ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

A+| A| A-

State of Inequality in India

Recommendations of the new state of inequality report do pose the challenge of implementation.

A recent report titled The State of Inequality in India by the Institute for Competitiveness, brought out in response to the request of the Economic Advisory Council to the Prime Minister (EAC-PM), has made a few surprising recommendations. They include raising minimum income and providing universal basic income to reduce the growing income gap and the introduction of an urban version of the demand-based Mahatma Gandhi National Rural Employment Guarantee Act to rehabilitate surplus labour.

The report also recommends increasing the share of expenditure allocated to the social sector and services to protect the most vulnerable sections from sudden shocks. Facilitating upward mobility of the poor by equitable access to education and creation of more jobs, conducting regular stocktaking of the extent of vulnerability of house­holds, and ensuring their overall well-being are some of the other suggestions. Most of these recommendations have been mooted earlier by academics and other experts and widely debated outside the government. But maybe this is the first time that the EAC-PM, which is expected to advise the Prime Minister on economy-related issues, is associating itself with such different and sweeping views.

The most interesting aspect of the report is its findings on the trends in income inequality. The study, which uses the Periodic Labour Force Surveys (PLFS) across the world to assess the earnings of the top and bottom percentiles and the average earnings of the workers, notes a huge divergence in earnings. This was because not only were the annual cumulative earnings of the top 1% almost three times larger than those at the bottom 10%, but their disparities have also increased.

In the three years between 2017–18 and 2019–20, the share of the top 1% earners moved from 6.14% to 6.84% and then to 6.82%, while that of the bottom 50% remained stagnant at around 22%. As regards the growth of incomes during this period, the income of the top 1% grew by 15%, while that of the bottom 50% rose by only 3.9%, that is, around one-fourth the pace of the top 1%. Similarly, while the income of the top 10% rose by 8.1% during the period, the income of the bottom 10% declined by 1%. Given the long-term trends in the growth of inequality, these current trends in worker earnings from the PLFS only reassert once again that the trickle-down theories that have been popularised by the Washington Consensus and the market economists make no sense.

These inequalities in earnings in the labour market are exacerbated by the low levels of the labour force participation rate (LFPR) in the economy. Though the LFPR has improved marginally to 53.5% in 2019–20, the still considerably large share of the labour force outside the labour market makes equitable growth of income a serious challenge. This is especially so because the low LFPR also has a gender aspect. Numbers show that currently less than a third, or just about 30%, of the female labour force is in the labour market as compared to the 76.8% of the male labour force available. Again, with almost three-fourths of the female labour force outside the labour market, any significant reduction in inequalities will continue to remain elusive. The report also highlights the urgent need to provide more jobs to the technically skilled and better-educated groups whose level of unemployment is the highest.

Overall, the findings of the inequality report clearly indicate that while there has been some improvement in the employment and income parameters in the recent pre-COVID-19 years, the benefit has been largely restricted to the dominant groups at the expense of the disadvantaged groups who have been marginalised and deprived of the gains. The trends in wage earnings clearly show that the gains have not only excluded the majority of the labour force at the bottom but also contributed to an uneven development and denied income gains and mobility to the disadvantaged social groups, especially women and the youth. This would have serious repercussions as these trends are likely to gain more momentum and again reduce participation rates and marginalise them further.

However, the growing disparities in the income earned in labour markets are only a partial reflection of the growing inequalities. The experience across the world has been that wealth inequalities, the data on which is largely restricted to rich countries, are usually much greater than income equalities. Such growing inequalities in income and wealth are rather distressing, especially in the context of the relatively smaller direct tax base of the economy where the tax rates on the higher-income groups are often lower than that in the developed economies.

But the most potent implication of the growing inequality highlighted in the report is its repercussion on the medium- and long-term growth. It is now increasingly recognised by economists across the world that higher inequality can emerge as a serious deterrent to growth. Even the publications of the International Monetary Fund vouch for the negative correlation bet­ween inequality and growth. In fact, the evidence they ferret out shows that an increase in the share of income of the top 20% leads to a deceleration in the gross domestic product growth in the medium term.

In contrast, any increase in the share of income of the bottom percentiles is usually associated with an acceleration of the medium-term growth rates. The reason for this is that a large number of poor and middle classes can do more for growth as they produce positive vibes through the interrelated economic, social, and political channels and provide the critical synergies needed for boosting growth.


Dear Reader,

To continue reading, become a subscriber.

Explore our attractive subscription offers.

Click here

Updated On : 11th Jun, 2022
Back to Top