Rising inequality hurts: When growth occurs, the poorest benefit the least

Plutarch was right when he said that an imbalance between rich and poor is the oldest and most fatal ailment of all republics. Much has been written to demonstrate that income inequality hurts the poor. However, following Thomas Piketty’s magnum opus, Capital in the Twenty-First Century, the focus has shifted to rapid growth of income shares of the top 1 per cent concurrently with growth in the developed countries. In a more recent contribution, Lucas Chancel and Piketty (2017) offer a rich and unique description of evolution of income inequality in India in terms of income shares and incomes in the bottom 50 per cent, the middle 40 per cent and the top 10 per cent (as well as top 1 per cent, 0.1 per cent, and 0.001 per cent), combining household survey data, tax returns and other specialised surveys.

Some of the principal findings are: one, the share of national income accruing to the top 1 per cent income earners is now at its highest level since the launch of the Indian Income Tax Act in 1922. The top 1 per cent of earners captured less than 21 per cent of total income in the late 1930s, before dropping to 6 per cent in the early 1980s and rising to 22 per cent today. Two, over the 1951-80 period, the bottom 50 per cent captured 28 per cent of total growth, and incomes of this group grew faster than the average, while the top 0.1 per cent incomes decreased. Three, over the 1980-2014 period, the situation was reversed; the top 0.1 per cent of earners captured a higher share of total growth than the bottom 50 per cent (12 per cent versus 11 per cent), while the top 1 per cent received a higher share of total growth than the middle 40 per cent (29 per cent versus 23 per cent).

According to Credit Suisse Global Wealth Report 2017, the number of millionaires in India is expected to reach 3,72,000 while the total household income is likely to grow 7.5 per cent annually to touch $7.1 trillion by 2022. Since 2000, wealth in India has grown at 9.2 per cent per annum, faster than the global average of 6 per cent even after taking into account population growth of 2.2 per cent annually. Neither Chancel and Piketty nor this report analyse the impact on poverty. 

Our research, based on the “India Human Development Survey 2005-12”, examines the links between poverty and income inequality, especially in the upper tail, state affluence (measured in per capita income) and their interaction or their joint effect. Another feature of our research is that we analyse their effects on a class of poverty measures: the head-count ratio or proportion of poor, their intensity of poverty, and a distributionally sensitive measure of poverty that assigns a higher weight to the poorest. 

The results are similar in as much as direction of causality is concerned but the magnitudes vary with the poverty index. Higher per capita income reduces the head-count ratio or proportion of poor while higher ratio of share of top 1 per cent of income to the share of the bottom 50 per cent increases it. Similar results are obtained when the head-count ratio is replaced by the poverty gap. Higher per capita income reduces the poverty gap by about the same amount as the head count ratio while greater disparity between the richest 1 per cent and the bottom 50 per cent increases it by a slightly larger amount (than the head-count ratio). The more glaring differences are observed when the distributionally sensitive poverty measure is used. The “trickle down” effect of income growth is lowest relative to the previous two measures of poverty. In other words, when growth occurs, the poorest benefit the least. Greater diversity between the richest and the bottom 50 per cent increases their poverty but only slightly. 

Why does rise of crorepatis or multi-millionnaires cause poverty to increase? The “Credit Suisse report” highlights that much of their wealth is due to property and stock market booms that do not translate into greater employment opportunities. Worse, these gains accrue at the expense of those at the bottom of the income/wealth ladder who are deprived of remunerative employment opportunities elsewhere. While Piketty is emphatically in favour of wealth redistribution through progressive taxation, many object on the grounds that incentive to accumulate wealth through fair means will get undermined. The official claim that demonetisation and long-term capital gains tax are essentially redistributive is not just misleading but fatuous. Social safety nets (such as MGNREGA and PDS) may help raise the incomes of the poor, but so far their performance has been dismal and likely to be worse due to budget cuts.

Kulkarni is a research affiliate of the Harvard Institute of Quantitative Social Science, Cambridge, MA, U.S;  Gaiha is professorial research fellow, Global Development Institute, University of Manchester, Manchester, England