Income Inequality Trends in India
- January 24, 2024
- Posted by: OptimizeIAS Team
- Category: DPN Topics
Income Inequality Trends in India
Subject :Economy
Section: Unemployment and Inflation
The report from the State Bank of India (SBI) suggests a significant fall in income inequality in India over the last decade, as measured by the Gini coefficient.
The Gini coefficient dropped from 0.472 in 2014-15 to 0.402 in 2022-23, indicating a substantial reduction in inequality.
However, there are nuances to this analysis, especially considering it relies on taxpayer data, and nearly 80% of income earners, earning less than ₹2.5 lakh per annum, fall outside the tax net.
A more detailed analysis using data from the 2017-18 and 2022-23 rounds of the Periodic Labour Force Survey (PLFS) reveals some important trends:
- Gini Coefficient Changes:
- The Gini coefficient declined from 0.4297 in 2017-18 to 0.4197 in 2022-23.
- For different forms of employment, the Gini coefficient fell for regular wage and casual wage workers but rose for self-employed workers, although the changes were minimal.
- The Gini for self-employed workers increased by 1.5%, while regular and casual wage workers experienced falls of 1.7% and 4.8%, respectively.
- Polarization of Incomes:
- While the Gini coefficient suggests an overall reduction in inequality, there is evidence of income polarization.
- Incomes of the top 10% grew faster than the bottom 30%, particularly among self-employed workers.
- The top decile’s average income grew at an annual rate of around 7.23%, while the bottom decile saw the slowest income growth at only around 1.67%.
- Changes in 90/10 Ratio:
- The 90/10 ratio, which measures the ratio of incomes of the top 10% to the bottom 10%, increased from 6.7 in 2017-18 to 6.9 in 2022-23.
- The 90/10 ratio fell for wage earners but increased significantly for self-employed individuals.
- Polarization Among Different Forms of Work:
- Polarization of incomes is seen prominently among self-employed workers, with the income of the top 10% being 8.3 times that of the bottom 10% in 2022-23, a significant increase from 2017-18.
- Explanatory Factors:
- The rise in women’s labor force participation, often in low-paid, part-time self-employed work, may contribute to the increase in income gaps among self-employed individuals.
- While taxpayer data may not reflect this polarization as the bottom 10% do not earn enough to be included in the tax net, it remains to be seen how future economic growth impacts this divergence.
In summary, the reduction in the Gini coefficient hides a process of income polarization, particularly among self-employed workers, indicating the need for a nuanced understanding of income distribution trends in India.
About Periodic Labour Force Survey (PLFS):
- Objective:
- To estimate key employment and unemployment indicators (WPR, LFPR, UR) in a short time interval (three months) for urban areas in the ‘Current Weekly Status’ (CWS).
- To estimate employment and unemployment indicators in both ‘Usual Status’ and CWS annually for both rural and urban areas.
- Initiation:
- Conducted by the National Statistical Office (NSO) under the Ministry of Statistics and Programme Implementation (MoSPI).
- Launched in April 2017.
- Significance:
- Aims to measure the employment and unemployment situation in India.
The Periodic Labour Force Survey provides crucial insights into India’s employment landscape, helping policymakers make informed decisions based on key indicators.
Key Terms in Labour Force Survey:
- Labour Force Participation Rate (LFPR):
- Percentage of the working-age population (15 years and above) either employed or unemployed but actively seeking employment.
- Worker Population Ratio (WPR):
- Percentage of employed persons in the population.
- Unemployment Rate (UR):
- Percentage of unemployed persons among those in the labour force.
- Activity Status:
- Determines a person’s status based on activities pursued during a specified reference period.
- Types of Activity Status:
- Principal Activity Status (PS):
- Criteria: Long time spent on a specific activity during the last 365 days.
- Subsidiary Economic Activity Status (SS):
- Criteria: In addition to the principal status, performing economic activity for 30 days or more in the last 365 days.
- Principal Activity Status (PS):
- Current Weekly Status (CWS):
- Activity status determined based on the last 7 days preceding the survey date.
Lorenz Curve and Gini Coefficient:
- Lorenz Curve:
- Graphical representation of wealth distribution.
- Developed by Max Lorenz in 1906.
- Illustrates the proportion of income earned by a given percentage of the population.
- 45º angle represents perfect income equality, deviation indicates actual distribution.
- Gini Coefficient:
- Derived from Lorenz Curve, serves as an economic development indicator.
- Measures income equality in a population.
- Scale: 0 (perfect equality) to 1 (perfect inequality).
- Interpretation: Zero signifies equal income for all, while one implies a single individual receiving all income.
90/10 Ratio:
- Definition:
- The 90/10 ratio is a measure of income inequality that calculates the ratio of the income received by the top 10% of the population to that received by the bottom 10%.
- Interpretation:
- A rising 90/10 ratio indicates a widening income gap between the wealthiest and the poorest segments of the population.
- Significance:
- It provides insights into the distribution of income, especially focusing on the extremes – the highest and lowest earners.
- Analysis:
- Economists use the 90/10 ratio to study trends in income inequality over time, helping to understand socio-economic dynamics.
- Governments and policymakers consider the 90/10 ratio when formulating policies to address economic disparities and promote more inclusive growth.
- Comparing the 90/10 ratio across different regions or countries offers a comparative analysis of income distribution patterns.
- Changes in the 90/10 ratio can reflect the effectiveness of social and economic policies in creating a fairer distribution of wealth.
Government’s Employment Initiatives:
- SMILE (Support for Marginalized Individuals for Livelihood and Enterprise):
- Aims to provide support and opportunities for marginalized individuals in livelihood and entrepreneurship.
- PM-DAKSH (Pradhan Mantri Dakshta Aur Kushalta Sampann Hitgrahi):
- Government initiative focusing on skill development and empowerment.
- MGNREGA (Mahatma Gandhi National Rural Employment Guarantee Act):
- Provides rural employment and livelihood opportunities, ensuring at least 100 days of wage employment.
- PMKVY (Pradhan Mantri Kaushal Vikas Yojana):
- Aims to enhance the employability of youth through skill development.
- Start-Up India Scheme:
- Encourages and supports startups, fostering entrepreneurship and job creation.
- Rozgar Mela:
- Job fairs facilitating direct interaction between employers and job seekers.
Types of Unemployment:
- Disguised Unemployment:
- More people employed than needed, often found in agricultural and unorganized sectors.
- Seasonal Unemployment:
- Occurs during specific seasons, affecting jobs like agricultural labor that are not year-round.
- Structural Unemployment:
- Arises from a mismatch between available jobs and workers’ skills.
- Cyclical Unemployment:
- Linked to economic cycles, rising during recessions and declining in growth periods.
- Technological Unemployment:
- Job losses due to technological changes, impacting India significantly with automation.
- Frictional Unemployment:
- Involves a time lag during job search or switching, often voluntary and not due to shortages.
- Vulnerable Employment:
- Informal, contract-less work without legal protection, often leading to unrecorded employment.