How has Income Inequality Evolved In India?

Posted by Nikhil Kumar
September 16, 2017

Self-Published

In a recently published paper “Indian income inequality, 1922-2014: From British Raj to Billionaire Raj”, economists Thomas Piketty and Lucas Chancel of World Wealth and Income Database present a grim picture of income disparity in various segments of the Indian population, both in terms of stock (present) and flow (historical trend). They show, with the help of empirical data, that current inequality in India in much higher than the immediate post-independence period.

Income Inequality in India in 2014:

The top 1% earn about 22 times the national average while the bottom 50% earn just 0.3 times of the national avergae. What is even  more stark is the low level (less than Rs. 2 lakh) at which the top 10% group starts.

Shares of Income:

There is an almost “mirror evolution” of top 10% share (red line) in total income and middle 40% share (blue line). While the share of top 10% decreased progressively from 37% to 32% between 1951-1980, it increased for the middle 40% from 43% to 47%. In 1980s, the trend reversed such that in 2000, both top 10% and middle 40% captured exactly 40% in total income, and diverging sharply thereafter. A similar evolution presents for top 1% (pink line) and bottom 50% (black line).

The share of national income attributable to the top 1% fell from 12% in 1951 to 6.2% of national income in 1982, but reached 21.7% in 2013-14.  This is the highest level recorded since the establishment of the income tax in 1922. Similarly, top 0.1% earners captured 8.6% of total income in 2013-2014, up from 1.7% in 1982 and 4.6% in 1951.  The top 0.01% income share reached 3.8% in 2013-2014, up from 0.4% in 1982-83 and 1.6% in 1951.

This graph shows that income share of top earners fell and that of low and middle earners increased during the period 1951-1980 while reversing this trend post 1981.

Total real per adult income growth: 

During 1951-1980, real per adult income of the bottom 50% and middle 40% groups grew substantially faster (respectively 87% and 74%) than average income (65%). On the contrary, top 0.1%, top 0.01% and top 0.001% income groups experienced a severe decrease in their real incomes (-26%, -42% and -45% respectively).
The situation reversed during the 1980-2014 period: the higher the group in the distribution of income, the lower the growth rate over the later period. 
The bottom 50% and middle 40% group grew much slower (89% and 93% respectively) than average income (187%). On the contrary, the top 10% and top 1% saw increases of 394% and 750% respectively. Similarly, the increase for top 0.01% and top 0.001% were 1834% and 2776%, respectively.  

Share of total national growth:

During 1951-1980, the bottom 50% group captured 28% of total growth compared to 49% for the middle 40% while 24% for the top 10% and just 1% to the top 1%. In fact, the share fell for the top 0.1% and higher groups.

On the other hand, in the period 1981-2014, the top 1% earners (less than 80 lakh adults) captured 29% of the total growth, more than the 11% captured by the bottom 50% as well as 23% captured by middle 40%, about 39 crore adults in each of the latter group. In fact, the top 0.1% (less than 8 lakh adults captured) 12% of the income growth.

During 1981-2014, the so-called “rise of the Indian middle class”, has been poorer than China or the United States where the share of the middle 40% group in national growth was more than 40% and 33% respectively in 1981-2014 as compared to 23% in India. The “emerging India” corresponds mainly to the top 10% of the population. India in fact comes out as a country with one of the highest increase in top 1% income share concentration over the past thirty years.

One of the interesting inferences they draw is the turnaround in Indian economy during and after the 1980s. While we celebrate the implementation of a new economic policy agenda, started during the premiership of Rajiv Gandhi, to disengage the public sector and to encourage entrepreneurship as well as foreign investments, it is also imporant to look at its unequal effects on different income groups. It would be well-advised for the policymakers to consider this while framing new policies.

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