PMF IAS Test Series for UPSC Prelims Banner Ad
PMF IAS Test Series for UPSC Prelims Banner Ad
  • Context (IE): Income inequality in India has decreased due to a higher tax base (SBI’s Economic Research Department).
  • The report also claims the idea of a K-shaped recovery is flawed.

K-shaped recovery

  • K-shaped recovery is an economic scenario where different segments of the economy recover at different rates and, in some cases, move in opposite directions following a disruption/crisis.
    • For example, during the COVID-19 pandemic, the technology sector experienced growth as remote work and online services surged.
    • In contrast, the hospitality and travel industries faced severe setbacks.
  • Income inequality refers to the unequal income distribution among individuals or households in a particular society or economy.
  • The Gini coefficient, derived from the Lorenz curve, is the most widely used measure of income inequality in a society.

Lorenz curve

  • It is a graphical representation of the distribution of income or wealth within a population.
  • A 45-degree, upward-sloping line demonstrates the line of equality. In the graph below, it is denoted as the blue line.
  • The more bowed the curve (Red line) is away from the perfect equality line, the greater the income inequality in the population. A straight line would indicate perfect equality.

A diagram of a line of equality Description automatically generated

Gini Coefficient

  • It is the gap between the line of equality (Red line) and the Lorenz curve (Blue Line).
  • It quantifies how much household income distribution deviates from perfect equality.
  • The Gini coefficient is calculated as the area between the Lorenz curve and the line of perfect equality, divided by the total area under the line of perfect equality.
  • The Gini coefficient is expressed as a value between 0 and 1, where:
    • 0 represents perfect equality (everyone has the same income).
    • 1 represents perfect inequality (one person has all the income, while others have none).

A diagram of a line of perfect equality Description automatically generated

Gini Coefficient

Status of income inequality in India

  • According to Oxfam India (2023)
    • Just 5% of Indians own more than 60%of the country’s wealth, while the bottom 50% of the population possess only 3%.
    • Between 2012 and 2021, 40% of the wealth generated in India has gone to just 1% of the total population, and 3% of the wealth has gone to the bottom 50%.
  • The Gini coefficient has increased from 0.32 in 1983 to 0.36 in 2019.

A close-up of a graph Description automatically generated

SBI’s Economic Research

  • According to SBI’s Economic Research Department Income inequality has declined in India due to,
    • Increased tax base
    • Shift in taxpayers from lower-income to higher-income tax brackets.
    • The transition of small firms into larger firms.
    • The rising trend of ordering from platforms such as Zomato indicates declining inequality.
    • Post-pandemic, the consumption of the bottom 90% population increased by Rs 8.2 lakh crore.
    • The Gini coefficient for taxable income declined from 0.472 to 0.402 from FY14 to FY22.
    • Female tax filers constitute around 15% of individual tax filers, with certain states like Kerala, Tamil Nadu, Punjab, and West Bengal having a higher share.

Major factors contributing to income inequality in India

  • Tax policy: high indirect taxes on Goods and services impact the poor and the well-off equally.
  • Rural-Urban Divide: Limited diversification of rural economies contributes to income gaps.
  • Wealth Concentration: in the hands of a few individuals or families (OXFAM report).
  • Informal Labor Market: job insecurity and lack of social security contribute to income disparities compared to the formal sector.
  • Globalization: while it can create economic opportunities, it may also lead to job displacement and income inequality.
  • Land Ownership: Unequal land distribution, with large landholdings held by a few.
  • Non-remunerative Agriculture: Agriculture, a primary source of income in rural areas, offers lower returns than urban industries.
  • Historical inequalities based on caste continue to impact access to education, employment, and economic opportunities.

Suggestions to reduce income inequality

  • Additional tax on the wealth of the richest 1%: 2% wealth tax and a 33% inheritance tax on the top 1% of our population will fetch an estimated ₹11 lakh crore per annum. (Jan Sarokar)
  • Expand the Earned income tax by implementing a tax credit system for poor & marginalized: E.g, a tax credit for low-income individuals could be used to offset the costs of GST.
Tax credits are a form of direct financial assistance to individuals and families designed to offset the cost of taxes.
  • Improving access to education and health along with other public services.
  • Strengthening people’s collective bargaining: it allows labour to receive a greater share of productivity gains as wages.
  • Provide a floor of social security: For example, Employment guarantee schemes, increase in minimum wages, and universal basic income.
  • Employment Generation by promoting the labor-intensive manufacturing sector.
Sharing is Caring !!

Newsletter Updates

Subscribe to our newsletter and never miss an important update!

Assured Discounts on our New Products!

Leave a Reply

Your email address will not be published. Required fields are marked *


Never miss an important update!