Tracing the Evolution of Income Inequality in India: A Five-Decade Analysis (1967-2023)

Abstract

This article examines the trajectory of income inequality in India from 1967-68 to 2022-23, focusing on household income distribution and inequality trends over five decades. It uses data from scientifically conducted household income surveys by institutions such as the National Council of Applied Economic Research (NCAER) and People Research on India’s Consumer Economy (PRICE). While India has achieved substantial economic growth since its independence, the benefits have not been equitably distributed, resulting in fluctuating levels of income inequality. This article provides an in-depth analysis of income share distribution across various percentiles, Gini coefficient trends, and the socioeconomic factors that shaped these dynamics. A notable finding is the sharp rise in income inequality from 2016 to 2021, partly exacerbated by the COVID-19 pandemic, followed by a significant reduction between 2021 and 2023. The paper concludes by offering policy recommendations to manage and reduce income inequality, emphasizing the need for more inclusive economic growth, targeted redistribution measures, and strengthened social safety nets.

Introduction

Income inequality in India has been a complex and evolving issue, shaped by a variety of economic, political, and social factors. Since gaining independence in 1947, the country has undergone major economic transformations, particularly following the economic liberalization of the 1990s. However, the benefits of economic growth have not been equally shared, leading to varying levels of income inequality over time. This article traces the evolution of income inequality from 1967-68 to 2022-23, using survey data from NCAER and PRICE, and seeks to assess the recent shifts in inequality, particularly in the context of the COVID-19 pandemic.

Findings

Long-Term Trends (1967-68 to 2015-16)

India's income inequality showed an overall improving trend from the late 1960s to 2015-16. The Gini index dropped from 0.463 in 1967-68 to a low of 0.367 in 2015-16, reflecting a relatively more equitable distribution of income over these decades. The share of the top 10% in total national income decreased from 36.49% to 27.88%, while the bottom 10% maintained a relatively stable share between 1.8% and 2.7%.

Recent Trends (2016-2023)

The period between 2016 and 2021 saw a sharp increase in income inequality. The Gini coefficient spiked to 0.506 in 2020-21, a 32% increase from its lowest point in 2015-16. During the same period, the share of the top 10% surged to 38.60%, while the bottom 10% saw their share drop to a low of 1.09%. This sharp rise in inequality coincided with economic disruptions caused by the COVID-19 pandemic.

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However, between 2021 and 2023, income inequality saw a notable decline. The Gini coefficient dropped by 23%, from 0.506 to 0.390, signalling a reversal of the previous upward trend. The income shares of the top 10% fell to 30.27%, while the bottom 10% recovered, holding 2.44% of total income. These improvements suggest that post-pandemic economic recovery measures, along with policies aimed at redistributing income, played a role in mitigating inequality.

Percentile Ratios and Income Distribution

• The D10/D1 ratio (top 10% to bottom 10% income ratio) decreased significantly, from 35.4 in 2021 to 12.4 in 2023, indicating a more equitable distribution of income between the highest and lowest earners.
• The D90/D50 ratio (top 90% to middle 50% income ratio) fell from 2.4 to 1.4 over the same period, reflecting faster income growth among the middle class compared to top earners.
• The D50/D10 ratio (middle 50% to bottom 10% income ratio) decreased from 14.4 to 8.3, indicating relatively higher income growth for the lower-income group compared to the middle class.

The findings from this paper reveal that India’s income inequality has fluctuated significantly over the past five decades, with periods of both improvement and deterioration. Economic liberalization initially led to rising inequality, but this trend was later mitigated by policies that fostered more inclusive growth. The COVID-19 pandemic reversed this progress, leading to a sharp rise in inequality between 2016 and 2021. The recent reduction in income disparity, however, offers hope for further progress, provided that appropriate policies are implemented to sustain this trend.

Policy Recommendations

1. Strengthening Social Safety Nets: Expanding the coverage and benefits of programs like the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) and the Public Distribution System (PDS) can help shield vulnerable populations from economic shocks.
2. Progressive Taxation: Increasing the progressivity of income taxes, along with capital gains taxes, can reduce income disparities by redistributing wealth from the top earners to lower-income groups.
3. Education and Skill Development: Investing in education and vocational training for the lower-income population can promote upward mobility and reduce structural inequality by improving access to higher-paying jobs.
4. Targeted Economic Stimulus: Government stimulus packages should prioritize sectors that employ a large number of low- and middle-income workers, such as agriculture, construction, and small-scale manufacturing, to ensure that economic recovery benefits are distributed more equitably.
5. Inclusive Growth Policies: Encouraging policies that promote inclusive economic growth, such as supporting small and medium enterprises (SMEs), can create more employment opportunities and reduce income disparities.
6. Gender and Social Equity: Addressing gender and social inequalities through affirmative actions in education and employment can help reduce income disparities across different demographic groups, leading to more comprehensive income equality.

Conclusion

The trajectory of income inequality in India has been shaped by a combination of economic growth, policy interventions, and external shocks such as the COVID-19 pandemic. While recent trends indicate a reduction in inequality, ongoing policy efforts will be necessary to maintain and further this progress, ensuring that the benefits of growth are shared more equitably across all sections of society.

Note:- The Gini coefficient is a summary statistic that measures the overall income inequality within a population. It ranges from 0 to 1, where 0 indicates perfect equality (everyone has the same income) and 1 indicates maximum inequality (one person has all the income, and everyone else has none).

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