Context: A number of recent consumption and asset surveys are showing a fall in inequality in India.
1. Post-Independence Economic Issues
Inherited Economic Challenges: India inherited a poor economy in 1947, with high levels of poverty. The first 50 years after independence saw poverty persist despite socialist policies aimed at income redistribution.
Slow Growth: The early decades post-independence witnessed slow economic growth due to excessive taxation, policies focusing on public sector dominance, and centralized control. These policies emphasized wealth redistribution but were unable to create substantial growth.
2. Liberalisation in the 1990s
Shift to Economic Liberalisation: In the early 1990s, India moved towards economic liberalisation, opening up markets, reducing trade barriers, and welcoming foreign investments. These reforms helped stimulate economic growth.
Growth Rate and Poverty Reduction: Between 1990-2020, India achieved an annual growth rate of ~6%, lifting 400 million people out of poverty.
Poverty Decline: By 2021, poverty in India dropped to 13% of the population, down from 40% in 2000. According to the World Bank (using a $2.15/day poverty line), this reflects significant upward economic mobility.
Urban vs. Rural Poverty: Based on household consumption expenditure surveys (2022-23), urban poverty stood at 10%, while rural poverty was at 5%.
Multidimensional Poverty: There has been a significant decline in multidimensional poverty, with improvements in access to essential services like sanitation, electricity, education, and healthcare.
3. World Inequality Lab (WIL) Estimates
Inequality Trends: According to WIL, the top 1% of earners in India receive 21% of disposable income, while the bottom 50% earn only 13%.
Limitations of WIL Data:
WIL’s data is primarily based on income tax returns, which only capture a small portion of the population, as India has a relatively low number of taxpayers.
Other studies, such as those by PRICE and NCAER, based on more comprehensive surveys that include both formal and informal sectors, show a much more equal income distribution. For example, they report the top 1% earning 8.8%, and the bottom 50% earning 22.8%.
The reliance on income tax data skews the actual distribution of income and wealth, leading some to question the credibility of WIL’s findings.
4. Trends Suggesting a Fall in Inequality in India
Upward Economic Mobility: Over 450 million individuals moved past the $2/day income line from 2000 to 2012, reflecting significant economic mobility.
Rising Incomes: The proportion of people with annual incomes between ₹5 lakh and ₹31 lakh grew from 14% in 2005 to 31% in 2021, indicating a significant increase in income levels.
Increased Employment Participation: The proportion of workers in India’s population rose from 34.7% in FY18 to 43.7% in FY24, suggesting better employment participation and economic engagement.
Rising Per Capita Income: Per capita income reached ₹2 lakh in FY24, signaling robust economic growth.
Growth of Small FMCG Players: Small FMCG (Fast-Moving Consumer Goods) players, catering to price-sensitive consumers, grew significantly, surpassing the large businesses. This challenges the idea that inequality is rising due to imbalanced consumption.
Multidimensional Poverty Decline: There has been a notable decline in multidimensional poverty, with key improvements in the availability of essential services like electricity, sanitation, and healthcare.
Wealth Creation through MSMEs: The rise of Micro, Small, and Medium Enterprises (MSMEs) and start-ups has contributed to wealth creation and a wider distribution of wealth. Credit to MSMEs has increased rapidly, enabling new enterprises and facilitating wealth distribution across society.
Rise in Millionaires: The number of Indian dollar millionaires doubled from 2012 to 2022. However, India’s share of global millionaires is still small (1.4%), compared to its 17.2% share of the world’s population, showing that wealth creation is still in an early stage.
Way Forward for Economic Growth and Reducing Inequality in India
1. Focusing on Upward Mobility
Enhancing Upward Mobility: Instead of just monitoring poverty and inequality, policies and research should emphasize upward economic mobility. The goal should be to create opportunities for individuals to improve their economic status, particularly through education, skill development, and job creation.
Encouraging Economic Engagement: Policies must be designed to foster an environment where individuals have access to avenues that promote climbing the income ladder. This includes facilitating better access to credit, training, and entrepreneurial opportunities, which will empower individuals to transition to higher income groups.
2. Avoiding Excessive Taxation of Wealth Creators
Avoiding Discouragement of Innovation: Excessive taxation of entrepreneurs and wealth creators could dampen investment and innovation, key drivers of India’s growth. While addressing inequality is important, tax policies should be balanced so that they do not inadvertently stifle entrepreneurial spirit and the growth of new businesses.
Promoting Long-Term Growth: The government should focus on creating an economic environment where prosperity is encouraged at all income levels. Taxation should be structured to ensure fairness, but also encourage the creation of wealth, and jobs, and enhance economic participation at all levels of society.
3. Improving Governance and Infrastructure
Decentralized Governance: A focus on governance reforms, particularly in non-metro areas, is crucial to spreading the benefits of growth across the country. Decentralization of power and decision-making will enable regions to prioritize local needs and maximize their economic potential.
Infrastructure Development: Investing in infrastructure, including transportation, digital connectivity, electricity, and healthcare, is critical to inclusive growth. Ensuring that even remote areas have access to necessary resources will enable people across India to fully participate in economic opportunities.
Improved Public Services: Strengthening the delivery of public services in areas like education, healthcare, and sanitation will be fundamental for improving the quality of life and ensuring that economic growth benefits all segments of society.
4. Broad-Based Growth Based on Consumption and Economic Mobility
Consumption-Based Growth: India’s growth should be driven by broad-based increases in consumption rather than concentration at the top. Policies aimed at improving the purchasing power of the middle class and lower-income groups will help sustain demand for goods and services across the economy.
Promoting Economic Mobility: Policies focusing on job creation, skills development, and business empowerment will help facilitate economic mobility. Providing opportunities for individuals to transition between income groups is vital to ensuring a more equitable distribution of wealth and continuing India’s long-term economic growth.
Addressing Inter-Regional Imbalances: India’s growth should also focus on reducing regional disparities. The development of underdeveloped regions through targeted investments in infrastructure and education will help ensure that the benefits of growth are not limited to only a few regions.