The country should worry about further deepening of economic inequality in the post-COVID period
The World Economic Outlook – a bi-annual publication of the International Monetary Fund (IMF) -- released in October 2020 has anticipated that the economic progress made by the countries since the 1990s to reduce poverty would be turned upside down by the COVID-19 pandemic. On top of that, economic disparity would rise too in the post-COVID world because the crisis has disproportionately impacted women, informal sector workers and people with lower levels of education.
Even before the pandemic had struck, there were pre-existing trends of the rise in income inequality (measured in terms of income Gini Coefficient) as compared with the early 1990s in not just many advanced economies of the world, but also among some of the fast-growing emerging market and developing economies, including India. Please see chart-1.
Source: World Economic Outlook, October 2020: A Long and Difficult Ascent, International Monetary Fund, please click here to access
According to the IMF's World Economic Outlook published in October this year, a number of factors are responsible for the rise in income inequality in the advanced capitalist as well as the emerging economies, "including skill-biased technological change that favored those with high educational attainment, the decline of unions, the increase in firms’ monopsony power in the labor market because of rising market concentration and the associated decrease in the bargaining power of employees, and regressive tax policy changes that have resulted in lower marginal taxes on the highest earners as well as lower corporate taxes over the past several years."
Recent media reports indicate that while rising stock prices in the past few months enhanced the wealth of a handful of billionaires and the richer sections of the society, rising joblessness and precarity in employment have pushed majority of the casual workers, the self-employed and those in regular/ salaried work into further income and food insecurity. The violence that erupted in the Wistron iPhone manufacturing plant in Karnataka’s Kolar district due to non-payment (also delay in payment) of salaries and overtime dues to the contract employees is a case in point.
So, why should a country pay attention to rising economic disparity and implement policies to arrest such trends? In an opinion piece published in 2012, Nobel laureate Joseph Stiglitz and public policy expert Linda J Bilmes wrote that when income gets concentrated in the hands of a few rich individuals, spending by the average citizen goes down. People from lower income classes have a higher marginal propensity to consume (MPC) in comparison to richer persons. The marginal propensity to consume is the proportion of extra income that is spent on consumption. In a layperson's language, a lower income person spends a larger portion of its increased income on consumption in comparison to a richer guy. When income gets concentrated among a few individuals at the top, aggregate demand in the economy goes down. However, when income is equally distributed among the lower income individuals through job creation, aggregate demand in the economy rises, which pushes up GDP through the 'multiplier effect'. When an economy is facing recession, employment generation through government spending helps to boost aggregate demand. Progressive taxation reduces income inequality in normal times. Stiglitz and Bilmes in that article also discussed how rent seeking activities such as ownership of industries and natural resources in the hands of a few entities and businesspersons because of their “close” connections with the government may lead to further inequality and how that damages the economy in terms of lack of competitiveness and innovation. Mistrust grows among economic agents when inequality widens, which has implications for the overall economy.
In this context it is important to look at The World Inequality Database https://wid.world, which has been developed by a team of economists and researchers, including Thomas Piketty, Facundo Alvaredo, Gabriel Zucman and Lucas Chancel. The project website of The World Inequality Database provides some of the most fascinating insights about rising income disparity and wealth inequality in India during the last 35 years or so.
The World Inequality Database came into being in January 2011 and prior to 2015 was known as The World Top Incomes Database (WTID). Since household level consumption expenditure or income surveys do not provide adequate information on income and wealth levels of the richest individuals, The World Inequality Database has overcome this limitation by combining various data sources for a country: national accounts, survey data, fiscal data, and wealth rankings. In short, the project has relied on multiple sources of data in their analyses to measure income and wealth disparities within the countries – data from income/ consumption expenditure surveys, income tax data, data from wealth surveys and wealth plus inheritance tax data besides national income and wealth accounts and wealth rankings.
Instead of using the Gross Domestic Product (GDP), The World Inequality Database has relied on the concept of national income i.e. GDP minus consumption of fixed capital (capital depreciation) plus net foreign income. National income has been considered by them to be more meaningful "because it takes into account the depreciation of the capital stock (including in principle natural capital), which is not an income to anyone, as well as the fraction of domestic output that is transferred to foreign capital owners (including in principle offshore wealth)."
Skewed income distribution
• The share of the top 10 percent of the population in the pre-tax national income fell from 39.6 percent to 30.0 percent between 1955 and 1982 (touching highs and lows in between). However, the share of the top 10 percent of the population in the pre-tax national income went up from 35.3 percent to 56.1 percent between 1983 and 2019. At present the share of the top 10 percent in pre-national income is at an all-time highest in the whole history of independent India. Please see the interactive chart below.
• About 19.2 percent of pre-tax national income belonged to the bottom 50 percent of the population in 1955, which increased marginally to 23.6 percent in 1982 (touching highs and lows in between). However, the share of the bottom 50 percent of the population in the pre-tax national income came down from 21.8 percent in 1983 to 14.7 percent in 2019. Presently, the share of the bottom 50 percent of the population in the pre-tax national income is at an all-time lowest in the entire history of independent India. Kindly consult the interactive chart above.
• The share of the top 1 percent of the population in the pre-tax national income declined from 14.1 percent to 6.1 percent between 1957 and 1982 (touching highs and lows in between). However, the share of the top 1 percent of the population in the pre-tax national income climbed up from 10.3 percent to 21.4 percent between 1983 and 2019. Please see the interactive chart above.
• Around 40.8 percent of the pre-tax national income was held by the middle 40 percent of the population in 1957, which increased to 46.3 percent in 1982 (touching highs and lows in between). However, the share of the middle 40 percent of the population in the pre-tax national income fell from 43.0 percent to 29.2 percent between 1983 and 2019. Kindly check the interactive chart above.
• It should be noted that the Sustainable Development Goal-10 aims to reduce inequality, which continues to exist in income as well as that based on age, sex, disability, religion or economic or other status within a country as well as among countries. Inequality acts as not only an obstacle to progress but also deprives people from opportunities and ultimately leads to the conditions of extreme poverty. Target 10.1 of the SDG-10 is about progressively achieving and sustaining income growth of the bottom 40 percent of the population at a rate higher than the national average by 2030. The World Inequality Database shows that nearly 13.4 percent of the pre-tax national income belonged to the bottom 40 percent of the population in 1955, which marginally increased to 16.7 percent in 1982. The share of the bottom 40 percent of the population in the pre-tax national income was 15.4 percent in 1983, which came down to 10.4 percent in 2019. Kindly consult the interactive chart above.
• Some of the countries where the top 10 percent of the population held 50-69 percent of the pre-tax national income in 2019 were India (56.1 percent), Saudi Arabia (53.6 percent), Myanmar (50.9 percent), Thailand (53.1 percent), Turkey (53.3 percent), Brazil (57.3 percent) and Mexico (58.0 percent), among others. Please see the interactive chart above.
Unequal wealth distribution
• The net national wealth as a percentage of net national income has increased from 383.31 percent in 1955 to 578.77 percent in 2012. Please consult the interactive chart below. The World Inequality Database states that in order to understand rising income inequality, it is important to not just look at wages and earned income but also at income from capital. It mentions that "[i]ncome from interest, from dividends, and from rents represents a minority of total personal income, but it is nonetheless significant, especially at the top of the distribution. The ratio of total personal wealth to total personal income has been rising. One consequence is that the role of inherited wealth – which declined for much of the twentieth century – has, in a number of countries, begun to acquire greater significance. In addition, there is extensive evidence – e.g. from billionaire rankings – suggesting that top global wealth holders have grown much faster than average and have therefore benefited from a substantial increase in their share." For estimating wealth inequality, it is critical to combine various sources of data in a consistent manner, including income tax data (using the capitalization method) and inheritance tax data (using the mortality multiplier method), says The World Inequality Database website. Kindly see the interactive chart below.
• The share of the bottom 50 percent of the population in the net personal wealth fell from 12.3 percent in 1961 to 6.4 percent in 2012. On the contrary, the share of middle 40 percent of the population in net personal wealth grew from 44.5 in 1961 to 46.0 percent in 1971 but then declined steadily to 30.8 percent in 2012. Kindly consult the interactive chart below.
Inequality Transparency Index
• The Inequality Transparency Index ranges between 0 and 20 for each country, and captures two dimensions: (a) In the first dimension, The World Inequality Database along with the United Nations Development Programme (UNDP) have differentiated between four different sources of data: income surveys, income tax data, wealth surveys, and wealth tax data; and (b) In the second dimension, they have evaluated various components for each of these sources: quality, frequency of publication, and access to the data. A higher score means higher transparency in public access to quality data on the distribution of income and wealth. According to The World Inequality Database website, the "index should also be considered as an incentive for governments to take steps in publishing transparent data and allowing easier access for researchers." It further adds that "the maximum grade of 20/20 corresponds to an ideal situation where countries would publish yearly distributional accounts on wealth and income with household surveys matching with administrative tax records. This makes it possible to have precise information on income and wealth statistics among all income and wealth groups, including those at the very top, as well as precise information of social and demographic characteristics of the population. As of 2020, we are still very far from this situation and the maximum grade that we find is 16.5/20."
• China (i.e. 6.5 out of 20) performs better than India (i.e. 5.5 out of 20) in 2019 in terms of the Inequality Transparency Index, which has been developed by The World Inequality Database and UNDP jointly.
• Please click here to access the technical note 2020/12 for a detailed insight on the construction of the index. Kindly click here to access the transparency data table 2020 to understand how the index is calculated.
The World Inequality Database, https://wid.world
Inequality Transparency Index, The World Inequality Database, 18 November, 2020, please click here to access
World Economic Outlook, October 2020: A Long and Difficult Ascent, International Monetary Fund, please click here to access
Inequality Measurement, Development Issues No. 2, 21 October, 2015, United Nations Department of Economic and Social Affairs, please click here to access
News alert: Study points towards hunger and destitution amidst hope for a V-shaped economic recovery, Inclusive Media for Change, Published on Dec 9, 2020, please click here to access
Wistron iPhone plant violence: Workers say months of pent-up anger behind outburst -Theja Ram, TheNewsMinute.in, 16 December, 2020, please click here and here to access, (accessed on 17th December, 2020).
The 1 percent's problem -Joseph E Stiglitz and Linda J Bilmes, May 31, 2012, please click here to access
Image Courtesy: Inclusive Media for Change/ Shambhu Ghatak