Income inequality in India declined during the pandemic: study

The paper also observes a sharp spike in extreme poverty during the pandemic, i.e. from February 2020 to July 2021, the last date for which data used in the paper are currently available. bloomberg
The paper also observes a sharp spike in extreme poverty during the pandemic, i.e. from February 2020 to July 2021, the last date for which data used in the paper are currently available. bloomberg

Summary

  • Consumption inequality also fell, but to a lesser extent, says a NBER working paper

Income inequality in India unexpectedly shrank during the pandemic, with the income of the richest falling and the poor showing “remarkable" resilience despite meagre government relief, a National Bureau of Economic Research (NBER) working paper has found. 

Consumption inequality also fell, but to a lesser extent.

The paper also observes a sharp spike in extreme poverty during the pandemic, i.e. from February 2020 to July 2021, the last date for which data used in the paper are currently available. In urban areas, income poverty spiked from a little over 40% before the pandemic to nearly 70% during the lockdowns. Poverty, measured by applying the World Bank’s $1.90 cut-off, fell after the lockdowns ended but did not recover to pre-pandemic levels.

The paper’s authors, Arpit Gupta, Anup Malani and Bartosz Woda, studied poverty and inequality using the Centre for Monitoring Indian Economy’s (CMIE’s) Consumer Pyramids Household Survey (CPHS) of 197,000 Indian households, or 0.073% of the population. CPHS has data on both income and consumption.

Comparing the income losses of rich and poor households during the pandemic, the authors found that households in the top income quartile, or the richest, suffered more significant blows to income. This is explained, they write, by the disproportionately high share of the services sector in incomes of the top-quartile income households. Simply put, rich Indians derive incomes disproportionately from services, which experienced the sharpest drop in consumer expenditure during the pandemic. Therefore, the rich suffered bigger income losses than the poor. 

Manufacturing consumption fell by half as much as service consumption. Agriculture consumption fell even less. Income from these sectors has a much smaller share in top-quartile income than services.

“The performance of lower percentiles are particularly remarkable since India—unlike the US—had little fiscal stimulus in the form of income transfers. While government transfers did spike during the lockdown, they were small in absolute value relative to household income," the researchers wrote in the paper.

The inequality debate is likely to pick up; a forthcoming report by Prof. Maitreesh Ghatak of the London School of Economics will highlight that consumption and wealth inequality went down in the years preceding the covid pandemic. The report’s consumption inequality findings are based on NSS (National Sample Survey) rounds of 2011-12 and 2017-18, the one that was released and later withdrawn. 

Wealth inequality has gone down, according to the All India Debt & Investment Survey NSS 77th round (January – December 2019) compared to the previous 70th round (2013).

“Income inequality has two components, within-sector and between-sectors. The first is welfare-reducing and needs to be controlled, while the latter is part of a country’s structural transformation to more modern sectors. An increase in inequality due to modernization has been considered to be part of the development process. The paper by Malani, Gupta and Woda has a lot of limitations, but it does indicate that when a growth shock hits the modern sectors more than the traditional sectors, income inequality may fall. This is fully consistent and the mirror image of our post-reform experience where more modernization and services-led growth led to higher inequality," said Sabyasachi Kar, RBI chair professor, Institute of Economic Growth.

Working papers are circulated for discussion and are not subject to review by NBER’s directors that accompanies official publications.

Earlier this year, reports by Oxfam and Azim Premji University argued that the pandemic likely hurt the poor more than the rich. However, these claims are contested, including by Nobel laureate Angus Deaton.

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