Context: A number of recent consumption and asset surveys are showing a fall in inequality in India.
Relevance of the Topic: Mains: Debate surrounding income inequality in India.
Economic Growth of India
Post-Independence Economic Issues:
- India inherited a poor economy in 1947 with excessive poverty levels. The first 50 years of independence saw poverty persist due to a lack of substantial economic growth, in spite of the socialist policies for income redistribution.
- The economy witnessed slow growth, excessive taxation, and policies that focused on wealth redistribution by way of public sector dominance and centralised control.
Liberalisation in the 1990s:
- In the early 1990s, India shifted toward economic liberalisation, opening up its markets, reducing trade barriers, and embracing foreign investments. These reforms led to an annual growth rate of ~6% (1990-2020), lifting 400 million people out of poverty.
- By 2021, Indian poverty had declined to 13% of the population, from 40% in 2000, according to the World Bank's $2.15/day poverty line (2017 PPP). This reflects upwards economic mobility.
- Based on household consumption expenditure surveys (2022-23), urban poverty was at 10%, while rural poverty was at 5%.
- There has been a significant decline in multidimensional poverty, extending to access to sanitation, electricity, education, and healthcare.
World Inequality Lab (WIL) Estimates:
- Inequality Trends in India: According to WIL, the top 1% of earners in India take home 21% of disposable income, while the bottom 50% earn only 13%.
Limitations of WIL Data :
- WIL's findings are based on income tax data, which represents a small proportion of the population. Surveys conducted by PRICE and NCAER, including both formal and informal sectors, reveal a far more equal distribution of income, with the richest 1% getting 8.8%, and the poorest 50% getting 22.8%.
- Dependence on income tax data is a major drawback, as India has a relatively low proportion of taxpayers. This skews actual distribution of income and wealth. Other studies, including academic and market surveys, disagree with WIL's report, suggesting the data may not be credible.
Trends suggesting fall of Inequality in India
A number of recent consumption and asset surveys are showing a fall in inequality in India.
- More than 450 million individuals have moved past the $2/day income line from 2000 to 2012, with great economic mobility.
- The proportion of individuals with incomes ranging from ₹5 lakh to ₹31 lakh annually grew from 14% between 2005 and 2021 to 31%, evidencing a large-based increase in income.
- The ratio of workers in the population went up from 34.7% in FY18 to 43.7% in FY24, indicating better employment participation.
- Average per capita income touched ₹2 lakh in FY24, which indicates rising economic growth.
- Small FMCG players reaching price-sensitive consumers grew significantly more than big business, falsifying the premise that inequality is on the increase due to unbalanced consumption behavior.
- Multidimensional poverty declined with noteworthy improvements in the availability of basic facilities like electricity, sanitation, and healthcare.
- India has seen massive entry into wealth creation, particularly in the form of start-ups and MSMEs (Micro, Small, and Medium Enterprises). Credit to MSMEs has increased very fast, encouraging the establishment of new enterprises and facilitating wealth distribution among a wider segment of society.
- The number of Indian dollar millionaires doubled from 2012 to 2022, though their absolute numbers are few compared to world averages. India's percentage of world millionaires is merely 1.4%, whereas its percentage in world population is 17.2%. This shows that wealth creation is at a nascent stage in India.
Way Forward
- Focusing on Upward Mobility: Policy and research must aim at enhancing upward mobility in the income distribution, instead of monitoring poverty and inequality alone. Policy must encourage economic engagement and offer opportunities for individuals to climb the income ladder.
- Avoiding Excessive Taxation of Wealth Creators: Excessive taxation of wealth creators, as proposed by certain inequality research, may hurt India's growth prospects by discouraging entrepreneurship and innovation. The government must aim at creating conditions where prosperity and upward mobility across income levels are promoted to ensure long-term economic growth.
- Improving Governance and Infrastructure: To ensure continued growth, India needs to give high priority to governance reforms, particularly in non-metro areas, so that economic benefits are spread widely. Improving infrastructure, decentralisation, and local public service delivery will be key to inclusive and sustainable growth.
Indian growth is primarily based on a broad-based increase in consumption and economic mobility, as opposed to a concentration of wealth at the top. Policies aimed at economic mobility, employment generation, and narrowing inter-regional imbalances will be crucial to continuing this growth trend.








