Why inequality dipped when poverty worsened

It appears counter-intuitive that inequality fell in a period when there is overwhelming evidence of a poverty rise.
It appears counter-intuitive that inequality fell in a period when there is overwhelming evidence of a poverty rise.


A fall in middle-class incomes may explain this puzzle and India’s revival plan must account for it

There is now a raging debate on what happened to poverty during the last decade. The curiosity is justified, given how eventful the decade was, with large catastrophic events, both policy-induced and natural. First the droughts in 2014 and 2015, then demonetization and the hasty roll out of India’s goods and services tax (GST) and finally the covid pandemic; the impact on the economy has been clearly visible, with average growth decelerating to its lowest in the last three decades. However, the real issue of who gained and who lost is still a matter of debate. The balance of evidence is largely in favour of the last decade being a lost one as far as poverty reduction is concerned. But it also points to a decline in inequality.

Consumption expenditure from the National Statistical Office has been the mainstay of inequality measurement. But the absence of a consumption survey after 2011-12 makes it difficult to say anything conclusively. The last survey in 2017-18 was abruptly junked by the government without any valid explanation. Its leaked findings revealed an increase in poverty between 2011-12 and 2017-18. Subsequent Periodic Labour Force Survey (PLFS) data confirmed the trend of a decline in consumption expenditure and worker income after 2017-18. The consumption survey data also showed that inequality actually fell, albeit marginally.

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On a comparable ‘modified mixed recall period’ basis, the rural Gini—used to measure inequality—fell from 28.7 in 2011-12 to 25.8 in 2017-18. The decline was larger in urban areas, with the Gini reading falling from 36.7 to 32.9. These numbers are not outliers and some evidence of this emerged in subsequent PLFS surveys. The All-India Debt and Investment Survey (AIDIS), which is used to track wealth inequality, lends credence to this trend. Unlike the consumption and PLFS surveys, the wealth inequality estimates from AIDIS do not show a sharp decline, but these do confirm that inequality in wealth in 2019 may not have risen, or stayed stagnant at the 2012 level. Of course, there are other private surveys which suggest that inequality may have gone up, but even in these, the rise seems marginal.

Notably, there has been much less debate on the trend in inequality as against poverty. This is not surprising, given India is still a country with very high poverty despite claims of reduction. The issue, however, is not the extent of decline in inequality, but what these trends represent and its implication for overall growth and income distribution in the economy.

It appears counter-intuitive that inequality fell in a period when there is overwhelming evidence of a poverty rise. While there is no clear explanation to this puzzle, it does appear to be a case of “levelling down", a term used by Derek Parfit and offered as an explanation by professor S. Subramanian ( Essentially, the decline in inequality is not a result of any transfer of income from the rich to the poor, or faster growth of the latter’s income, but a result of a faster decline in income among the middle class and well-off. Disaggregated analysis of all the available evidence seems to back this explanation. It also fits in with the broad trend of a slowdown in our economy, which has affected not just the poor, but almost every section of the income spectrum with the possible exception of the very rich. Earnings data from the PLFS also confirms this, by showing a sharper decline in the earnings of regular workers compared to casual workers.

It is also likely that the poor were in a better position to weather the economic shocks and slowdown because of an expansion of India’s social protection base over the past two decades. The Public Distribution System has seen a massive expansion after the enactment of the National Food Security Act and the free rations given during the pandemic. Even schemes such as the rural employment guarantee were helpful in insulating the poor in these difficult circumstances.

So while welfare measures may have provided basic security to the poor, a decline in inequality driven by incomes of the non-poor does raise questions on the sustainability of economic growth in the medium to long run. The evidence in recent years confirms weak demand in the economy led by weaker discretionary spending. Not only did it contribute to the slowdown, it also delayed a growth revival. If it persists, we could face more obstacles in the way of a broad-based economic revival.

Sure, it is necessary to strengthen the net of social protection for the poor. But any plan for an economic revival will be incomplete without accompanying efforts to revive the purchasing power of India’s large middle class.

Himanshu is associate professor at Jawaharlal Nehru University and visiting fellow at the Centre de Sciences Humaines, New Delhi.

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