STATE OF INEQUALITY REPORT
1. Context
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.
2. What is Consumption inequality?
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- The World Bank's inequality data focuses on consumption rather than income or wealth, which raises several concerns. Firstly, consumption inequality tends to appear lower than disparities in income or wealth.
- This is because low-income households typically spend most of what they earn on basic needs, with little to no savings. When their income increases, their spending doesn't rise proportionately, as they now have the capacity to save. As a result, consumption patterns don’t fully reflect broader income or wealth inequalities.
- Secondly, the data used to assess consumption inequality primarily comes from the Household Consumption Expenditure Surveys (HCES) of 2011–12 and 2022–23.
- While these surveys may reliably capture spending at the lower end of the economic spectrum, they often miss the high-income outliers, thereby underreporting the true extent of inequality.
- Additionally, substantial methodological differences between the two survey rounds make direct comparisons over time problematic. This issue has been acknowledged by various experts and is even highlighted in the official documentation accompanying the 2022–23 HCES data
3. Income and Wealth Inequality
- The World Bank’s reported low Gini coefficient pertains specifically to consumption inequality and should not be equated with global measures of income disparity
- Accurately assessing income and wealth inequality in India is challenging, primarily because official surveys tend to overlook individuals with extremely high earnings and assets.
- To address this gap, researchers from the World Inequality Database (WID), under the leadership of economist Thomas Piketty, have used a broader set of data—including tax filings, national surveys, and rich lists—to develop more representative estimates of inequality in the country. Their findings reveal a stark contrast to the more optimistic picture presented by the World Bank.
- According to WID estimates, India’s Gini coefficient for pre-tax income in 2022–23 stood at 0.61. This places India among the most unequal nations globally, with 170 out of 218 economies reporting lower levels of income inequality.
- The scenario for wealth distribution is even more skewed. India’s wealth Gini is estimated at 0.75, suggesting a more severe concentration of assets than income or consumption. While this is a high figure, several countries still have even greater wealth inequality; in fact, 67 nations report a lower wealth Gini than India.
- The trends are also concerning. Income inequality, as measured by the Gini coefficient, has increased notably from 0.47 in 2000 to 0.61 in 2023. Wealth inequality has also risen, albeit less dramatically—from 0.7 in 2000 to 0.75 in 2023—largely because the baseline level of concentration was already high. These patterns clearly contradict the notion of declining inequality suggested by the World Bank.
- Moreover, the Gini coefficient, while widely used, tends to obscure the extreme accumulation of wealth by a small elite. It reflects the overall distribution but doesn’t indicate how much wealth is held by the richest few. When we focus on the top 1%, the inequality becomes even more pronounced.
- In 2022–23, the top 1% of adults in India owned nearly 40% of the country's net personal wealth. Only four countries—Uruguay, Eswatini, Russia, and South Africa—exhibited greater concentration among the wealthiest
4. Key takeaways from Household Consumption Expenditure Survey (HCES) 2023-24
- The estimated average Monthly Per Capita Consumption Expenditure (MPCE) for 2023-24 in rural and urban India is Rs. 4,122 and Rs. 6,996, respectively, excluding the value of items received for free through social welfare programs. When the imputed value of these free items is considered, the estimates rise to Rs. 4,247 for rural areas and Rs. 7,078 for urban areas.
- In nominal terms, the average MPCE (without imputation) grew by approximately 9% in rural areas and 8% in urban areas compared to 2022-23 levels. The urban-rural MPCE gap has also narrowed, decreasing to 70% in 2023-24 from 71% in 2022-23 and 84% in 2011-12, reflecting consistent consumption growth in rural areas.
- The largest increase in average MPCE from 2022-23 to 2023-24 occurred among the bottom 5-10% of the population in both rural and urban areas. Following the trend from the 2022-23 HCES, non-food items accounted for the majority of household expenditure in 2023-24, comprising about 53% of MPCE in rural areas and 60% in urban areas.
- Within the food category, beverages, refreshments, and processed foods continued to dominate household spending in 2023-24. Non-food expenditure remained concentrated in categories such as conveyance, clothing, bedding, footwear, miscellaneous goods, entertainment, and durable goods. For urban households, rent—including house rent, garage rent, and accommodation charges—accounted for around 7% of non-food expenditure.
- Consumption inequality has decreased in both rural and urban areas. The Gini coefficient for rural areas declined from 0.266 in 2022-23 to 0.237 in 2023-24, while in urban areas, it fell from 0.314 to 0.284 during the same period
5. Way forward
Over the past several decades, the overarching trend in India has been an increase in both income levels and inequality, rather than any meaningful reduction. Interestingly, a decline in consumption inequality amid this broader rise in income is not surprising. As overall incomes grow—provided the real incomes of the poor do not decline (though some experts, like Utsa Patnaik, argue they have)—the spending capacity of lower-income groups tends to rise more sharply compared to the middle and upper classes. In contrast, wealthier groups, whose incomes grow faster, are more likely to channel a larger share into savings. These savings then contribute to the accumulation of greater wealth.
Thus, it is entirely possible for consumption inequality to decline even as disparities in income and wealth widen—an outcome clearly visible in India’s current economic landscape. What stands out most is the stark concentration of income and wealth that has accompanied India’s growth, placing it among the most unequal countries globally. This level of inequality could have serious implications for the nation’s long-term economic development
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For Prelims: Current events of national and international importance For Mains: General Studies III: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment |
Source: The Hindu
