Economic inequality is a hindrance to the process of growth and development in India.

Even
though there is an economic growth in India, it is not able to reduce the growing inequalities of
the Indian society. Our development strategies failed to reduce the extent of regional and sectoral
inequalities. Domestic and foreign investments are not directed to backward regions of the
country. Already developed states are found to be preferred destination of investment.
Meaning of Economic Inequality In India four forms of inequalities are found. Inequality of
income, Inequality of consumption expenditure, Inequality of asset holding, and Regional
inequality.

Inequality of the distribution of wealth and income refers to a situation in which small section of
society share large part of nation income whereas large sections of society are devoid of income.
There
is
an
unequal
distribution
of
income.
Inequality in consumption expenditure refers to a situation in which a large percentage of total
consumption expenditure is incurred by a small percentage of population. Inequality of
consumption expenditure shows that a large percentage of bottom population has to struggle to
survive, whereas a small percentage of top population enjoys a lavish lifestyle.
Regional inequality refers to inequality of growth process across various states in the country and
different regions with in a single state. Some states or regions are far more prosperous than the
others.
Nature and Extent of Economic Inequality in India In India inequality of income is calculated
based on the data on consumption distribution (provided by NSSO) and income tax data. To
examine the distribution of income in India, a Committee was appointed by the Government
under the chairmanship of Prof. P.C. Mahalanobis. The committee submitted the report in 1964.
Besides this Committee, National Council of Applied Economic Research (NCAER), Reserve
Bank of India, World Bank and many economists have undertaken important research studies
relating to distribution of income. However, these studies relate to different periods of time, and
are based on different methodologies. The results of these studies are not strictly comparable.
Higher Lorenz ratio or Gini-coefficient points to a greater degree of inequality. Gini index in
India was 33.4 in 2011-12 which points to an alarming magnitude of inequality in India.
Rural and Urban Breakup In India there are inequalities of income are found in rural and urban
areas as well. Per capita income in rural areas is less than the per capita income in urban areas.
However the inequality levels in rural areas are less than the inequality at urban areas.

Causes of Inequality of Income and Wealth in India Causes of Inequality of Income in India:
Inequality in the ownership of assets, Laws of inheritance, Cost of professional training,
Inflation, Unemployment, Tax evasion, Corruption and smuggling, Greater Burden of indirect
taxation
or
regressive
tax
structure.

Government

Policy

to

Reduce

Inequalities

of

Income

and

Wealth

Ever since independence, Government has been focussed on reduction of inequalities of income
and wealth in the country. Land Reforms Land reforms have been introduced to remove
inequality in the ownership of land. Land in excess of the ceiling limit has been distributed
among the tenant farmers, and among the small and marginal holders. Expansion of Public
Sector Government pursued a policy of assigning a flagship-role to the Public Sector. Many
commercial banks were nationalised in 1966-68. However, since 1991, there has been reversal of
the government policy. Privatisation has become the centrestage of growth-strategy. This is
because public sector has only yielded inefficiency and bankruptcy. Encouraging Small Scale
Industry The Government is providing support to develop small scale industry. Monopolies and
Restrictive Trade Practices Act Monopolies and Restrictive Trade Practices Act, 1969 was
passed to put a check on concentration of economic power. Poverty Alleviation Programmes
Government should frame poverty alleviation programmes particularly those which provide
gainful employment to the economically weaker section of the society. Pricing Policies
Government should design the pricing and distribution policies to reduce the inequalities present
in the society. Government should provide the basic amenities at lower price to the weaker
sections
of
the
society.
Measures to Correct Regional Imbalances Following measures have been taken to remove
regional imbalances: (i) Greater share of central pool of funds should be allocated to backward
states. (ii) Provision of Grant-in-aid by the Central Government to the backward states. (iii)
Launching of Special Area Programmes like Desert Development Programme, Drought Prone
Area Programme, etc. (iv) Propagation and use of improved dry farming technology. (v)
Provision of infrastructural facilities in backward districts. (vi) Development of forward and
backward linkages in those backward regions. Economic Inequalities and Five Year Plans
Economic growth with social justice has been one of the most important objectives of five year
plans in India. Growth must be inclusive of all segments of the society rather than exclusive of
larger sections of the society. Keeping in mind the goal of social equality, Planning Commission
of India adopted different strategies during different five year plans to achieve this goal. During
the initial period of planning (up to third plan), the objective of equitable distribution was not
given any centrestage priority. However, in subsequent plans, equality received its due focus.
Abolition of zamindari System, ceiling on landholding, subsidy for use of HYV technology are
important measures taken in the five year plans. But the plans are not able to succeed fully as the
inequalities
are
not
removed
fully.

Inequality is in the news once again and the news is not particularly good. In a speech last
month, Reserve Bank of India governor Raghuram Rajan commented that increasing inequality
could be curtailing world demand. Since the rich typically spend a smaller portion of their
income compared with the poorwho spend almost all of their incomerising inequality is a
threat to aggregate demand in the global economy, Rajan argued .
Rajan belongs to a new generation of economists who are beginning to take inequality more
seriously than before. In his famous 2010 book, Fault Lines, Rajan argued that refusal to tackle
growing inequality in the US led federal policymakers to encourage the housing boom which
eventually led to the great crash of 2008, with disastrous consequences for both the US and the

global economy. Rajan has been quite blunt about inequality in wealth and power in India as
well.
In a 2008 speech to the Bombay Chamber of Commerce, Rajan warned about the fault lines in
the Indian economy at a time when most commentators were exuberant about India.
My former classmate from IIT, Jayant Sinha, recently sent me a spreadsheet he had compiled,
said Rajan. It lists the number of billionaires per trillion dollars of GDP for the major countries
of the world. Guess which country tops the list? It is Russia, with 87 billionaires for the $1.3
trillion of GDP it generates. Of course! you will saythese are the oligarchs who stole the
countrys mineral resources, who participated in the Loan for Votes scheme, etc. But guess
which country comes second? It is India with 55 billionaires for the $1.1 trillion it generates.
Rajan then went on to argue that given the size of Indias economy, the number of billionaires it
produced was extraordinary compared with emerging market peers such as Brazil, or with
developed market peers such as Germany. Moreover, the fact that most billionaires gained
wealth because of their access to natural resources such as land or government contracts raised
disturbing questions about the nature of Indias growth process. If Russia is an oligarchy, how
long can we resist calling India one, questioned Rajan.
If inequality is large or growing in India, why do we not talk about it more often? There seems to
be two key reasons. First, until recently, there was dearth of credible data on income inequality
in India. Second, within the economics profession, there was a broad consensus that inequality
may often be par for course for a fast-growing developing economy such as India, and once it
grew richer, the tide would turn.
Both these aspects are changing. We now have newer sources of evidence on inequality in India.
Also, economic thinking on inequality has changed considerably across the globe over the past
few years.
Historically, estimates of inequality in India have always been based on consumption
expenditure data culled from household surveys conducted by the National Sample Survey
Office (NSSO). Based on these estimates, inequality in India has always seemed benign and
comparable with inequality levels in the rest of the world. Economists were always aware that
comparing consumption-based inequality in India with income-based inequality in other
countries was like comparing apples to pears, if not to oranges.
Even if the rich earn a lot more than the poor, they are unlikely to spend all of their additional
income. Thus, consumption-based inequality measures are expected to understate income
inequality. Yet, the absence of an alternative measure ensured that the consumption-based Gini
coefficient (which measures inequality) was officially endorsed (by the erstwhile Planning
Commission) and widely used.
Even that measure suggests an increase in inequality in recent years. Estimates based on NSSO
data by Himanshu, an economist at Jawaharlal Nehru University and a Mint columnist, show
that the Gini coefficient based on consumption data rose significantly from 0.298 in 1983 to
0.347 in 2004-05 (the Gini coefficient takes values between 0 and 1, with 0 indicating perfect
equality in income or consumption distribution and 1 indicating complete inequality in such
distribution). The coefficient rose further to 0.359 in 2011-12.
Despite the increase in the official gauge of inequality in India, the level of inequality is
considered moderate given that the Gini coefficient for middle-income developing countries
tends to range from 0.400 to 0.500, and exceeds 0.500 in some of the most unequal countries of
the world, such as those in Latin America.

However, an alternative dataset based on the India Human Development Survey (IHDS) by
researchers from the National Council of Applied Economic Research (NCAER) and Maryland
University suggests a starkly different picture.
This dataset was used to estimate household incomes, which were calculated to compute an
income-based Gini coefficient for the first time in India. The result was startling: the Gini
coefficient turned out to be as high as 0.52 when based on income data, although the
consumption-based Gini coefficient was much lower at 0.38, and comparable with the NSSObased estimate.
In terms of income inequality, India seems scarcely better than some of the most unequal
countries of Latin America.
If one were to reliably compute inequality of wealth distribution, India would probably fare
worse, as Rajans rough analysis suggested. Wealth data is incredibly more difficult to obtain
compared with income, and are based on a large number of imputations and assumptions.
Nonetheless, one widely used estimate of wealth across countries is provided by the investment
bank Credit Suisse. Their latest report makes for sober reading, as a recent Mint article by
Manas Chakravarty pointed out .
The report released recently estimated that the top 1% in India own more than half of the
countrys total wealth. The richest 5% own 68.6% of the countrys wealth, while the top 10%
have 76.3%. At the other end of the pyramid, the poorer half jostles for 4.1% of the nations
wealth, wrote Chakravarty.
If the lack of data was one handicap in understanding the impact of inequality, the weight of
scholarly opinion in economics was another handicap. Economists neglected inequality for a
long time based on two supposedly fundamental laws of economics.
The first one is the simple hypothesis of the equity-efficiency trade-off, which suggests that with
rising growth rates, some are left behind and that inequality is an inevitable consequence of the
growth process. Conversely, focusing on redistributive policies will impede economic growth.
One of the most influential papers in economics, authored by Simon Kuznets in 1955 , argued
that high inequality, associated with growth, is a transient phase in development. Gradually,
growth will trickle down to the poor and inequality will start declining.
In a famous graduation speech, Thomas Sargent, a Nobel laureate, listed the trade-off between
equity and efficiency among the valuable lessons of our beautiful subject.
Another Nobel-winning economist, Robert Lucas, was harsher on attempts to curb inequality.
Lucas suggested that focusing on inequality is harmful and most poisonous. In a tongue-incheek response, two International Monetary Fund (IMF) economists used one of his own papers
and showed that the welfare costs involved with tolerating inequality outweigh gains made
by growth-enhancing strategies .
The initial postwar experience indeed seemed to vindicate Kuznetss U-curve hypothesis on
inequality. But as an earlier Economics Express column pointed out , the seminal work of
Thomas Piketty as well as contributions from scholars such as Anthony Atkinson have
challenged Kuznetss hypothesis. Their work suggests a sharp rise in top income shares across
countries in the developed world since the 1970s after a period of moderation in the years
following the Second World War.
Recent research from the IMF suggests that inequality may in fact harm the growth prospects of
an economy. An IMF discussion note published last year put together cross-country evidence
that suggests that lower initial inequality may facilitate high growth rates for a long duration,
while high levels of inequality may cause redistributive pressures and lead to an unstable growth

path. There is little macroeconomic evidence for an equity-efficiency trade-off, the note by IMF
economist Jonathan D. Ostry and his colleagues said.
The other economic principle that has been employed to claim that inequality isnt as important
as it is made out to be is the Pareto principle. The Pareto principle suggests that if the income of
a particular individual or a set of individuals increases without affecting the well-being of others,
such an outcome could be desirable for society.
But most policies to tackle inequality involve making at least some people worse off. Hence, the
Pareto principle seemingly comes in the way of such policies. Nobel laureate Angus Deaton, in
his latest book The Great Escape, challenges the Pareto principle by arguing how the
concentration of wealth impedes non-pecuniary well-being.
The very wealthy have little need for state-provided education or health care; they have every
reason to support cuts in Medicare and to fight any increase in taxes, writes Deaton. They have
even less reason to support health insurance for everyone, or to worry about the low quality of
public schools that plagues much of the country. They will oppose any regulation of banks that
restricts profits, even if it helps those who cannot cover their mortgages or protects the public
against predatory lending, deceptive advertising, or even a repetition of the financial crash.
To worry about these consequences of extreme inequality has nothing to do with being envious
of the rich and everything to do with the fear that rapidly growing top incomes are a threat to the
wellbeing of everyone else, writes Deaton. There is nothing wrong with the Pareto principle,
and we should not be concerned over others good fortune if it brings no harm to us. The mistake
is to apply the principle to only one dimension of wellbeingmoneyand to ignore other
dimensions, such as the ability to participate in a democratic society, to be well educated, to be
healthy, and not to be the victim of others search for enrichment. If an increase in top incomes
does nothing to reduce other incomes but hurts other aspects of well-being, the Pareto principle
cannot be called on to justify it.
In a Science article published last year , renowned development economist Martin Ravallion of
Georgetown University points to three important consequences of inequality.
First, poverty typically declines at a lower rate in countries with high inequality. Second, when
theres extreme initial inequality, growth alone cant lift all the boats as poverty becomes less
responsive to economic growth. Third, when theres a large rent accruing to a small set of rich
elite, they will try to impose barriers on policies that promote innovation and foster market
competition.
Of course, inequality is also a cause for worry because it may lead to social unrest. At least on
this, economists and other social scientists have been worrying for quite some time.
In a widely cited 1973 research paper , economists Albert Hirschman and Michael Rothschild
coined the term tunnel effect to describe how inequality can lead to conflict. The tunnel effect
referred to a parable about multi-lane traffic that the authors used to describe inequalitys impact.
New York University development economist Debraj Ray presented a modified parable to
explain this effect in a 2010 research paper :
Youre in a multi-lane tunnel, all lanes in the same direction, and youre caught in a serious
traffic jam, wrote Ray. After a while, the cars in the other lane begin to move. Do you feel
better or worse? At first, movement in the other lane may seem like a good sign: you hope that
your turn to move will come soon, and indeed that might happen. You might contemplate an
orderly move into the moving lane, looking for suitable gaps in the traffic. However, if the other
lane keeps whizzing by, with no gaps to enter and with no change on your lane, your reactions

may well become quite negative. Unevenness without corresponding redistribution can be
tolerated or even welcomed if it raises expectations everywhere, but it will be tolerated for only
so long. Thus, uneven growth will set forces in motion to restore a greater degree of balance,
even (in some cases) actions that may thwart the growth process itself.
Rising caste conflict in India arising out of demand for reservations in jobs is an illustration of
the tunnel effect. Huge inequality in wealth distribution within the Patidar group in Gujarat has
led some of them to demand reservations in government jobs. Tunnel effect was also at play
during the Gujjar-Meena clashes in Rajasthan.
In 1968, Shrilal Shukla wrote his great dystopian novel Raag Darbari, in which he describes
how the local elite in a fictional village called Shivpalganj stifled every possibility of removing
inequities. Raag Darbari offers a useful prism to explain the contemporary rise in inequality and
its perverse effects.

The International Monetary Fund (IMF) has warned that both India and China face the social risk
of growing inequality.
By implication, it is suggesting that there is a problem with the redistribution of incomes in both
these economies as high economic growth rates are not reducing inequality.
In its regional economic outlook for Asia and Pacific, IMF said that Asian countries are unable
to replicate the growth with equity miracle and pointed out that inequality has only increased
in the past two and a half decades, lowering the effectiveness of growth to combat poverty and
preventing the building of a substantial middle class.
Indias Gini coefficient rose to 51 by 2013, from 45 in 1990, mainly on account of rising
inequality between urban and rural areas as well as within urban areas. Chinas Gini coefficient
also rose to 53 in 2013, from 33 in 1990. At a time when inequality has been coming down for
most of the world, the average net Gini coefficient for Asia rose to 40 in 2013 from 36 in 1990,
the highest among the rest of the world.
Gini coefficient is a widely used measure of inequality and takes into account income
distribution among residents of a country. The income in this case has been calculated net of
taxes and transfers. The higher the Gini coefficient, the greater is the inequality.
Within-country income inequality has risen in most of Asia, in contrast to many regions. In
some larger countries (such as China and India), spatial disparities, in particular between rural
and urban areas, explain much of the increase, the report said.
The report stressed the need for broadening access to health, education and promoting financial
inclusion and reducing inequality of opportunities to bring down overall inequality levels. It also
stressed the need for effective fiscal policy that broadens the coverage of social spending but at
the same time moves towards a progressive taxation system that taxes the rich more.

Highlighting the gap between the rich and the poor, the report pointed out that access to
education is an important factor that explains inequality. It added that in countries including
India, the percentage of people with less than four years of schooling is higher for the poor than
for the rich. Similarly, there is a substantial gap in access to healthcare between high- and lowincome households. It added that financial inclusion has promoted equality in India across states.
French economist Thomas Piketty, in an interview with Mint in January this year, had talked
about the high levels of inequality in India and made a case for taxing the richs income at higher
tax rates.
.. if you use the extra tax revenue to invest in the health system, in the education of the bottom
50% or bottom 70% of the country, then, yes, increased tax of the rich in India would be actually
good for growth. It would reduce inequality and at the same time increase growth, he had said.
IMF made a case for India to reduce its dependence on indirect taxes and increase reliance on
direct taxes. Indirect taxes are considered regressive as they are levied uniformly across all
individuals, irrespective of their income levels. In India, however, the share of direct taxes to
gross domestic product has been falling. From a high of 5.93% in 2008-09, it has come down to
5.47% in 2015-16.