Context: The government recently claimed that India is one of the most equal countries based on the Gini Index. However, the experts argue that this measure does not fully capture the real extent of inequality.
Relevance of the Topic: Prelims: Gini Coefficient, Palm Ratio, World Inequality Database, World Bank recent report on inequality.
What is the Gini Index?
- Gini Index or Gini Coefficient is a statistical measure of inequality. It quantifies how equally income, wealth or consumption is distributed across households or individuals in a country.
- It ranges in value from 0 to 100. A score of 0 means perfect equality. A score of 100 means one person has all the income, wealth or consumption and others have none, hence absolute inequality. The higher the Gini Index the more unequal the country.
- Graphically Gini Index can be explained by the Lorenz curve.
- A perfectly equal distribution will be shown by a diagonal line, while the actual distribution will be shown by the Lorenz curve.
- The Gini Index tells us how far the Lorenz Curve is from the ideal equality line; the farther it is, the more unequal the society.
India's Gini Index Trends:
- As per the World Bank’s Poverty and Equity Brief- India ranks fourth globally in income equality with a Gini score of 25.5 (2022-23), after the Slovak Republic, Slovenia and Belarus.
- The index was measured at 28.8 in 2011, and reached 25.5 in 2022. This shows that India has made consistent progress in combining economic growth with social equity.
- India primarily uses a consumption-based Gini Index instead of an income-based one, relying on household surveys that measure inequality based on individuals’ consumption levels rather than their actual incomes.
However, economists argue that consumption-based Gini Index fails to reflect actual levels of inequality, especially in India’s context.
Trends from World Inequality Lab Database:
World Inequality Database which is based on income shows:
- Income inequality in India is rising from a Gini of 52 in 2004 to 62 in 2023.
- Wage disparity remains high, with the median earnings of the top 10% being 13 times higher than bottom 10% in 2023-24.
- The top 1% earn more than 22% of national income. The bottom 50% earn less than 15%. India's inequality is now worse than colonial levels.
Limitations of Consumption-based Measures:
- Underestimates Inequality: Rich people consume proportionally less and save more of their income. Poor people spend nearly all of their income leading to less visible inequality in consumption data.
- Fails to capture Wealth Inequality: Wealth disparities such as those in property or financial assets are ignored.
- Affected by Public subsidies: Free ration, subsidies etc. improves consumption data but may not always lower inequality in real life.
Thus, it is misleading to compare India's Consumption based Gini Index value with that of other countries, which use an income based Gini.
Limitations of the Survey data
- Differential Non-response Bias: High-income individuals often decline to participate in surveys.
- Sampling Errors: Probability of randomly including ultra-rich in a small survey is low.
- Surveys largely capture the middle-income majority. But most inequality is driven by the top 1%, who are missing from survey samples.
Way Forward
- Shift from a purely consumption-based approach to include income-based inequality measures, aligning with global standards.
- Combine household survey data with income tax data to better capture top incomes and reduce underestimation.
- Use Alternative Indicators like Palma Ratio. Palma Ratio measures the ratio of the richest 10% of the population’s share of national income divided by the poorest 40% 's share.