Saturday, September 29, 2012

Income inequality in India



Inequality in income is at a very high level in India and has further increased over the past two decades. The increasing per capita income of the country should not lull us into complacency as we see that the lowest strata of society has got only a small portion of the development pie. We should also recognize that a good growth in the GDP does not mean good for the population at large and unless direct measures are taken by the government, this inequality would only increase.
The Gini index measures[1] the extent to which the distribution of income or consumption expenditure among individuals or households within an economy deviates from a perfectly equal distribution. A Lorenz curve plots the cumulative percentages of total income received against the cumulative number of recipients, starting with the poorest individual or household. The Gini index measures the area between the Lorenz curve and a hypothetical line of absolute equality, expressed as a percentage of the maximum area under the line. Thus a Gini index of 0 represents perfect equality, while an index of 100 implies perfect inequality.

The World Bank has computed India’s GINI (%) at 37 in 2005. The progressive increase in the Gini index [2]over the past few years shows that income inequality in India is only increasing.

Gini Levels
Early 1990s
 Late 2000s ()


Years
OECD
0.30
0.31

6.3
2008
Indonesia
0.39
0.37

-6.7
2005-2009
India
0.32
0.38

16.0
1993-2008
China
0.33
0.41

24.2
1993-2008
Russian Federation
0.40
0.42

6.0
1993-2009
Argentina
0.45
0.46

0.9
1992-2009
Brazil
0.61
0.55

-9.4
1993-2008
South Africa
0.67
0.70

3.1
1993-2008


Another way to describe inequality is by looking at changes in household income for different groups [3], notably those at the bottom, the middle and the top of the distribution. Larger rises in income for those at the bottom and middle of the income distribution may, in particular, signal that opportunities and equalization are both growing. The truth in the case of India is that incomes of the rich are increasing at a greater rate than those of the poor, thereby exacerbating the income differential further.








There are several reasons for this persisting inequality. Some of the key sources include a large and persistent informal sector, widespread regional divides (e.g. urban-rural), gaps in access to education, healthcare and nutrition, and barriers to employment and career progression for women and weaker sections of society.

It is incumbent on the government of the day to take measures to address the issues causing inequality. It is however seen that the benefit and tax systems in India are far from effective in easing market driven inequality. The coverage and generosity of social protection systems is very poor as is evident from the low allotments for health and education in the budgetary spending.

At the same time, the tax system delivers only modest redistribution, reflecting such problems as tax evasion and administrative bottlenecks to collect taxes on personal income.

Reducing inequality while working towards higher growth in the country requires a multipronged approach. The approach should include: 1) provisions of social assistance that target those most in need; 2) spreading the rewards from education; and 3) preparing to finance higher social spending in the future.
It is important to underline that tackling inequality goes beyond the remit of labour, social welfare and tax policies. Other policies, such as those aimed at improving the business environment, product market regulation, infrastructure development, health care and public administration reforms also have a role to play in reducing inequality.

Conditional cash transfers may be particularly well suited to reducing inequality and promoting social mobility in the country. The fact that they could combine income support with the requirement to maintain investment in human capital and child health means that they can be useful tools not only for tackling household poverty, but also for promoting school enrolment and improving healthcare for children.

Addressing inequalities in both access to, and quality of, education can also make an important contribution to lowering inequality in labour income.
Enhancing the distributive capacity of the tax system would require an emphasis on improving revenue collection procedures and strengthening the extent to which taxpayers comply voluntarily with their obligations. A focus on the fight against corruption would also help improve tax collection.


[1] http://en.wikipedia.org/wiki/Gini_coefficient
[2] http://dx.doi.org/10.1787/888932535432
[3] http://dx.doi.org/10.1787/888932535451

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