Aspects of inequality of India

Subject: Economy

Section: National Income

Context:

A new working paper, titled “Income and Wealth Inequality in India, 1922-2023: The Rise of the Billionaire Raj”, by World Inequality Lab has estimated that “inequality declined post-independence till the early 1980s, after which it began rising and has skyrocketed since the early 2000s.

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The paper, which has been co-authored by Nitin Kumar Bharti, Lucas Chancel, Thomas Piketty, and Anmol Somanchi, combines data from national income accounts, wealth aggregates, tax tabulations, rich lists, and surveys on income, consumption, and wealth to arrive at the results.

Here are the main takeaways:

Growth in average incomes

According to the WIL paper, between 1960 and 2022, India’s average income grew at 2.6% per year in real terms (that is, after removing the effect of inflation).
This period can be broadly divided into two halves: “Compared to a real growth rate of 1.6% per year between 1960 and 1990, average incomes grew by 3.6% per year between 1990 and 2022”.
It further states that the periods 2005-2010 and 2010-2015 saw the fastest growth at 4.3% and 4.9% per year respectively.

Emergence of very high net worth individuals

The period between 1990 to 2022 witnessed a rise in national wealth and the emergence of very high net worth individuals (those with net wealth exceeding $1 billion at market exchange rate; this number increased from 1 to 52 to 162 in 1991, 2011 and 2022 respectively.

Rise in the percentage of income tax payers

The paper finds that the share of the adult population that filed an income tax return — which had remained under 1% till the 1990s — also grew significantly with the economic reforms of 1991.
By 2011, the share had crossed 5% and the last decade too saw sustained growth with around 9% of adults filing a return in the years 2017-2020.

Extreme levels of inequality in India

The paper finds that in 2022-23, 22.6% of India’s national income went to just the top 1%, the highest level recorded in the data series since 1922 — this is higher than even during the inter-war colonial period.
The top 1% wealth share stood at 40.1% in 2022- 23.

Extreme wealth concentration at the very top

Most of these gains came post-1991 after which point top 1% shares have been on a steep upward trend right until 2022-23.
The wealth concentration within the top 1% as well is extreme.

International comparison of income inequality

In the paper, the authors put India’s income and wealth inequality levels (as of 2022) in global perspective by comparing India with Brazil, China, France, South Africa, United Kingdom, and the United States.
If one looks at the income share of the top 10%, India stands second only second to South Africa.
If, however, one compares the income share of the top 1%, India ends up having the highest levels at 22.6%.

International comparison of wealth inequality

The picture is slightly less extreme when wealth inequality is considered.
In terms of top wealth shares (Figure 15b), we see that both with top 10% and top 1%, India comes out in the middle of the pack, with Brazil and South Africa standing out with their extreme wealth concentration levels (85.6% and 79.7% top 10% shares respectively).

Poor data leading to likely underestimation of inequality

Notwithstanding such stark findings, emphasized that the quality of economic data in India is notably poor and has seen a decline recently.
It is therefore likely that our results represent a lower bound to actual inequality levels.

Policy solution

Implementing a super tax on Indian billionaires and multimillionaires, along with restructuring the tax schedule to include both income and wealth, so as to finance major investments in education, health and other public infrastructure, could be effective measures.