Claims about India’s rising inequality don’t tell the full story
The Indian Express, January 14
The article explores the dynamics of inclusive growth in India, emphasizing poverty reduction and narrowing inequality as essential for achieving a developed nation status by 2047.
It critiques headline-grabbing inequality data, highlights structural economic improvements, and showcases significant gains in living standards, education, and welfare among disadvantaged groups, underlining India’s progress toward inclusivity.
Importance Of Inclusive Growth For India’s Development
India’s goal of becoming a developed nation by 2047 relies on inclusive growth. This means improving living standards for the economically disadvantaged and reducing income inequality.
Fair income distribution is not just a moral issue but also influences overall demand and resource allocation, which affects the nation’s progress toward a developed economy.
Income Inequality Trends In India
The PRICE ICE360 survey provides direct insights into income distribution in India. Recent data indicates a decline in income inequality and an expansion of the middle class.
However, some reports claim that inequality is rising, often focusing on the income share of the richest 1%, as estimated by the World Inequality Lab (WIL). These claims rarely examine the methodology or limitations of such estimates.
Limitations Of WIL Estimates
The WIL uses data suggesting that 80% of Indian households spend more than they earn, which is an unlikely scenario. This underestimates the income of low- and middle-income groups while overstating the share of top earners.
Even so, WIL data shows some positive trends. From 2017 to 2022, the income share of the bottom 50% increased, and the share of the top 10% declined slightly.
Factors Ignored in Top Income Estimates
WIL and PRICE data overlook the impact of reduced marginal tax rates and better tax administration. Lower tax rates since the 1970s have encouraged accurate income reporting, explaining part of the rise in top-income levels. Improved tax administration has also contributed to a minor increase in reported top incomes since 2014.
Misrepresentation Of Inequality
Both WIL and PRICE estimates exclude key factors like welfare transfers to low-income groups and taxes paid by high-income groups. For example, in 2024, the top 1% of individual taxpayers contributed 42% of the total tax, despite accounting for 17.5% of reported income.
This demonstrates that post-tax disposable incomes for high earners are significantly lower than their pre-tax figures suggest.
Correcting Misleading Inequality Data
The disposable income of high earners after taxes is only 65–75% of their pre-tax income. On the other hand, low-income group incomes are boosted by welfare programs, making them higher than reported.
Addressing these discrepancies can significantly reduce perceived inequality and provide a more accurate picture of India’s economic landscape.
Inequality And Return On Capital
Inequality is influenced by the relationship between the rate of return on capital and GDP growth. If returns on capital exceed GDP growth, capital owners claim a larger share of national income, increasing inequality.
Since capital is concentrated among a few, this widens the gap.
On the other hand, when GDP growth surpasses post-tax capital returns, a larger share of income goes to labor, which helps reduce inequality, assuming other factors remain constant.
Real Return on Capital vs. GDP Growth
Over the past decade, the average Consumer Price Index (CPI) inflation has been 5.5%. This brings the average real return on capital to below 2%. Similarly, the weighted average real lending rates, an indicator of returns on productive capital, have been under 4% in the last five years.
Meanwhile, India’s average GDP growth rate has exceeded 6%, suggesting a favorable environment for labor-driven income distribution.
Cost Of Equity And Inclusive Growth
The cost of equity is a useful measure of return expectations from capital. A 2024 report by NSE and EY indicates that India Inc.’s average cost of equity is 14.2%.
After adjusting for risk, inflation, and taxes, the actual returns are lower than GDP growth. This alignment of lower capital returns and higher growth rates supports an economic structure that promotes inclusive growth.
Economic Dynamism And Opportunities
India’s economic vibrancy is evident in the reduced role of inherited wealth in determining individual incomes. Around 60% of top-income earners do not come from wealthy backgrounds. The rise of first-generation billionaires, fueled by the thriving start-up ecosystem, highlights the opportunities created by India’s dynamic economy.
Poverty Reduction As A Measure Of Inclusive Growth
Reducing poverty is a key indicator of inclusive growth. The NSSO Household Consumption and Expenditure Surveys (2023 and 2024) reveal that consumption growth between 2011-12 and 2023-24 has nearly eliminated extreme poverty.
Consumption inequality has declined, and dietary habits have improved, with increased consumption of milk, fish, meat, and fresh fruits.
These changes are particularly significant for the bottom 20% of households, even excluding free food items.
For instance, the share of rural households consuming fresh fruits rose from 63.8% in 2011-12 to over 90% in 2023. Vehicle ownership among the poorest 20% also jumped from 6% in 2011-12 to 40% in 2023.
Progress in Education
Educational achievements have paralleled economic gains, with the gross enrolment ratio rising sharply, particularly for SC and ST students. This progress underscores the inclusiveness of India’s growth.
While challenges remain, the advancements in poverty reduction, consumption patterns, and education demonstrate that India is moving toward a more equitable society.