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How India has become an unequal republic

In the wake of covid-19, the ILO estimates that 400 million workers in India are at risk of falling into poverty. (Photo: Getty)Premium
In the wake of covid-19, the ILO estimates that 400 million workers in India are at risk of falling into poverty. (Photo: Getty)

  • Inequality based on class, rural-urban metrics and religion has risen. The pandemic will only make things worse
  • The elites who benefited thanks to the public sector, IITs, IIMs in the era of economic planning are the same class of people who benefited the most post the 1990s pro-business reforms

Inequality is broadly found to have risen in India between 1990 (which marked economic reforms) and 2020. There are three processes behind this rising inequality, which became apparent in the early 2000s. First, the much-touted pro-market reforms in industry in the 1990s ended up being pro-business reform.

Second, the failure of India’s industrialization strategy, including the recent make-in-India campaign. Unlike China, India could not break its stagnant history of industrialization. Instead, the services sector emerged as the driver of economic growth, replacing industry and benefiting a tiny elite. Therefore, India could not generate enough jobs.

Third, the deepening agrarian crisis. The continued differential in growth and productivity between the farm and non-farm sector is the key factor that is driving the peasant crisis today. Their protest is partly an outcome of this rising inequality. Notwithstanding the merits and demerits of the three farm reforms, the protests expose the unstated deep anxieties of farmers and their future prospects in the changing political economy.

Finally, beside its underclass and farmers, another victim of this rising inequality is India’s religious minority, Muslims. We also comment on India’s record on poverty reduction.

We show three axes of inequality—based on class, rural-urban metrics and religion. To do so, we use three measures of inequality: consumption, income and wealth based on the availability of data. While consumption data is used regularly, data for income and wealth is more infrequent. We use All-India Debt and Investment Survey (AIDIS) for wealth, Indian Human Development Surveys (IHDS) for income and National Sample Survey (NSS-CES) for consumption expenditure.

The class divide

There has been a sharp rise of inequality in terms of class since the 1990s. Broadly speaking, consumption inequality is relatively lower than that of wealth and income, but even that has risen over time from 0.33 in 1994 to 0.40 in 2012. Since there is an upper limit on immediate consumption (or spending), unlike accumulated wealth, for instance, consumption inequality tends to be lower in most countries.

If we disaggregate by deciles, the richest 10% control 63% of wealth in 2012 followed by 41% in income and 35% in consumption. Thirty years before, the wealth was relatively less concentrated; the share of the richest decile was 51.6% (see Chart 1). It’s quite evident the enormous rise in inequality has been driven by growth in the richest decile.

Deepening disparity
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Deepening disparity

The rising inequality is termed as “billionaire raj" by Lucas Chancel and Thomas Piketty. They show the sharp rise of income, particularly of the top 1%. They present an overall U-shaped curve of inequality in the last 70 years—declining inequality from 1950s to 1980s followed by a sharp rise thereafter. Also, they contest the hypothesis about the rise of a middle class in India. In their analysis, it is the top 10% who benefited the most as compared to the middle 40%.

In terms of inequality among countries, Hai-Anh Dang and Peter Lanjouw place India amongst the top countries with highest inequality globally—as it stands second only to West Asian countries when measuring the income share of the top 10% in 2016.

The religious divide

Another dimension where India stands out in inequality is the worsening position of religious minorities, particularly the Muslims. The wealth share of Muslims to their population has worsened from 0.65 in 1992 to 0.57 in 2012; the corresponding figures for Hindus rose from 0.99 in 1992 to 1 in 2012. This indicates Muslims’ wealth is considerably short of their population.

In 2005, the Sachar Committee Report showed that Muslims were on the margins in terms of political, economic and social relevance and that their average condition was comparable to, or even worse than, the country’s backward communities including Dalits in certain indicators. Since then, the situation has worsened. In terms of income, Muslims earn, on an average, 77% of what Hindus earn in India in 2012 (see Chart 2).

But the gap is smaller in poor states (Muslims earn 95% of what the Hindus earn in Madhya Pradesh, 91% in Uttar Pradesh and J&K and 82% in Bihar) in comparison to the states below the Vindhyas (where the percentages are 71%, 73%, 74% and 75% for Tamil Nadu, Kerala, Maharashtra, and Karnataka respectively). Undivided Andhra Pradesh is an exception in the South—Muslims earn about 89% of what Hindus do, probably because of Hyderabad.

The gap is the largest in West Bengal, Gujarat and Haryana (where Muslims earn only 33% of what Hindus earn). Muslims earn only 71% of what Hindus earn even in Delhi. In sum, Muslims earn less than Hindus in all the states except Rajasthan where they earn 108% of what Hindus earn.

While we don’t have consistent data for income to follow the trend in the post-2012, the recently surfaced ‘suppressed’ NSS data released by the Ministry of Statistics and Programme Implementation in June 2019 shows further deterioration of Muslims, particularly of its youth.

Rural-urban divide

The increased wealth concentration and income inequality are outcomes of the urban bias in economic growth. Since the 1990s, India’s economic growth has been marked by an urban bias. The rural-urban disparity, as measured by the ratio of urban-to-rural expenditure, has gone up. The decline of India’s agriculture—and rise of urban-biased service-led economic growth—has led to the widening of rural-urban disparities (see Chart 3).

For instance, in 1993-94, the average Monthly Per Capita Expenditures (MPCE) was 281 in rural India and 458 in urban India, about 63% more than rural. This gap widened to 92% in 2004-05 and stabilized to around 84% in 2011-12, with rural MPCE reaching 1,430 and the urban rising to 2,630.

While we do not have disaggregated data for post 2011-12, it is unlikely that disparities have come down given policy shocks such as demonetization, stymying of MGNREGA, deceleration in real wages, and the collapse in global farm prices.

Instead, the leaked data of the 75th round of NSSO for 2017-18 suggests that the rural–urban gaps could have further widened between 2012 and 2018. The rural MPCE declined by 8.8%, while it rose by 2.2% in urban India. The urban/rural consumption expenditure ratio today stands at 2.1. This means that an average urban-dweller today can consume twice that of an average person in a village.

The key factor that drove this disparity is the unprecedented decline of the farm sector. The ratio of per worker GDP in agriculture to per worker GDP in non-agricultural sectors—a measure of productivity—has been decreasing from 0.36 in 1981 to 0.14 in 2011. Even during 2013-19, the average agricultural GDP growth rate was 3.1%, which is much lower than average GDP growth of 6.7%. Even this growth in agriculture was driven by non-crop sectors like livestock.

The poverty factor

The large numbers of poor who have exited poverty in recent decades remain vulnerable. In the wake of covid-19, the ILO estimates that 400 million workers in India are at risk of falling into poverty. These workers are pushed back to poverty precisely because India’s strategy of poverty reduction has been revolving around fragile distributional policies and weak growth links.

Notwithstanding the arbitrariness of poverty line calculation, the 2000s has been seen as a decade of growth and distribution as the decade achieved better growth and highest poverty reduction since independence. The average decline in the poverty ratio was 2.18 percentage points per year during 2004-05 to 2011-12 as compared to 0.74 percentage points per year during 1993-94 to 2004-05.

However, the poor who escaped poverty during this period were actually sitting just above the poverty line. Their income increased to an extent that they escaped poverty, but not to the level that they can withstand any external shocks—not just covid-19.

For instance, if we increase the rural poverty line, let’s say, by 25% from 816 (Planning Commission estimate in 2011-12 based on the Tendulkar Committee) to 1,020 per month, the percentage of poor immediately doubles from 25.6% to 45.4%.

Such a vulnerable bandwidth of poverty is more pronounced in the poorest states. The rural poverty increases in the UP from 30% to as high as 53.4% while it rises from 36% to 59% in the MP. With a 25% increase in the poverty line, the incidence of rural poverty rises from 22% to 47% in even Gujarat. The South Indian states are relatively better and notably have a relatively lesser rural population. However, they are not far from the crisis.

In other words, it is safe to argue that a large part of India’s poverty reduction was not an outcome of broad-based growth, which in turn generates decent jobs, but one led by provision of a fragile social safety net—PDS and MGNREGA.

Such uneven growth across decades indicates that the elites who benefited thanks to the public sector (including the Indian Institutes of Technology and Indian Institutes of Management) in the era of economic planning are the same class of people who benefited the most post the 1990s pro-business reforms.

Hence, it is not surprising that the top income decile largely representing urban professionals grew at the expense of others. The rise of the Bharatiya Janata Party in 2014 has only emboldened this class by way of big businesses taking decisive control over the policy space in India. In sum, the unprecedented rise of inequality and poor record in poverty reduction is an outcome of this decisive shift in India’s growth strategy.

Christophe Jaffrelot is a senior research scholar at CERI-Sciences Po/CNRS. Kalaiyarasan A. is assistant professor, Madras Institute of Development Studies, Chennai

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