Why in News?

• A recent World Bank report has triggered debate by claiming low and falling inequality in India, based on consumption data.
• However, independent studies and expert analyses challenge this narrative, revealing high and rising levels of income and wealth inequality, raising concerns over data reliability, methodology, and policy implications.

What’s in Today’s Article?

• World Bank Report and Government Response
• Understanding Consumption Inequality
• Income and Wealth Inequality in India
• Limitations of Gini Coefficient
• The Paradox of Falling Consumption Inequality
• Conclusion

World Bank Report and Government Response:

• Claim:
  • Gini coefficient fell from 0.288 (2011-12) to 0.255 (2022-23), indicating one of the lowest inequality levels globally.
  • The Gini coefficient is a statistical measure that represents income or wealth inequality within a group or country.
  • It ranges from 0 to 1, with 0 indicating perfect equality (everyone has the same income/wealth) and 1 indicating perfect inequality (one person has all the income/wealth).
  • Higher Gini coefficients signify greater inequality.
• Government's take: The findings were presented as evidence of successful economic policies and inclusive growth.
• Counterview: Critics argue this does not reflect income or wealth inequality, but only consumption inequality, which is inherently less unequal.

Understanding Consumption Inequality:

• Definition: Inequality in spending patterns, not in income or wealth distribution.
• Reasons it understates true inequality:
  • Poor households consume most of their income; wealthier households save more.
  • Consumption does not increase at the same rate as income.
• Data source issues: Based on Household Consumption Expenditure Surveys (HCES) 2011-12 and 2022-23, which -
  • May miss high-end consumption.
  • Are methodologically inconsistent, making comparisons unreliable.
  • Even the official release cautions against drawing such direct comparisons.

Income and Wealth Inequality in India:

• True picture from World Inequality Database (WID):
  • Income Gini (2022-23): 0.61 (one of the highest globally, 170 countries rank lower).
  • Wealth Gini (2022-23): 0.75 (67 countries have lower concentration).
• Trends over time:
  • Income Gini rose from 0.47 (2000) to 0.61 (2023).
  • Wealth Gini rose from 0.70 (2000) to 0.75 (2023).
• Concentration of wealth:
  • The top 1% own ~40% of personal wealth.
  • Only Uruguay, Eswatini (Swaziland), Russia, and South Africa have higher concentration.

Limitations of Gini Coefficient:

• Aggregate measure: Doesn't show distributional details like top 1% share.
• Fails to capture:
  • Extreme inequality at the top.
  • Inter-generational wealth accumulation.
  • Social impacts of high inequality (e.g., reduced social mobility, political capture).

The Paradox of Falling Consumption Inequality:

• Explained: Rising incomes lead the poor to consume more, while the rich divert extra income to savings and investments, lowering consumption inequality.
• Key insight: Consumption inequality can fall even when income and wealth inequality rise, which is the case in India.
• Warning sign: High inequality can undermine future growth, social cohesion, and policy legitimacy.

Conclusion:

• While the World Bank’s consumption-based inequality data may appear promising, it masks the underlying income and wealth disparities that are increasingly defining India’s economic structure.
• For policymakers, understanding the real picture of inequality is essential for formulating inclusive, equitable, and sustainable growth strategies.