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Income Inequality: A Rising Cause of Concern in India

Vrinda Mathur
Apr 28, 2023

According to a new report, the COVID-19 pandemic has exacerbated existing inequalities. The World Inequality Report, published by the World Inequality Lab, discovered that wealth and income inequality remain widespread around the world.

"The COVID crisis has exacerbated inequalities between the very wealthy and the rest of the population. However, while government intervention in rich countries prevented a massive rise in poverty, this was not the case in poor countries. This demonstrates the importance of social states in the fight against poverty," explains Lucas Chancel, the report's lead author.

In economics, income inequality refers to a significant disparity in the distribution of income among individuals, groups, populations, social classes, or countries. Income inequality is a significant component of social stratification and social class.

It affects and is affected by many other types of inequality, including wealth, political power, and social status inequalities. Income is a major determinant of quality of life, influencing individuals' and families' health and well-being, and it varies according to social factors such as gender, age, and race or ethnicity.

The definition of global income inequality refers to the unequal distribution of income throughout the world. Furthermore, there are five measures of income inequality: the Gini coefficient (the most commonly used), the Lorenz curve, decile ratios, and the Theil index. Inequalities in health, education, income, and other relevant life dimensions result from global inequality in opportunities.

What do you understand about Income Inequality?

Income inequality influences and is influenced by discrimination of political influence, social rank, wealth, and other types. That is, it can occur within a country, between countries, or for people all over the world who are unaware of national boundaries. Nonetheless, tax breaks, loans, and subsidies may prevent this from happening.

Regardless of individual characteristics, bureaucratic, legal, and fiscal elements, such as corporate control and the level of public vs. private management and asset ownership, influence income level. Furthermore, global inequality remains severe, with many people living in abject poverty.

Income inequality refers to how income is distributed unequally across a population. The more unequal the distribution, the greater the income inequality. Wealth inequality, or the unequal distribution of wealth, is frequently associated with income inequality. Populations can be divided in various ways to demonstrate various levels and types of income inequality, such as income inequality by gender or race. The Gini coefficient, for example, can be used to analyze the level of income inequality in a population.

Income inequality and income disparity segregation can be studied using various segmentation techniques. Income disparity analysis segmentations are used to examine various types of income distributions. Income distributions by demographic segmentation form the basis for studying income inequality and income disparity.

The different types of income segmentations studied when analyzing income inequality may include distributions for:

Gender
Ethnicity
Geographic location
Occupation
Historical income

India has a problem with inequality. Due to the health and economic consequences of the Covid-19 crisis, India's economy experienced the largest annual contraction (7.3%; NSO, MOSPI 2021) in the post-independence period in 2020-21. Nonetheless, the stock market has recovered from an initial dip and is up 75% year on year.

Last year, the total number of Indian billionaires increased from 102 to 140, and their combined wealth nearly doubled to $596 billion. After the United States and China, India has the third-highest number of billionaires in the world. Nonetheless, Covid-19 is estimated to have increased the number of poor in India by 75 million, accounting for nearly 60% of the global increase in poverty.

An earlier study found that, after accounting for population and economic differences between countries, India has a higher proportion of multimillionaires than expected (Ghatak and Ray 2014). Furthermore, India has a greater proportion of the world's extremely poor than it does of the world's population.

With a population of 17.8% of the global population, India accounts for 139 million of the total 689 million people (20.17%) living in extreme poverty in 2017 (World Bank 2020). (World Bank 2019).

Also Read | Income Statement: Components and Steps

Causes of Income Inequality

One of the most pressing socio-economic issues in America today is why income inequality is increasing in the United States, particularly between the top 10% of workers and everyone else. Controversies about the Rise of American Inequality:

A Survey (NBER Working Paper No. 13982) by Robert J. Gordon and Ian Dew-Becker provides a comprehensive survey of seven aspects of rising inequality that are usually discussed separately: changes in labor's share of income; inequality at the bottom of the income distribution, including labor mobility; skill-biased technical change; inequality among high-income groups; consumption inequality; and geographical inequality.

They conclude that changes in labor's income share play no role in rising labor income inequality: by one measure, labor's income share was nearly the same in 2007 as it was in 1950. However, there are gender differences in income inequality: for example, between 1979 and 2005, the income gap between women working for the median wage (the 50th percentile) and low-income women (at the 10th percentile) grew much faster than it did for men at those income levels.

According to the authors, this suggests that the decline in the real value of the minimum wage over that time was causal. In some ways, this is unsurprising, given that women are roughly twice as likely as men to work for minimum wage. However, despite these reasons some of the reasons for income inequality have been listed below:-

Causes of Income Inequality

Technological Advances:

New computer technology plays an important role in supporting the skill premium and increasing employment income variation. As a result, technological progress can eliminate many jobs through investments in mechanization or improve the skill criterion for job appointment and retention. It stimulates the demand for a skilled workforce and money more than it does for an unskilled or low-skilled workforce.

Globalization of Trade:

The high monetary and trade flows between nations, which are partially authorized by technological advancements, are commonly cited as guiding unfair income distribution. Furthermore, trading freedom can have a cumulative effect on the earnings of the unskilled workforce in developed countries.

Globalization of Commerce:

Increased cash flows and capitalism, particularly FDI and portfolio flows, are said to have increased income inequality in emerging and developed laissez-faire economies. However, the concentration of foreign liabilities and assets in comparably higher technology and skill-concentrated sectors raises wages and demand for higher-skilled labor.

Business Network:

Fiscal development, calculated as the corresponding share of the stock market and banking sectors within an economy, primarily boosts top incomes during the initial expansion phase. Furthermore, inequity may increase as higher-income individuals have a disproportionately larger share of access to funds. This would almost certainly increase the skill premium and possibly the return on capital.

Everyone Has an Equal Opportunity:

The government may devise and establish machinery to provide equal opportunities to all rich and poor people in finding work or starting a business. In other words, something could be done to reduce the influence of family members on career choices. For example, the government may establish a system of generous stipends and scholarships to enable even the poorest citizens to obtain the highest level of education and technical skill.

Promotion of Labour Intensive Manufacturing:

The failure to promote labor-intensive manufacturing like; Construction, Textile, Clothing, Footwear, etc. is the single most reason for rising inequalities. Manufacturing, which is labor-intensive, has the potential to absorb millions of people who are leaving farming.

Agriculture's share of the labor force has decreased, but the workers who have left farms have not found work in modern factories or offices. Most are trapped in small, unorganized businesses with low productivity. Inequality could be reduced if India could reverse this trend and promote labor-intensive manufacturing.

Also Read | Three Types of Income: Active, Passive & Portfolio

Consequences of Income Inequality

Income inequality in the United States has not been this high since the Great Depression (see Figure below). According to some estimates, wealth inequality is even greater, even though measuring it is more difficult than measuring income. What impact will these large disparities have on the economy in the future? Although no definitive answer has yet been provided, recent academic research provides some hints as to what can be expected.

Above all, we should be able to forecast the effects of income inequality on economic growth, as I did in my doctoral dissertation. Theoretical research indicates that this effect can go both ways, from inequality to growth and vice versa (see Chapter 1.4 for more details). We have fairly solid empirical evidence that income inequality and GDP move in lockstep (see, for example, this and this), but it is unclear which of the effects if any, dominates. In their recent article, B. Atems and J. Jones attempts to disentangle these effects.

Using data from US states, they discover that high-income inequality reduces economic growth rather than increasing it and that this effect is persistent, implying that increasing inequality has a negative long-term effect on economic growth. Inequality may have different consequences in rich and poor countries. Although more research is needed, the available empirical evidence suggests that income inequality harms economic growth in rich economies, particularly in the United States (see also the research by the OECD).

They discover, using data from US states, that high-income inequality reduces rather than increases economic growth, and that this effect is persistent, implying that increasing inequality has a negative long-term effect on economic growth. In rich and poor countries, inequality may have different consequences. Although more research is needed, empirical evidence suggests that income inequality hurts economic growth in rich economies, particularly the United States (see also the research by the OECD).

Addressing the challenges of the twenty-first century will be 'impossible without significant redistribution of wealth and income inequality,' the authors of the report argue.

The report investigates various options for addressing income and wealth inequality, most of which are based on taxation policies. They explain that the examples provide lessons from around the world and throughout recent history, and conclude that "inequality is always a political choice, and learning from policies implemented in other countries or at different points in time is critical to designing fairer development pathways."

Also Read | An Overview of Income Distribution

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Income Inequality: A Rising Cause of Concern in India

What do you understand about Income Inequality?

Causes of Income Inequality

Technological Advances:

Globalization of Trade:

Globalization of Commerce:

Business Network:

Everyone Has an Equal Opportunity:

Promotion of Labour Intensive Manufacturing:

Consequences of Income Inequality

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