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N Chandra Mohan: Reign of the one per cent?

Inequality in India is worsening and clearly following the US pattern

N Chandra Mohan 

India is a “relatively low-income inequality country” – to borrow an expression from a World Bank publication – when compared to China or Brazil, but there is no doubt that disparities have been widening of late. Planning Commission officials have admitted that inequality has risen in the first decade of the new millennium, although the factors responsible for it need more research. A popular explanation is that these disparities are owing to the economic reforms of the 1990s, but data of the five-yearly surveys of National Sample Survey Organisation to clinch this issue is far from conclusive.

If consumer expenditures are considered a proxy for income, the Gini coefficient – a measure of inequality – has risen from 0.35 in 2004-05 to 0.37 in 2009-10 in urban India and from 0.27 to 0.28 in rural India over this period. Obviously, income is being concentrated in the hands of fewer people, especially in towns and big cities. The Gini lies between zero (at which every one has the same income) and one (at which one person has all the income). Even though it is rising, the inequality in consumer expenditures is still much lower than the Gini coefficient of 0.55 in Brazil.

A much sharper expression of these trends is the rising ratio of monthly per capita consumer expenditures of the top 10 per cent of the population to the bottom 10 per cent. In urban India, this ratio was stable at 8.3 in 1993-94 and 8.4 in 2004-05 but rose to 10.1 in 2009-10. By contrast, it was more stable in rural India at 5.8. The pattern is the same if one considers the ratio of expenditures of the top 15 per cent to the bottom 15 per cent of the population. These numbers reflect sharpening dualism since the benefits of rapid growth has disproportionately benefited the top than the bottom of the pyramid.

Professors Abhijit Banerjee of Massachusetts Institute of Technology and Thomas Piketty of the Paris School of Economics have used more direct measures like income tax returns to assess trends in income disparities. Their earlier work established that the share of top incomes in India followed a U-shaped curve during the first half of the 20th century. Around 1950, the share of the top one per cent of the population was 13.4 per cent of total income, which gradually declined over the subsequent decades to 4.8 per cent in 1980. The share of top incomes then began climbing upwards to 7.4 per cent in 1990 and around nine per cent in 1998-99.

According to these researchers, the increase in top income shares was highly concentrated, with most of the gains going to the top percentile of the very rich in India. In the 1990s, it was the top 0.1 per cent of the population that, in fact, enjoyed a growth rate of income that was faster than overall per capita GDP growth, in contrast to the 1980s when there was faster growth for the whole top percentile group (see also Antony Atkinson, Thomas Piketty and Emmanuel Saez’s “Top Incomes in the Long Run of History”, National Bureau of Economics Research Working Paper no 15408).

Unfortunately, they have not updated their work. But if World Bank taxation expert Sebastian James’ numbers are reliable, the share of the rich top one per cent has since then risen to 30 per cent of the total income in 2008-09. The upshot is that the trend of snowballing inequalities in India is clearly following the US pattern, where CEO pay has widened substantially vis-à-vis the American worker’s income. This, in turn, has triggered a backlash like the Occupy Wall Street movement the slogan of which is that we are the 99 per cent in contrast to the top one per cent who control 23.5 per cent of income.

Professor Saez of the University of California has recently updated estimates on top US incomes that strikingly show why the backlash in that country is in no danger of fizzling out. During the recent US recession of 2007-09, the average real income per family fell by 17.4 per cent. The average real income of the top one per cent, too, declined by 36.3 per cent that led to a decrease in the top income percentile share from 23.5 per cent to 18.1 per cent. To be sure, the average income of the bottom 99 per cent also plunged by 11.6 per cent that erased whatever gains they registered from 2002-2007.

But during the recovery in 2010, average real income per family grew by 2.3 per cent. The average real income of the top one per cent increased by 11.6 per cent while the bottom 99 per cent grew by only 0.2 per cent. The rich, thus, captured a staggering 93 per cent of the gains during the first year of recovery! “Such an uneven recovery can help explain the recent public demonstrations against inequality,” argued Saez. The point is that India, too, might face this denouement if income disparities keep widening as they have during the nineties and noughties.

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First Published: Mon, March 26 2012. 00:21 IST