Inequality in India

• 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. 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). 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.

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.