Economic Forum (WEF) type of studies that show a dramatic increase in India’s inequality. Piketty talks of how, between 1951-80 and 1980-2014, the bottom 50% of the population saw income growth rise marginally from 87% to 89%, while the top 1% saw income growth rise from 5% to a whopping 750%. In 2014, he says, the share of national income accruing to India’s top 1% of earners was 22%, while the share of the top 10% was 56%. And the WEF shows India has a Gini coefficient of 47 versus Pakistan’s 37—according to this study, 60.4% of Indians are below the poverty line today. Yet, India’s official data shows no great change in inequality, and as for poverty, the official National Sample Survey (NSS) put it at 13% in 2011, based on the World Bank’s $1.9 per day of consumption. Given Piketty used NSS data for consumption for part of the population and income tax data for the rest, the dataset was always problematic, more so since even he admitted that GDP data showed higher household consumption than the NSS data.
And Surjit Bhalla showed (goo.gl/6F5SFF) how flawed the Piketty data was by pointing out that while the middle 50% saving rate was 18% in 1999-00—based on Piketty data—this fell to zero in 2011-12! As for the WEF, it used the World Bank’s inflation-adjusted new poverty line —of $3.2 per day in 2017—but applied this to India’s consumption basket of 2011! And we know the NSS captures much less consumption than the GDP data does.
While the last NSS consumption data is for 2011, consumer-research firm PRICE’s all-India market survey for 2015-16 suggests inequality continues to fall, especially for rural India—unlike the NSS, PRICE has data on both consumption as well as incomes (most global inequality estimates are based on income). What of the past? NCAER has been conducting annual all-India income-expenditure surveys for several decades, so this allows a comparison. Indeed, there is a link between NCAER and PRICE since the latter’s MD & CEO Rajesh Shukla was the chief statistician of NCAER and was involved in many of the older surveys.
The NSS and NCAER surveys of 2004-05 yield similar Gini coefficients for both rural and urban areas. The bottom 10% of the population, NCAER-PRICE surveys show, hasn’t really benefitted from GDP growth. In 1994-95, rural India’s bottom decile accounted for 2.8% of income and this remained roughly the same over the next two decades—it was 2.7% in 2015-16. The corresponding numbers were 2.4% and 2.6% for urban India. In the case of the top 10%, however, as opposed to Piketty, the NCAER-PRICE data shows their income share falling by 3-5 percentage points across the country. Between 1994-95 and 2004-05 (see graphic), there is a sharp hike in income inequality in both rural and urban areas, possibly the result of the 1991 reforms where the increased opportunity was seized by the better off since they were more equipped to do so. Between 2004-05 and 2013-14, when economic growth increased dramatically, income inequality fell, though a lot less in rural areas. This is counter-intuitive, since the general view is that, in developing countries, inequality rises along with economic growth in the initial years. One possibility, then, is that the growth wasn’t fast enough to cause inequality to rise; the other is that the middle classes benefitted a lot due to new jobs/salaries rising very fast. More research is needed to explain the reasons for the fall in Gini coefficients.
What is most interesting is what happened in the next two years since, while overall economic growth was respectable, these were drought years—and while it is true that rural India is not just agriculture, a drought does lower rural income growth. During this period, according to PRICE’s data, there was a dramatic fall in rural inequality and a moderate fall in urban areas. Since the NSS data for this period is not out as yet, there is no independent corroboration of the PRICE survey. But there are logical reasons for why inequality could have fallen—and this augurs well for the future. Inequality, as a very basic level, is a function of economic growth and access to markets, primarily, will determine how this growth benefits the larger populace —whether some benefit more is a different question. Over the last few years, it is obvious, a lot more Indians have got access to mobile phones and rural electrification has also increased dramatically—it is true that India’s definition of an ‘electrified’ village is problematic but if 97-98% of villages are ‘electrified’ today as compared to 80% a decade ago, that’s a big jump. And if the government is right in its claim that 1.2 lakh kilometers of rural roads were constructed in 2014-17, that must surely result in highermarket access and hence rural prosperity and lower inequality.
So, if the government pays special attention to increasing access to various facilities that matter, even with moderate GDP growth, inequality can reduce —while access to education has also risen along with that to roads/electricity/LPG/telephones/banking, its poor quality is a clear problem and has to be dealt with fast. So, while the government continues to aggressively spend on increasing rural access to these facilities, if it is able to improve rural health through better sanitation and primary care facilities and its massive health insurance plan takes off—medical emergencies are a big reason for families slipping back into/towards poverty —we are looking at the likelihood of a more equal India.