Income Distribution in India: Pattern and Inequalities

In this article we will discuss about Income Distribution in India. After reading this article you will learn about: 1. Pattern of Income Distribution in India and 2. Inequalities in Income Distribution during the 1970s, 1980s and in Recent Times.

Pattern of Income Distribution in India:

The distribution of national income in India totally remained in-equal although its volume has grown sizeably, more particularly during the last two decades. Rather with this growth of national income over the last two decades, inequality in the distribution of personal income has been accentuated.

Thus in recent years, the problem of inequality in the distribution of income and wealth has gained much importance in India.

In the mean time different estimates of personal income distribution have been prepared by the Reserve Bank of India, Iyengar and Mukherjee and the NCAER. Table 3.6 shows the figures of personal income distribution which cannot be strictly compared as they are related to different periods and are based on different methods.

From Table 3.6, the estimate of the Reserve Bank of India (1953-54 to 1956-57) shows that the top 5 per cent of the rural population enjoyed 17 per cent of the income while the bottom 20 per cent of the rural population enjoyed nearly 9 per cent of the aggregate income.

The top 50 per cent of the rural population has earned 69 per cent of the income while the bottom 50 per cent has earned only 31 per cent of the total income. Again in the urban areas, the top 5 per cent of the urban population enjoyed about 26 per cent of the total income while the bottom 20 per cent of the urban population received only 7 per cent of the aggregate income of the country.

Moreover, the top 50 per cent of the urban population enjoyed about 75 per cent of the aggregate income while the remaining bottom 50 per cent of the urban population enjoyed only 25 per cent of the income leading to a situation where few rich become richer and a few poor become poorer. The estimates made by Iyengar and Mukherjee and by the NCAER also brought out the same result.

Considering this income inequalities, the Mahalanobis Committee concluded, “The wider range of variation that one finds between the top and the bottom tenths of population clearly reveals the existence of concentration of economic power in the country in its most generalised form.” The Mahalanobis Committee advanced two main reasons for this unequal distribution of income.

Firstly, widespread unemployment and under-employment in India that has resulted in a low productivity per unit of labour and that is considered as the most important responsible factor for low levels of income and living of large masses of people.

Secondly, heavy concentration of income and wealth in the possession of few people has resulted from widespread tax evasion. Under such a situation, the committee pleaded for a drastic change in the overall strategy of economic development.

The National Council of Applied Economic Research (NCAER) made an in-depth Study Of the problem of inequality in the distribution of national income at two points of time, i.e., one in 1960 and another in 1962. Later on, the Council conducted another all India Household survey of Income, saving and consumer expenditure in the year 1967-68.

The report of the Council reveals that the bottom 20 per cent of the rural households earned nearly 5 per cent of the total disposable income in 1962 and then the same share slightly declined to 4.8 per cent in 1967-68. But the share of the top 20 per cent of the rural household was about 48 per cent in 1962 and then the same share finally increased to 53 per cent in 1967-68.

On the other hand, the bottom 20 per cent of the urban population enjoyed only 4.1 per cent of the total disposable income in 1960-61 and 5.2 per cent in 1967-68 in comparison to that of 56 per cent and 53 per cent income enjoyed respectively in 1960-61 and 1967-68 by the top 20 per cent of the urban population of the country.

If we now consider the prevalence of black money then the disposable income of the top 20 per cent would show a steep rise. Moreover, rich farmers in India had received much advantage from the new agricultural strategy (i.e., green revolution) and in the absence of suitable income tax net in the rural areas; widespread tax evasion raised the degree of inequality in the disposable income to a considerable extent.

Thus considering all these estimates together we can find that during the first two decades of planning, the bottom 20 per cent of the population had a share of 7.5 per cent of total personal disposable income and the top 20 per cent of the total population had a share of about 47 per cent of total personal income.

Inequalities in Income Distribution during the 1970s, 1980s and in Recent Times:

Distribution of personal income in India has undergone a change during the 1970s and 1980s although the inequality in its distribution was accentuated during 1950s and 1960s. The Planning Commission in its Draft Five Year Plan 1978-83 observed,

“Trends in the distribution of income and wealth are difficult to discern, but the evidence of persistence of gross inequalities is clear. Analysis of consumption expenditure (data source : National Sample Survey—28th Round) shows that in 1973-74 the lowest 20 per cent accounted for 9.5 per cent of total consumption in rural areas while the highest 20 per cent accounted for 38 per cent. For urban areas the corresponding figures were 9.2 per cent and 40 per cent. The concentration ratio for two distributions was 0.27 and 0.30. The inequality of incomes for both groups would be greater than consumption inequalities.”

Thus the Planning Commission is of the view that income inequalities in India are much higher than consumption inequalities and the World Bank estimates of income inequalities also corroborated this view. The World Bank and International Labour Organisation jointly prepared these estimates for 1975-76.

These estimates revealed that in 1975-76, the lowest 20 per cent households (both rural and urban) shared 7 per cent of the household income and the highest 20 per cent households share 49.4 per cent of the household income.

Again the World Bank’s estimates of personal income distribution in India for the year 1983 also indicate that personal income inequalities slightly diminished between 1975-76 and 1983.

Although these two estimates of the World Bank are not strictly comparable, yet they show that while the share of top 10 per cent households had gradually declined from 36.6 per cent of household income in 1975-76 to that of 26.7 per cent in 1983 but the share of bottom 40 per cent households gradually increased from 16.2 per cent of the household income to that of 20.4 per cent.

Thus considering all these above mentioned estimates of income distribution, it can be said that the distribution of national income and wealth in the hands of a few individuals and household on the one hand and on the other it reveals prevalence of gross inequality of income and wealth along with consequent widespread poverty of the vast masses of the country.

The Sixth Plan (1980-85) estimate of the distribution of consumption expenditure (based on NSS data) reveals that the bottom 40 per cent of the population in the rural areas accounted for 21.6 per cent of total private consumption expenditure and the top 20 per cent of the population accounted for 40 per cent of the total private consumption expenditure.

In urban areas, the situation was even worse where the bottom 40 per cent accounted for just 20.2 per cent of consumption expenditure and the lop 20 per cent accounted for 41.6 per cent of total consumption expenditure.

Surprisingly, the World Watch Institute, in its annual report “Vital Signs 1995” observed that income disparity between the rich and the poor is lower in India than in China or the USA. The report observed that the richest 20 per cent of the Indian population earns only five times more than the poorest 20 per cent. It is the same in Pakistan while in Bangladesh it is even smaller.

In contrast, China’s top 20 per cent earns six times more than the lowest 20 per cent. In the USA, the disparity is perhaps the widest with the richest 20 per cent earning nine times more than the lowest quintile, But the observation made by the World Watch Institute is in sharp contrast with the various other observations made by the Planning Commission of India and the World Bank in the aforesaid analysis.

Therefore, the finding of this report is questioned from different angles.

Again the Human Development Report, 1994 shows that in 1960 the richest 20 per cent of the population earned 70.2 per cent of total income and the poorest 20 per cent earned only 2.3 per cent of the total income, In 1980, the income disparities between the rich and poor has further widened as the richest 20 per cent and the poorest 20 per cent of the total population accounted 76.3 per cent and only 1.4 per cent of the total income respectively.

Again in 1993, the income disparity condition has widened further as the richest 20 per cent of the total population shared 84.7 per cent of the total income and the poorest 20 per cent of the total population shared only 1.4 per cent of the total income of the country.

The recent study made by National Council of Applied Economic Research (NCAER) revealed that India’s rich-middle-class-poor profile has change drastically during the past two decades (1991-2011).

The study shows that out of total 228.4 million households of the country at the end of 2009-10, 47.6 million were high income households (20.44 per cent), 140.7 million (61.6 per cent) were middle income households and 41.0 million (17.96 per cent) were low income households. Thus the study shows drastic changes in the income distribution profile of the country.

Thus it can be safely concluded that with the process of economic development initiated in the economic planning in India during the last five and half decades the rich became richer and the poor became poorer. Moreover, the planning process in India has failed miserably to reduce the magnitude of unemployment and underemployment in the country.

Thus the present situation demands structural transformation of our policies towards employment generation, controlling tax evasion and redirecting income distributional pattern of the country effectively.