Opinion Claims about India’s rising inequality don’t tell the full story

However, headlines claim that income inequality is rising. Most such claims focus on the income shares of the richest 1 per cent, as estimated by the World Inequality Lab (WIL). Little attention is paid to its nature and limitations.

The WIL estimates for low- and middle-income households are based on a source that takes income to be less than expenditure for as many as 80 per cent of Indian households. As an inevitable consequence of using this implausible scenario — in which all households but the top 20 per cent spend more than they earn — the income of the bottom 80 per cent is underestimated. The outcome is an overestimation of the national income shares of top incomes and an underestimation of the low- and middle-income groups’ shares.

Still, WIL estimates show that the national income share of the bottom 50 per cent rose from 13.9 per cent in 2017 to 15 per cent in 2022, whereas the share of the top 10 per cent fell from 58.8 to 57.7. The national income shares of the top 1 per cent are estimated to have been rising since 1991. Since 2014, however, the rate of increase has added up to a little over one percentage point.

Additionally, top income estimates by WIL and PRICE ignore two factors — reduction in marginal tax rates over time and improvements in tax administration. Part of the increase in the reported top income levels is attributable to the peak rates plummeting from 93.5 per cent in the 1970s to 39 per cent now, a phenomenon described as the Laffer Curve. Moreover, better tax administration accounts for at least a 25-basis-point rise in the top incomes since 2014.

Further, the extent of inequality is exaggerated, as WIL and PRICE estimates ignore welfare transfers to low-income groups and tax paid by high-income groups. For instance, in the assessment year 2024, the top 1 per cent of individual taxpayers accounted for 17.5 per cent of reported income, but their contribution to total tax paid was 42 per cent. If we consider all taxpayers, the top 1 per cent accounted for 49 per cent of reported income but 72.77 per cent of the total tax paid.

Simply put, the actual post-tax disposable income of top-income taxpayers is 65- 75 per cent of the incomes used in headline-grabbing estimates. For low-income groups, in contrast, estimates are based on incomes smaller than their actual income, which is augmented by welfare transfers. Correcting for these omissions will substantially reduce the inequality estimates.

A major determinant of inequality is the rate of return on capital vis-à-vis the GDP growth rate. When the former is higher, the national income share of capital owners rises over time. It worsens inequality, as capital tends to be owned by a relatively small group. Conversely, when the economy’s growth rate is higher than the post-tax returns on capital, an increasing share of national income goes to labour. This reduces inequality, ceteris paribus.

Taking the average CPI inflation during the last decades as 5.5 per cent, the average real rate of return on capital is less than 2 per cent. During the last five years, the weighted average real lending rates, an indicator of the return on productive capital, have been less than 4.0 per cent. In contrast, the average GDP growth rate has been above 6 per cent.

The cost of equity is another good proxy for return expectation from capital. According to a 2024 report of NSE and EY, India Inc.’s average cost of equity is 14.2 per cent. Adjusting this for risk, inflation, and taxes, the expected returns are less than the growth rate. So, the macro dynamics of the production process are conducive to inclusive growth.

Of course, some companies, especially in the small- and mid-cap segments and start-ups, have delivered returns well above GDP growth rates. This has benefitted more than 14 per cent of Indian families through mutual fund investments.

Yet another testimony of economic dynamism is the finding that inherited wealth is not the primary determinant of individual incomes. Sixty per cent of the top-income reporters are not from the wealthiest families. India has produced the largest number of first-generation billionaires who owe their rise to the booming start-up ecosystem.

V Anantha Nageswaran, Chief Economic Advisor, is spot-on in emphasising poverty reduction as the litmus test of inclusive growth. The NSSO’s Household Consumption and Expenditure Surveys 2023 and 2024 show that consumption growth during 2011-12 and 2023-24 has almost eradicated extreme poverty. Since 2011-12, consumption inequality has also come down. The food basket has become healthier as shares of milk products, fish and meat, and fresh fruits have increased. These improvements are even more striking for the bottom 20 per cent of households, even if we ignore the food items received free of cost. The proportion of rural households consuming fresh fruits rose from 63.8 per cent in 2011–12 to over 90 per cent in 2023. The proportion of the poorest 20 per cent households with vehicle ownership rose from 6 per cent in 2011-12 to 40 per cent in 2023.

These gains by the traditionally disadvantaged groups are matched by equally impressive gains on the educational front — the increases in the gross enrolment ratio are the highest for SC and ST students. While there is little room for complacency, Indian growth is inclusive on most counts.

The writer is director, Delhi School of Economics. Views are personal