Claims about India’s rising inequality don’t tell the full story

The discussion on inclusive growth in India has gained prominence as the nation aims to become a developed country by 2047. A key indicator of this is the living standards of the bottom economic strata, as well as the evolution of income inequality. This has sparked debates over the accuracy of income inequality data and its implications for India's growth trajectory, with recent claims suggesting rising inequality, despite alternate data showing improvements for lower-income groups.

Income Inequality Trends:

• National Income Share of Low-Income Groups: WIL estimates show that the share of national income for the bottom 50% of the population rose from 13.9% in 2017 to 15% in 2022, indicating some reduction in income inequality.
• Income Share of the Top 1%: While the national income share of the top 1% has increased since 1991, it only grew by a little over one percentage point since 2014.
• Issues with WIL Estimates: WIL's estimates are based on flawed data, assuming income is less than expenditure for 80% of households, which distorts the income distribution and overstates inequality for top income groups.

Taxation and Welfare Transfers:

• Tax Contribution by the Top 1%: The top 1% of income earners contribute significantly more in taxes, accounting for 42% of total tax receipts in 2024, despite their income share being lower.
• Post-Tax Disposable Income: After accounting for taxes and welfare transfers, the actual disposable income of the top 1% is 65-75% of what is reported in inequality estimates. Conversely, the bottom 80% benefits from welfare transfers that are not considered in these reports.
• Welfare Impact on Inequality: Welfare transfers substantially reduce inequality by boosting the income of low-income groups, thereby offsetting the apparent income disparity highlighted by gross income estimates.

Economic Dynamics and Inclusive Growth:

Capital vs. Labor Income: The rate of return on capital has been lower than GDP growth rates in India, which supports the redistribution of national income towards labor and helps reduce inequality.

• Entrepreneurial and Start-up Growth: Many top-income earners in India are not from wealthy families but have benefited from the booming start-up ecosystem, showcasing merit-based wealth creation.
• Consumption and Education Gains: Consumption inequality has decreased, and the poorest 20% have seen significant improvements in food, vehicle ownership, and access to education, with the highest gains in educational enrollment among SC and ST communities.

Practice Question:

Analyze the role of income distribution in achieving inclusive growth in India. How do recent trends in consumption and education among lower-income groups challenge or support the claims of rising income inequality?