Economic inequality in India worsens under UPA

In the last few posts of this series, I have analyzed improvements in income and Human Development Index in India. This post focuses on economic inequality in India. Similar treatment of economic inequality in Gujarat under Narendra Modi can be found in another post. I will seek to address the following questions here:

  1. Is inequality getting worse despite (or because of) economic growth?
  2. Are the poorest segments seeing their real incomes rise as a result of this economic growth?
  3. How do the current UPA government and the previous NDA government compare in terms of addressing this inequality?
  4. Are the UPA’s visibly larger subsidies and social welfare schemes correlated with reductions in inequality?

The key data for my analysis are from the National Statistical Surveys (NSS) on household expenditure. These surveys tell us how much people are spending per person per month in rural and urban areas. This metric — average monthly per-capita consumption expenditure — is reported for various groups: e.g. the poorest 5% of Indian people in rural areas spent on average just Rs. 525 a month per person in 2011. That number amounts to less than $10 a month, or about 30 cents a day — much below internationally recognized thresholds for poverty at a dollar or more a day. This metric does not directly measure income or wealth. But poor people usually do not have significant savings, and tend to spend most of what they earn. So when looking at the situation of the poor people, these data provide a good proxy for improvements in the income at the bottom rungs of the economic ladder.

The data available from various NSS rounds allow us to compare the amount spent per person per month in 1999, 2004, and 2011 by the bottom 5%, next 5% (i.e. 5-10th percentile), next 10% (10-20th percentile), and so on of the Indian population. After adjusting for inflation, this allows us to compare the increase in the amounts during the five NDA years between 1999 and 2004, and then seven UPA years between 2004 and 2011. Given that the UPA had more time to bring about any improvements than NDA did, in order to make the comparison fair, I computed a compounded annual growth rate. These rates then indicate the average annual improvement seen by that segment of the population under each government.

The chart below summarizes the analysis.

india-mpce-fractile-cagrs

This chart shows, for instance at the top left, that the consumption of the poorest 5% of rural people increased by 2.5% a year under NDA, while it only increased by 0.6% a year under UPA. At bottom right, you can see that the consumption of the richest 5% of urban people increased under UPA by 5% a year, while it had only grown by 0.8% a year under NDA.

From this chart, it is clear that:

  1. NDA outperformed UPA in terms of improving the condition of the bottom 20% in rural areas.
  2. For all other segments — including urban poor – improvements were more rapid under UPA than NDA. Middle class and rich urban people grew their consumption levels much faster under UPA than under NDA.
  3. The largest gaps are for the middle- and high-consumption groups. Their consumption grew much faster under UPA than NDA. This means that the gap between rich and poor widened more under UPA than under NDA. 
  4. Mean consumption (i.e. the national average) across all groups increased more under UPA than NDA for both rural and urban people. The difference is most striking for urban people: the increase under UPA was 3.7% while it was just 0.5% under NDA.
  5. Growth rates in mean consumption were higher for rural areas than urban areas under NDA, while urban growth was much faster under UPA.

Now, back to the questions I set out to answer:

1. Is inequality getting worse despite (or because of) economic growth?
Yes. The data clearly show a widening gap between the bottom 20% and the middle 20%. The gap between the middle 20% and the top 20% may be widening even more rapidly. Economic inequality is growing in India.

2. Are the poorest segments seeing their real incomes rise as a result of this economic growth?
Yes, the poorest segments are seeing their real incomes rise. Even the poorest of the rural poor saw a 0.6% growth rate in their inflation-adjusted consumption levels (and by proxy, real income). But that rate is much slower than the rate of real GDP growth.

3. How do the current UPA government and the previous NDA government compare in terms of addressing this inequality? 
Of the 18 subgroups analyzed, 16 showed better improvements under UPA than NDA. However, the 2 subgroups that improved better under NDA are the two poorest. Economic inequality is growing at a more rapid rate under UPA than it did under NDA.

4. Are the UPA’s visibly larger subsidies and social welfare schemes correlated with reductions in inequality?
These data show widening economic inequality under UPA. They do not indicate a closing of the income gap as a result of UPA’s policies. While real GDP grew at a CAGR of 7.9% under UPA, expenditures (and by proxy, incomes) of the poorest subgroup grew at a barely noticeable CAGR of 0.6%. Proponents of subsidies and social welfare schemes may argue that without those schemes, the poorest subgroup would not even have seen that 0.6% CAGR in consumption. But that proposition is hard to test with numbers.

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