INCOME INEQUALITY 

• Recent findings based on taxpayer data suggest a substantial reduction in India's Gini coefficient, indicating a noteworthy decline in income inequality from 2014-15 to 2022-23. However, a critical analysis reveals potential limitations in the assessment, primarily stemming from the focus on taxpayer data, which excludes a significant portion of income earners.
• While the reported Gini coefficient decline is significant, the reliance on taxpayer data raises concerns. Approximately 80% of income-earners, according to the 2022-23 Periodic Labour Force Survey (PLFS), fall below the minimum taxable threshold of ₹2.5 lakh per annum. This data gap necessitates a more comprehensive examination of income distribution among all earners.
• To address these concerns, an in-depth analysis using PLFS data from 2017-18 and 2022-23 explores changes in income inequality across various employment categories. This includes self-employed individuals, regular wage earners, and casual wage workers. The nuanced findings underscore the need to qualify the overarching conclusion of reduced inequality.
• While the empirical evidence supports the decline in the Gini coefficient, an alarming trend emerges a polarization of incomes. The top 10% of earners have experienced faster income growth compared to the bottom 30%, with this divide being particularly pronounced among self-employed workers.

The Gini coefficient, also known as the Gini index or Gini ratio, is a statistical measure of income inequality within a population or a social group. It ranges from 0 to 1, with 0 representing perfect equality (everyone has the same income) and 1 representing perfect inequality (one person has all the income).

• It captures the concentration of income among individuals or households. A higher Gini coefficient indicates a higher degree of inequality, where a small portion of the population holds a significantly larger share of the total income than the rest.
• The Gini coefficient is calculated based on the Lorenz curve, which graphically depicts the distribution of income in a population. The coefficient itself measures the area between the line of perfect equality and the actual Lorenz curve.
• A Gini coefficient of 0.2 signifies relatively low inequality, while a coefficient of 0.7 suggests a stark difference in income distribution. Values exceeding 0.9 are rare and indicative of extreme inequality.
• The Gini coefficient is widely used by economists, policymakers, and researchers to:

• • Compare income inequality across different countries or regions over time.
  • Evaluate the effectiveness of policies aimed at reducing inequality, such as progressive taxation or social welfare programs.
  • Analyze the relationship between inequality and other economic and social factors, such as poverty, crime rates, and health outcomes.

It's important to note that the Gini coefficient is just one measure of inequality, and it has certain limitations. It doesn't capture other forms of inequality, such as wealth inequality or access to resources. Additionally, it considers only income distribution within a specific population or group, ignoring potential differences between groups.

4. The Periodic Labour Force Survey (PLFS) on Aggregate Inequality Trends

• The latest iteration of the Periodic Labour Force Survey (PLFS) introduces a noteworthy enhancement by capturing the gross incomes of the self-employed, offering a more comprehensive analysis of income dynamics. However, it's crucial to note that the presented analysis is preliminary and lacks adjustments for potential errors in income reporting, zero-income declarations, or seasonal variations in self-employed incomes, especially in agriculture.
• The scope of the analysis is restricted to individuals earning income from work, excluding unpaid family helpers, a category predominantly comprising women.
• Within the self-employed category, encompassing own-account workers like individual farmers and roadside hawkers, as well as those employing others, the analysis focuses on nominal weekly incomes without adjusting for inflation.

• As indicated in Table 1, the overall Gini coefficient has marginally decreased from 0.4297 in 2017-18 to 0.4197 in 2022-23. A closer look at different employment forms reveals nuanced trends. For regular-wage and casual-wage workers, there's a reduction in Gini coefficients, signalling decreased inequality. Conversely, the Gini coefficient for self-employed workers experiences a modest increase from 0.37 to 0.3765, reflecting a 1.5% rise.
• While overall inequality has declined, a notable observation surfaces: the reduction in inequality among the top income earners surpasses that of the entire population. This suggests a concentrated impact, warranting a more granular examination of the factors contributing to this pattern.

5. About Income Polarization in India

• The Gini coefficient, while providing an overall measure of inequality, may mask underlying shifts in the income distribution. Figure 1 illustrates a discernible pattern of polarization within the Indian economy, revealed through a detailed examination of income growth across different deciles in the two Periodic Labour Force Survey (PLFS) periods.
• Income-earners in the PLFS surveys are categorized into deciles, with the average weekly income estimated for each decile over five years. The annual rate of growth in average weekly incomes for each decile is then charted. While the majority of deciles experience similar growth rates (8%-9%), a pronounced difference emerges between the top 10% and the bottom 30%. The top decile sees an annual income growth of approximately 7.23%, surpassing the bottom 20% and aligning with the third decile. In contrast, the bottom decile exhibits the slowest income growth at around 1.67%.
• The 90/10 ratio, which measures the ratio of incomes between the 90th percentile (top 10%) and the 10th percentile (bottom 10%), serves as a key indicator of polarization. Table 2 indicates an increase in this ratio from 6.7 in 2017-18 to 6.9 in 2022-23, highlighting a widening gap between the highest and lowest income brackets.

• The analysis delves into changes in polarization among different forms of work. Notably, the 90/10 ratio witnesses a significant decline for wage earners, particularly a substantial fall for regular wage workers. In contrast, self-employed individuals experience a marked increase in the 90/10 ratio. In 2022-23, the income of the top 10% of self-employed individuals is 8.3 times that of the bottom 10%, showcasing a substantial rise compared to 2017-18. The primary source of income polarization stems from the growing divergence in incomes among the self-employed.

6. Factors Behind Changing Inequality Trends

• This preliminary analysis offers a glimpse into notable trends, but a more comprehensive investigation is imperative to grasp the intricacies of these changes in inequality dynamics. Despite the need for rigorous scrutiny, we can attempt to provide an initial explanation for the seemingly contradictory shifts observed in the economy.
• The documented surge in women's labour force participation is a key factor contributing to these nuanced changes. However, this increase is notably dominated by low-paid, part-time self-employed work. While households may witness a rise in overall earnings and women actively participating in the workforce, the surge in low-paid self-employment has inadvertently widened the income gap within the self-employed category. This contributes to the observed polarization among income-earners, especially among the self-employed, even as disparities in wage work both regular and casual show a decreasing trend.
• The pronounced income polarization among self-employed individuals, which is not as evident in taxpayer data, can be attributed to the fact that the bottom 10% of earners do not generate sufficient income to fall within the taxable bracket. The reduction in the Gini coefficient, while indicative of an overall decrease in inequality, conceals the underlying process of income divergence. This nuanced understanding reveals that the reduction in inequality is not uniform across the entire population but rather a result of diverging income trajectories.