The Indian Economy Blog

August 11, 2007

Income Inequality In India: Is The Sky Falling On Our Heads?

Filed under: Basic Questions,Growth,Regulatory reforms — Prashant @ 7:33 pm

Not quite, says our friend and erstwhile guest blogger, Blue Sky (sent via email).

“It is an article of religious faith amongst Indian and Western leftists that pro-market policies are destroying India by making it a horribly unequal place, the rich getting richer and the poor even poorer. The article linked to, from the Indian Express finally sheds some light on this issue. It shows that India’s level of income inequality, as measured by the Gini co-efficient, is amongst the lowest in the world, even if it has risen a bit recently. In fact the co-efficient is much higher in the Western countries (like the US) which host most of the people complaining about the allegedly negative trends in India. The Gini is above 0.50 for almost all latin American countries and above 0.40 for the US.

As usual, this news will be ignored by the critics since it is inconvenient to their hermetically sealed ideology that is impermeable to facts.”

There is good news for India as a recent Asian Development Bank report finds that inequality has not increased significantly in India since the liberalization and rapid growth of the economy from 1991 onwards. This finding, the report says, is unlike the claims of many scholars who claim sharp increases in inequality. While other important economies in the region have registered comparatively sharp increases in inequality.

Most importantly it finds that rural expenditures grew by 17 per cent, comparatively faster to urban expenditures that grew by only 15 per cent during 1993-2004, although the absolute difference in expenditures remained, debunking the myth that only urban India is prospering.

(Link)

16 Comments »

  1. Wait till some commie comes and takes you to task for writing such an article. How can anything to do with liberalization lead to lowering of poverty in India?

    According to the commies, the only way to run a country is by being bloated, inefficient, having free lunch/dinner, giving pathetic service and organizing a hartal at the drop of a hat. Anything else is sheer blasphemy.

    Comment by Full2njoy — August 11, 2007 @ 9:55 pm

  2. Full2njoy,

    Prescient comment, my friend. In just over 12 hours after you posted that comment, someone did just that.

    Comment by Nitin — August 12, 2007 @ 8:30 pm

  3. I am surprised that leftist ideologies still have an audience. As the Chinese philosopher Lao Zi once said, “Feed a man a fish and you feed for a day, teach him how to fish and you feed him for a lifetime”.

    How many fish are we going to need to feed the millions? Pro market policies are all about teaching men and women how to fish. There will even be a lot more fish to hand out as well.

    Comment by Nikhil Nayak — August 12, 2007 @ 11:48 pm

  4. Communism/socialism wasn’t only supposed to be more fair than capitalism, but also more efficient, in that it wouldn’t squander precious resources in wasteful competition. Now, most people associate communism with a rejection of materialism even though, philosophically, nothing could be further than the truth. Thank goodness (except for those who had to suffer through it, namely our forefathers/mothers) that reality gave us a natural experiment to debunk such nonsense.

    Comment by Krishna — August 13, 2007 @ 3:00 am

  5. Prashant,
    Ironically, BlueSky – and you – missed this other post, also published in the Indian Express on the same day, titled “ADB report highlights widening gap between Asia’s rich & poor”. The highly contrasting titles shed more light on Blue Sky’s own biases than on either the correctness of the leftist view, or on income inequality per se.

    The post fails to mention, for instance, that income inequality in India would have been significantly higher if measured by income, not expenditure, or if more reliable data had been available. Either way, the impact of inequality on Indian society is significantly more pronounced than indicated:

    For instance, India has a lower Gini coefficient, of 36.2, compared to China, but among its poorest families, as many as 28% of children are severely underweight compared with 5% for the richest households.

    In my previous posts I have categorically avoided an inter-country comparison. But since the topic has been broached, it is revealing to mention the proverbial dog that did not bark for Ramasubbu. He compares Indian inequality with that in China and the US, but says nothing of countries significantly less unequal – such as in Scandinavia. Are we now to take comfort in that we are not the worst on any given scale? I hope our expectations have not sunk to such low levels, and encourage you to look at countries better than us, not worse!

    In order to aid objectivity let me quote what the report actually says:

    The sections particularly focus on the case of India, a country in which economic growth has been fairly rapid over the last 20 years but where many influential stakeholders are expressing serious concerns that increases in inequality mean that the poor have been “bypassed” by growth. The analysis reveals that this view is not quite correct. In particular, expenditures and wages are found to have increased at all points of the expenditure and wage distributions. In line with the results for developing Asia more broadly, and covered in Section 4, it is once again a case of both the rich and poor growing richer, but with the rich getting richer faster. Of course, since expenditures and incomes of the poor are meager to begin with, the spirit behind the concerns that growth has bypassed the poor remains.

    Since I am consistently in the minority here, and though I do not wish to be the left’s flag bearer, it is important to make one thing clear (without indulging in the normative name calling that tends to be the norm here). The problem for India today is not simply to lift people out of absolute poverty – we’re doing a dandy job of increasing per capita incomes. The biggest challenge is to ensure everyone has a stake in that growth (hence the rhetoric of “inclusive growth”). This is not simply of academic importance for a country on which its peoples already place many conflicting demands in so many other arenas. And it is in that context that we need to look at other experiences. For a primer on US inequality, see this NYTimes article (requires subscription, mirror here, my comment here), that reveals the problems with trying to fix inequality after the fact (of growth).

    Given its wide scope and despite its overall balanced view, the ADB report is clearly being spun many ways. But this post might have been more credible if Blue Sky had not ignored a significant portion of the report or provided the full context, rather than rely on opinion pieces that are as religious as the leftists decried here.

    Comment by Dweep — August 13, 2007 @ 5:09 am

  6. [...] The income gap is growing in many Asian countries. China’s gap is approaching Latin American levels (which are the highest in the world), but despite a recent rise, India is doing better than many imagine (relatively speaking). [...]

    Pingback by Links 8/12: Republicans 2008; the economics of obesity and pre-school; Pakistan, Afghanistan, Asia’s income gap — The Seminal :: Independent Media and Politics — August 13, 2007 @ 7:59 am

  7. Guys,

    Nothing is gonna be affected in a big way due to the income differences.

    The thing is we don spend proportionate to our earnings..

    That’s Y we are @ where we are now. Check out my blog about how saving affects our economy.. I ll be glad to have your comments.

    Comment by Sathyaraj — August 13, 2007 @ 10:11 am

  8. My Blog is

    http://savingissin.blogspot.com/

    Will meet you there.. :)

    Comment by Sathyaraj — August 13, 2007 @ 10:12 am

  9. I am a bit surprised to read that Income Inequality has not increased in India[I am not a leftist :)].What I observe here in Bangalore is quite the contrary.I have seen salaries sky rocketing in some sectors ,real estate prices going over the roof which makes it difficult to afford a decent house even for people in the *million rupees* range.This economy has given rise to many jobs which were earlier unthinkable – but in many instances I do feel that the good effect is just an illusion.[Many of these people who have come to bigger cities in search of a better future live in miserable conditions].It’s not liberalization but concentration of economic activity is the problem[IMHO].The governments of the day are to blame for this.It is a well known fact that the political class owns large tracts of land around big cities and there is really no incentive for them to create additional economic centers.If India has to retain its advantage and uplift the living standards of a majority of its populace then it has to look at creating such economic centers.

    Comment by Shailesh — August 13, 2007 @ 11:12 am

  10. Krishna you must be in a time warp. I have travelled to several countries where communism/socialism has been present. The devastation to the people and the economy is immense.

    I was in Dresden back in 1996 when East Germany had just joined the West. Look at the Russian states and Cuba. In India visit Calcutta (Kolkata) and you see eerie similarities. Dilapidated buildings, dictatorships or top heavy governments. Busted economies. Crushed people. This is the price we have paid by and large even in India for taking a socialistic form of governance. The only exemption to the rule is Sweden.

    To claim that that communism/socialism was designed to be more fair and efficient than capitalism just doesn’t hold water any more. Poverty exists in all societies and in former Eastern block countries it was brutal. To think that socialism / communism is an antidote is ridiculous.

    Comment by Nikhil Nayak — August 13, 2007 @ 12:27 pm

  11. Nikhil–I think you misunderstood my point, probably because I didn’t present it very well. Let me try again. I am no supporter of socialism; quite the opposite, in fact.

    I was actually saying that leftists often forget that the attraction of communism/socialism in its early days was not only that it would be more “fair” than capitalism but also that it was thought to be more efficient–thus planned economies were expected to soon overtake more decentralized, open ones. People really did fear that a centrally planned machine could produce higher output at faster rates–and with less inequality–than alternative forms of market/government structure. Before the collapse of the Soviet Union, American economists overestimated the size of the Russian economy by six times!

    History has proven the communist/socialist way of thinking to be clearly wrong. China’s recent success, which has more to do with quasi-market institutional reforms than adherence to ideology, provides further evidence against the radical left. On the inequality front, the irony is that China’s Gini is considerably higher than India’s (and understandably so, because China’s policy has been biased toward rapid urbanization, with agriculture providing an implicit subsidy for industrial output).

    Despite this fact, there appear to be various Indians who want to hang on to this discredited worldview, now insisting that it is compatible with an anti-materialist outlook. This makes no sense–Marx would be rolling in his grave! I see the current obsession amongst some (including most of the Congress Party) with the rise in the Gini coefficient is yet another attempt to revive a discreted way of thinking. The cynics amongst us also know that it is shameless pandering to votebanks. But youthful idealists–like some who post on this board–get swept up in the rhetoric. India’s rise out of poverty can only be delayed by those who continue to cling to this idiocy. Unfortunately there are many who aren’t willing to let go, and some of them occupy positions of enormous power in the country.

    Nikhil, your travels sound fascinating. Also, have you seen the Oscar winning film, Lives of Others? I highly recommend it to anyone who wants to better understand what really happened behind the Curtain.

    Comment by Krishna — August 13, 2007 @ 4:16 pm

  12. Krishna,
    I completely support your historical assessment of socialism’s evolution and demise. History has indeed shown planned economies to be bad at efficiency, so would not defend a planned economy. Yet, one can also say that today it is capitalism that is en vogue – in essence it has become an end in itself, rather than a means, which explains why the “youthful idealism” on this forum is, if anything, originating from the far right – not the left or center. Nothing indicates this better than your own position on the socialism-capitalism debate.

    While you and many others (I will avoid using nouns as adjectives at this point) place a heavy burden of proof on any kind of market intervention, particularly in relation to efficiency, you place almost no such burden on free markets (and India’s growth) related to equity. I venture you are not really cynical but simply idealogically predisposed, or you would question both sides. The link above, to inequality in the US, might be a good start that suggests that concerns over growing inequality are while “shameless pandering”, still relevant and deserve discussion rather than dismissal.

    Comment by Dweep — August 13, 2007 @ 8:53 pm

  13. Krishna, thanks for the reply and clarification. I apologize for going off like that but as you said it looked like you were supporting the socialist view. Thanks for clearing that up and for the history.

    Will have to look up the movie. Work takes me to a few places in which I manage to squeeze in some time for making some visits.

    Comment by Nikhil Nayak — August 14, 2007 @ 11:20 am

  14. [...] We all know that right wingers (whether it is social or economic) have an inherent dumbness. Well, why else are they going to be on the right anyway!! Today, I saw this post on IEB that claims that income inequality is not so bad anyway. This is yet another instance of managing to kick ones own ass. Let us dig a bit more on their stupidity. [...]

    Pingback by The inherent dumbness of Indian Economic Right is in display again : Marxist-Leninist-Stalinist-Maoist — August 15, 2007 @ 6:29 pm

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  16. The discussion about \”left\” and \”right\” is a waste of time.

    Please look at the data carefully. Understand the difference between \”expenditure\” and \”personal income\”. A low Gini for expenditure cannot be compared to a low gini for incomes. Do we talk about quantiles, deciles, etc.? Do we talk about the whole population, about economically active population, about taxpayers only etc? Who gets noticed. Who doesn\’t? That makes comparisons difficult.

    Data sources:

    Klaus Deininger and Kihoon Lee from the World Bank and Lyn Squire from the Global Development Network provided updated data to the World Income Inequality Database in May 2007:
    http://www.wider.unu.edu/wiid/WIID2b.zip

    Same data as part of a Lua-Script for your own experiments:
    http://luaforge.net/frs/?group_id=49&release_id=794

    Inequality Measures (that\’s my site):
    http://www.poorcity.richcity.org/

    LuaExpat script interpreter:
    http://www.poorcity.richcity.org/Lua-5.1.2-Expat.zip

    Lua:
    http://www.lua.org

    India is not Brazil. But surely India is not in the low range of income inequality measures.

    I think, that collecting and verifying(!) income data in India is a big challenge.

    By the way: Very interesting is the comparison between the two rich countries Norway and Nigeria.

    Comment by Goetz — September 7, 2007 @ 12:24 am

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