What is the state of inequality in India?

The story so far: A recent report by the World Bank has generated significant debate with regard to the true picture of inequality in the Indian economy. The report outlined a number of salutary outcomes; not only had extreme poverty reduced drastically, inequality had reduced too. The Gini coefficient — a measure of inequality that ranges from 0 to 1, with 1 indicating extreme inequality — had fallen from 0.288 in 2011-12 to 0.255 in 2022-23, making India an economy with one of the lowest levels of inequality in the world.

What followed?

This finding was highlighted by the government as a vindication of its growth policies and economic management. However, as plenty of commentators have pointed out, the facts highlighted by the World Bank do not provide a true picture of inequality in the country. While inequality in consumption may be low — which is in itself a contested fact — income and wealth inequality in India are extremely high and have increased over time, making India one of the most unequal economies in the world.

What is consumption inequality?

The inequality figures detailed by the World Bank are not of income or wealth, but of consumption. This is problematic for several reasons. First, inequality in consumption will always be lower than inequality in wealth or income. A poorer household will spend a majority of its income on the necessities of life, and will have very little savings. If its income doubles, consumption spending will not double, since the household will now be able to save some amount of its income; its consumption levels will not rise in the same proportion as their incomes. Thus, consumption inequality will always be less than income or wealth inequality.

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Second, there are certain problems with the use of databases for the calculation of inequality. Data on consumption spending comes from the Household Consumption Expenditure Surveys (HCES) of 2011-12 and 2022-23. These surveys may provide accurate information on low levels of expenditure, but are unable to capture extremely high incomes, thus providing an under-estimation of inequality. Furthermore, there have been significant methodological changes between the two surveys that render them incompatible, and do not allow for a comparison of inequality levels over time. This has been pointed out not just by several researchers, but the official release of the HCES for 2022-23 also cautions against simple comparisons.

What are the levels of income and wealth inequality?

The low Gini mentioned by the World Bank, therefore, relates to consumption inequality, and cannot be compared to levels of income inequality worldwide. What is the true level of income inequality?

Calculating the actual level of income and wealth inequality in India is extremely difficult, since official surveys tend to miss out on extremely high levels of income and wealth. However, researchers at the World Inequality Database (WID), led by Thomas Piketty, have analysed several sources of data, including national-level surveys, tax records, and published lists of the extremely rich in India, estimating more accurate indicators of inequality. These estimates provide a more sobering look at the state of inequality in India.

The Gini coefficient for pre-tax income for India in 2022-23 is 0.61; out of 218 economies considered in the WID, there are 170 economies with a lower level of inequality, making India one of the most unequal economies in the world. The picture is not much better when considering wealth inequality. India’s Gini coefficient for wealth inequality is 0.75, implying that wealth is far more concentrated than income or consumption. Even though wealth Gini is high, other countries have far greater wealth concentrations; there are 67 countries with a lower wealth Gini than India.

As shown in the figures in Table 1, the Gini coefficient for income has shown a significant rise, from 0.47 in 2000 to 0.61 in 2023. Wealth inequality has risen in a lower proportion, only because levels of wealth inequality have been so high to begin with. The Gini for wealth inequality rose from 0.7 in 2000 to 0.75 in 2023. Either way, the picture of low and falling inequality as outlined by the World Bank does not characterise the current reality of India.

In fact, the use of the Gini understates the sheer concentration of wealth occurring in India today. The Gini coefficient is an aggregate measure, and takes into account the entire range of observations. It does not provide information on the relative share of wealth or income held by a fraction of the population. When considering wealth concentration of the top 1%, India emerges as one of the most unequal economies in the world. According to data from the WID, in 2022-23, the top 1% of adults in India controlled almost 40% of net personal wealth. There are only four economies with a higher level of wealth concentration — Uruguay, Eswatini (Swaziland), Russia and South Africa.

Is a reduction in consumption inequality on expected lines?

The story over the past few decades is one of rising incomes and inequality, and not a reduction. In fact, a reduction in consumption inequality is not unexpected in such a scenario. As incomes rise, assuming that there is no fall in real incomes of the poor (an outcome which some authors such as Utsa Patnaik assert has actually happened), the consumption of the poor would rise in a greater proportion than middle and upper classes, who would be able to save much more out of their rising incomes. The higher incomes of upper classes would allow for greater levels of saving, which can then be transformed into greater levels of wealth. Consumption inequality can reduce even when income inequality and wealth inequality rise; all these outcomes characterise the Indian economy today. What is of significance is the extreme concentration of incomes and wealth that have accompanied growth in India today, making it one of the most unequal economies in the world, an outcome that has consequences for future growth prospects of the economy.

Rahul Menon is Associate Professor in the Jindal School of Government and Public Policy at O.P. Jindal Global University.