wealth distribution

How income inequality in India can be narrowed

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India’s share of the world’s poorest is higher than its share of the world population, according to World Bank data of 2020. The World Inequality Report (WIR) 2022 shows that while domestic inequality has multiplied, global inequalities between countries have declined. The gap in average income between the richest 10 per cent and the lowest 50 per cent countries has narrowed from over 50x to under 40x.

The most equal region (Europe) and the least equal region (Middle East and North Africa or MENA) have dramatically different levels of inequality. In Europe, the top 10 per cent of income earners account for roughly 36 per cent of the total income, whereas in MENA it accounts for 58 per cent.

However, the world’s most extreme inequality has been observed in India. According to the WIR, the top 10 per cent of the country’s population account for 57 per cent of the national income, of which, 22 per cent is held by the top 1 per cent.

While a small section of India’s populace enjoys 5-star privileges, for the bottom 50 per cent sustainability of life is still a challenge. This is due to a variety of factors, including but not limited to, loss of job opportunities, an erratic unorganised sector, and rising poverty and inflation.

Has Covid made matters worse?

The pandemic has severely affected the poor and hurt the middle class in terms of loss of accumulated wealth and savings.

There is a debate on whether the pandemic has caused a reduction in inequality. While most reports suggest inequality has risen because of a rise in poverty and shrinkage of the middle class, the report by the National Bureau of Economic Research shows a decline in inequality. This is because Indians in higher percentiles of the income distribution saw larger relative income declines during the pandemic. However, it fails to reflect the deprivations of poor households.

According to an Oxfam report, billionaires’ fortunes increased 10-fold over the decade and their total wealth now is higher than the outlay of Union Budget 2018-19, which stood at ₹24,422 billion. This shows how crony capitalism is on rise, leading to massive inequalities.

Lessons from abroad

The rising inequality is linked to slower economic growth. Given that the five Nordic countries — Denmark, Finland, Iceland, Norway, and Sweden — are among the most equal in the world on a variety of criteria, it makes sense to look to them for guidance on how to create a more equal society.

Nordic countries have attained high levels of welfare and equality. This is due to strong focus on social solidarity, taxation and higher spending on education and healthcare. Unlike most other nations, these countries offer free higher education to their citizens and have a creative education system. This reminds one of the Thomas Piketty quote: “Over a long period of time, the main force in favour of greater equality has been the diffusion of knowledge and skills.”

Way forward for India

Evidence suggests that expenditure on healthcare, education, and social safety reduces inequality. For example, if a government invests in free and high-quality public services, poor people would not have to spend on them, allowing them to save money. It is also essential for the government to spend more on R&D and innovation.

Another way forward could be directly reducing income disparity by taxing the wealthiest more. These taxes, if used to fund public services, can further reduce inequality. Providing tax benefits to companies that share more of the profits with their employees can also help in mitigating the disparity.

It is imperative that India frees itself from the shackles of income inequality so as to ensure prosperity across all economic classes.

Mehta is a consultant and columnist, and Jain is a financial and legal researcher

Published on


February 16, 2022

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