Gotta Fix Those Inequality Gaps

Rajesh Shukla    May 25, 2024

OPINION I The Economic Times

Tracing the trajectory of income inequality in India since its independence reveals a nuanced landscape shaped by diverse economic policies, demographic changes, and political shifts. To determine whether income inequality has intensified over the past decade, it is crucial to scrutinize data and research from trustworthy data sources. This article aims to illuminate the evolution of income inequality in India over the last five decades, drawing on findings from scientifically conducted household income surveys by private institutions such as the National Council of Applied Economic Research (NCAER) and People Research on India’s Consumer Economy (PRICE) spanning from 1967-68 to 2022-23. These surveys provide a robust foundation for understanding the long-term trends and recent shifts in income distribution and income inequality within the country.

Since gaining independence, India has seen substantial economic growth, yet the benefits of this growth have been unevenly distributed. The period of economic liberalization introduced new opportunities and wealth, but it also led to a rise in inequality—a trend that has only been exacerbated by recent economic disruptions, including the pandemic.

To illustrate, the share of total national income held by the top 10% of the population was 36.49% in 1967-68. This figure gradually decreased to 32.86% in 1994-95 and further declined to 27.88% in 2015-16, indicating a trend toward greater income equality. However, this trend reversed dramatically, and by 2020-21, the share of the top 10% surged to 38.60%, the highest level recorded, before dipping slightly to 30.27% in 2022-23.

Conversely, the bottom 10% of the population has consistently held between 1.8% and 2.7% of total income over this period, except during 2020-21 (the COVID period), when their share plummeted to a mere 1.09%.

How has income inequality evolved over this period? Initially, in the first 20 years following independence, the Gini index stood at 0.463. It then gradually improved, reaching its lowest point at 0.367 in 2015-16, indicating a more equitable distribution of income at that time.

However, the period between 2016 and 2021 saw a sharp reversal of this trend, with the Gini index increasing by 32%, moving from 0.367 to a much higher 0.506. This spike highlights a significant growth in income disparity, exacerbated by COVID-19.

The most recent data from 2021 to 2023 show a notable improvement, with the Gini index decreasing by 23%, from 0.506 to 0.390. This reduction suggests a move towards reversing the previous increase in inequality, potentially influenced by post-pandemic economic recovery measures and interventions aimed at redistributing income more fairly.

Overall, while the trajectory of income inequality in India has seen periods of both improvement and deterioration, the recent decrease offers a hopeful sign that efforts to manage and mitigate income disparities are having a positive impact, though continued vigilance and policy adjustments are necessary to maintain and further this progress.

Levels of Income Inequality: 1968 to 2023                 

Survey period Share in household disposable income (%) Ratio (D10/D1) Gini Coefficient
Bottom 10% population (D1) Top 10% population (D10)
1967-68 1.80 36.94 20.3 0.463
1975-76 2.27 33.88 14.9 0.416
1994-95 2.33 32.86 14.1 0.425
2004-05 1.93 35.75 18.5 0.469
2013-14 2.15 30.78 14.3 0.404
2015-16 2.48 27.88 11.2 0.367
2020-21 1.09 38.60 35.4 0.506
2022-23 2.44 30.27 12.4 0.390

Source: NCAER’s Income Surveys (1968-2005); PRICE’s ICE 360 Surveys (2014-2023)

How has income inequality decreased? Income inequality can decrease for various reasons, survey findings show real average household income increased 12.3% to Rs. 3.62 lakh from 2021 to 2023. The bottom 50% of households, encompassing laborers, petty traders, small business owners, and small & marginal farmers, have seen a significant recovery, witnessing their share of total household income rise from 15.84% in 2020-21 to 22.04% in 2022-23.

The findings also paint a comprehensive picture of how income inequality has changed across different percentiles of the income distribution. Here's a breakdown of what these changes indicate:

90th to 10th Percentile Ratio: The significant decrease in the ratio from 35.4 in 2021 to 12.4 in 2023 highlights a substantial reduction in income inequality between the top and bottom of the income distribution. The fact that income at the top was 6.9 times higher than income at the bottom in 2023, compared to 35.4 times higher in 2021, signifies a notable improvement in income distribution.

90th to 50th Percentile Ratio: The decrease in this ratio from 2.4 in 2021 to 1.4 in 2023 indicates a significant reduction in income inequality between the top and middle of the income distribution. This suggests that the middle-income group experienced relatively faster income growth compared to the top earners, contributing to a more equitable income distribution.

50th to 10th Percentile Ratio: The significance of this ratio over the period further emphasizes that the change in inequality was primarily driven by improvements at the lower end of the income distribution. A notable decrease in this ratio (14.4 in 2021 to 8.3 in 2023) would indicate that the bottom earners experienced relatively higher income growth compared to the middle-income group.

Addressing income inequality is crucial not only for economic stability but also for fostering social cohesion and enhancing overall well-being. By acknowledging the interconnected nature of inequality across various dimensions such as income, expenditure, education, health, and opportunity, India should adopt more holistic strategies to promote inclusive growth and reduce disparities.