How the data sets stack up

How the data sets stack up

What has happened?

In recent years, there has been a lot of discussion on increasing inequality within several countries of the world, including India, particularly after the publication of Thomas Piketty’s book on inequality

What we discuss here

• The trends in inequality
• That the poverty ratio is equally important as the Gini coefficient in analysing issues relating to growth and distribution

Consumption inequality

Inequality in rural areas declined while it increased in urban areas in the post-reform period, particularly in the high growth period

Reason for inequality in consumption

• National Sample Survey (NSS) data may not be capturing the consumption of the rich adequately, i.e. underestimation
• The difference between the consumption expenditure according to the National Sample Survey Office (NSSO) and national income could be partly due to this factor
• In India the difference between NAS and NSS is widening over time

Income inequality

• The income Gini was about 20 points higher than consumption Gini while wealth Gini was nearly almost 40 points higher than consumption Gini
• Thus, inequality in income and wealth is much higher than that of consumption
• The data base for computing income inequality is not as solid as the base for consumption expenditure
• The reasons for sharp differences between consumption Gini coefficient and income Gini coefficient have to be analysed. In some other countries, such differences are no more than 5-10 points

Trends in poverty ratio

• The number of persons below poverty declined by 5 percentage points during 1983 to 1987-88 but rose by 4 percentage points during 1987-88 to 1993-94
• Poverty declined faster in the post-reform period, particularly in the 2004-2012 period as compared to 1993-2005
• Poverty declined by 2.2 percentage points per annum during the period 2004-05 to 2011-12. This was the period of highest economic growth since Independence. It is the fastest decline of poverty compared to earlier periods

Conclusions from above trends:

• Urban growth is the most important contributor to the rapid reduction in poverty even in rural areas in the post-1991 period
• Within the post-reform period, poverty declined faster in the 2000s than in the 1990s

Criticism

Tendulkar poverty level is low and needs to be raised

Counter to criticism

Holds good upon raising the cut-off:As far as reduction in the poverty ratio is concerned, it holds good even if we raise the poverty cut-off to 1.5 times the Tendulkar cut-off

Growth and distribution

The impact of higher growth on poverty reduction can also be seen from the decile-wise growth in per capita consumption expenditure

Income distribution worsens during early period of economic growth

It was Simon Kuznets who had argued in a famous paper in 1955 that in the early period of economic growth distribution of income tends to worsen, and that only after reaching a certain level of economic development an improvement in the distribution of income occurs.

Changes in poverty ratio equally important

• Even if the Gini coefficient remains the same or picks up, the poverty ratio can be declining. This has been true of India
• The decline in poverty is much higher particularly in the period 2004-05 to 2011-12 in spite of rise in inequality.
• Thus the changes of the poverty ratio is an equally important indicator to monitor

What is the “Gini Index” ?

• The Gini index or Gini coefficient is a statistical measure of distribution developed by the Italian statistician CorradoGini in 1912
• It is often used as a gauge of economic inequality, measuring income distribution or, less commonly, wealth distribution among a population
• It is a measure of deviation from perfect equality
• The coefficient ranges from 0 (or 0%) to 1 (or 100%), with 0 representing perfect equality and 1 representing perfect inequality
• Values over 1 are theoretically possible due to negative income or wealth.

High-income and low income country can have same index

A high-income country and a low-income one can have the same Gini coefficient, as long as incomes are distributed similarly within each: Turkey and the U.S. both had income Gini coefficients around 0.39 in 2014, according to the OECD

Lorenz curve

The Gini index is often represented graphically through the Lorenz curve

Criticism of Gini Coefficient

It is criticised for being overly sensitive to what happens to people in the middle, and not so good at picking up changes at the extremes, where there has been a growing focus in inequality research

Alternative to Gini Coefficient: The Palma Ratio

• The Palma ratio is an alternative to the Gini index, and focuses on the differences between those in the top and bottom income brackets
• The ratio takes the richest 10% of the population’s share of gross national income (GNI) and divides it by the poorest 40% of the population’s share
• This measure has become popular as more income inequality research focuses on the growing divide between the richest and poorest in society.