Analysing the Rising Gap in Incomes

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Analysing the Rising Gap in Incomes Blog Image

Why in News?

  • The State Bank of India's (SBI) recent report highlights a substantial decrease in income inequality in India over the past decade.
  • The report indicated a decline in the Gini coefficient from 0.472 in 2014-15 to 0.402 in 2022-23.
  • Since the SBI report primarily relies on taxpayer data, it is important to have an assessment of the PLFS which includes a broader spectrum of income-earners.

An Assessment of SBI’s Report on Reduction in Inequality

  • Gini Coefficient Reduction
    • The Gini coefficient is a numerical representation of income distribution, ranging from 0 (perfect equality) to 1 (perfect inequality).
    • The SBI report indicates that the Gini coefficient, a widely used measure of income inequality, has experienced a substantial decrease in India.
    • In this case, the coefficient has fallen from 0.472 in 2014-15 to 0.402 in 2022-23.
  • Magnitude of Change
    • The numerical drop in the Gini coefficient from 0.472 to 0.402 signifies a reduction of almost 15%, indicating a noteworthy improvement in income equality over the specified period.
    • The report refers to a decade-long timeframe, suggesting that the observed reduction in income inequality is not a short-term fluctuation but rather a trend sustained over several years.
  • Positive Implications
    • A decrease in the Gini coefficient is generally interpreted as a positive development, as it suggests a move towards a more equitable distribution of income among the population.
    • The reduction in income inequality could have significant implications for policymakers, indicating the potential success of economic policies or social programs aimed at addressing disparities in income distribution.

A Critical Assessment of SBI Report

  • Taxpayer Data Limitations
    • The primary concern is centred around the reliance on taxpayer data for the analysis of income inequality.
    • A significant proportion of income-earners, nearly 80%, fall below the minimum taxable threshold and their income is not covered in the analysis.
    • SBI report raises concerns about the representativeness of the findings, emphasising that taxpayer data may not provide a comprehensive reflection of income distribution among the entire population.
    • This limitation can result in an incomplete understanding of the true extent of income inequality.
  • Exclusion of Low-Income Earners
    • Since the SBI analysis is based on taxpayer data, individuals with incomes below the minimum taxable amount are excluded from consideration.
    • This exclusion is significant because a substantial portion of the population falls into this category, and their economic conditions may not be adequately represented.
  • Sensitivity to Economic Disparities
    • Critics imply that the reduction in the Gini coefficient, as reported in the SBI analysis, might be sensitive to the economic disparities present within the taxpayer base.
    • If a considerable portion of low-income individuals is excluded, it may impact the accuracy of the findings.
  • Absence of Supplementary Data
    • To address the limitations of relying solely on taxpayer data, the critics have suggested the incorporation of additional sources, such as data from the Periodic Labour Force Survey (PLFS). 
    • This would provide a more holistic understanding of income distribution, considering a broader spectrum of income-earners.

An Analysis of Reduction in Inequality According to PLFS Data

  • Unlike other surveys, the PLFS records gross incomes of the self-employed, thus allowing for a greater depth of analysis.
  • The Gini coefficient has fallen from 0.4297 in 2017-18 to 0.4197 in 2022-23 when comparing the different forms of employment.
  • The Gini coefficient falls for regular wage and casual wage workers, but rises for the self-employed. However, the changes are largely minimal.
  • The Gini for the self-employed workers rises from 0.37 to 0.3765, an increase of 1.5%.
  • For regular and casual wage workers, the Gini coefficients register falls of 1.7% and 4.8%, respectively.
  • Inequality has fallen, but inequality among the top income earners seems to have fallen far more than when we consider the population.

Polarisation of Incomes

  • Divergence in Income Growth
    • The top decile's average income grew at a specific annual rate (e.g., 7.23%), surpassing the growth rates of the bottom 20% and resembling the third decile.
    • In contrast, the bottom decile witnessed the slowest income growth, at a lower rate (e.g., 1.67%).
  • 90/10 Ratio
    • The 90/10 ratio, which calculates the ratio of incomes of those at the 90th percentile (top 10%) to the 10th percentile (bottom 10%).
    • There has been an increase in this ratio from 6.7 in 2017-18 to 6.9 in 2022-23.
    • A significant finding is that the 90/10 ratio has increased significantly for the self-employed, reaching a specific value in 2022-23.
    • The income of the top 10% of self-employed individuals was, for example, 8.3 times that of the bottom 10%.

Possible Explanations of Contradictory Findings in Income Polarisation

  • Rise in Women’s Labor Force Participation
    • The contradictory changes in income inequality maybe linked to the documented rise in women’s labour force participation.
    • This rise is due to forms of low-paid, part-time self-employed work.
    • The rise in women’s labour force participation, particularly in the self-employed sector, is a potential factor contributing to income polarisation.
    • The nature of self-employed work undertaken by women might be low-paid and part-time, which could influence income dynamics within this group.
  • Increased Household Earnings
    • While households may be earning more due to the increased labour force participation, this increase is accompanied by a surge in low-paid self-employed work.
    • The juxtaposition of increased earnings at the household level and the specific type of work undertaken by women leads to an increase in the gap between the top and bottom of self-employed incomes.
  • Polarisation Among Income-Earners
    • The overall increase in low-paid self-employed work contributes to polarisation among income-earners.
    • This polarisation is more significant among the self-employed, potentially explaining the contradictory changes in income inequality trends.

Conclusion

  • While the overall reduction in the Gini coefficient suggests a positive trend, the polarisation of incomes, particularly among the self-employed, complicates the contradictory analysis of SBI report and PLFS data.
  • A nuanced understanding of income dynamics is crucial for formulating effective policy interventions.
  • Therefore, policymakers need to consider the specificities of different employment categories and the potential gender dimensions influencing income disparities.

Q1) What is the Periodic Labour Force Survey (PLFS)?

The Periodic Labour Force Survey (PLFS) is a survey conducted by the National Statistical Office (NSO) in India. It is aimed at collecting comprehensive and detailed information on various aspects of the labour market in the country. The PLFS is designed to provide insights into employment and unemployment patterns, labour force participation, and other related indicators.

Q2) What is the main objective of PLFS?

It is a periodic survey conducted at regular intervals to monitor changes and trends in the labour market over time. The survey covers both rural and urban areas across all states and union territories of India. The survey collects data on various labour-related parameters, including employment status, type of employment, industry, education, and other socio-economic characteristics of the labour force.


Source: The Hindu