India’s Rising Inequality 
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Source: This post on India’s Rising Inequality has been created based on the article “Claims about India’s rising inequality don’t tell the full story” published in The Indian Express on 14th January 2025.  

UPSC Syllabus topic: GS Paper 3- Indian Economy 

Context: The article critically examines the claims of rising income inequality in India, offering a nuanced perspective on the state of economic distribution and inclusivity. It challenges popular narratives about inequality, asserting that Indian growth has been largely inclusive and has contributed to improved living standards across socio-economic strata. 

Why is inclusive growth essential for India? 

  1. Inclusive growth is crucial for India to achieve the goal of becoming a developed nation by 2047.  
  2. Key indicators include: 
  • Improving living standards for those at the bottom of the economic pyramid. 
  • Reducing income inequality, as it impacts aggregate demand and resource allocation, which affects economic growth. 

Is income inequality increasing in India? 

  1. No. Survey-based PRICE ICE360 data suggests income inequality has decreased, and the middle class has expanded in recent years. 
  2. Claims about rising inequality often rely on data from the World Inequality Lab (WIL), which has limitations. 

What are the limitations of WIL’s inequality estimates? 

  1. WIL data assumes that 80% of Indian households spend more than they earn, which is implausible. This results in: 
  2. Underestimating incomes of low- and middle-income groups. 
  3. Overestimating the national income shares of the top 1% and 10%. 
  4. Despite its flaws, WIL shows: 
  • The bottom 50% share of national income rose from 13.9% (2017) to 15% (2022). 
  • The top 10% share fell from 58.8% to 57.7% in the same period. 
  • The top 1% share has risen slightly since 2014, by about one percentage point. 

How do tax policies and administration affect inequality estimates? 

  1. Reductions in marginal tax rates and better tax administration have led to: 
  2. Increased reported incomes among top earners. 
  3. Marginal tax rates dropped from 93.5% (1970s) to 39% (now). 
  4. The top 1%: 
  • Accounts for 17.5% of reported income but pays 42% of total taxes. 
  • This contribution reduces their post-tax disposable income to 65-75% of headline estimates. 
  • Low-income groups benefit from welfare transfers, which increase their actual income. 

How does GDP growth compare to returns on capital? 

  1. Higher GDP growth relative to returns on capital benefits labour over capital, reducing inequality: 
  2. Real rate of return on capital: <2% (average CPI inflation: 5.5%). 
  3. Average GDP growth rate: >6%. 
  4. Weighted real lending rates: <4%. 
  5. Even though some small- and mid-cap companies outperform, mutual fund investments benefit 14% of Indian families. 

Is inherited wealth the primary determinant of top incomes? 

No. The majority of top earners (60%) are self-made and not from the wealthiest families. India leads in producing first-generation billionaires, fueled by the booming start-up ecosystem. 

What are the trends in poverty and consumption inequality? 

  1. Extreme poverty has nearly been eradicated since 2011-12. 
  2. NSSO data (2023-24) highlights: 
  3. Consumption inequality has declined. 
  4. Improvements in diet quality (increased consumption of milk, meat, fish, fruits). 
  5. Vehicle ownership among the poorest 20% households rose from 6% (2011-12) to 40% (2023). 

Is Indian growth inclusive? 

Yes, on most counts: 

  1. Rising living standards for low-income groups. 
  2. Expansion of the middle class. 
  3. Declining inequality in consumption and income. While challenges remain, India’s economic and social policies have contributed significantly to inclusive growth. 

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