»The Daily Reckoning by Bill Borner

How unequal is India?
29 OCTOBER 2011

- By Asad Dossani, Author, The Lucrative Derivative Report

Asad Dossani
A common criticism of India's growth story has been that it is very unequal. The rich get richer while the poor get poorer is a common mantra we hear. Casual observation confirms just how unequal incomes are in the country. For example, what the average driver or servant earns in a year is often less than what the average middle class professional earns in a month.

But does this mean that India is a highly unequal country? Are the poor not benefitting from the high economic growth? And how does India's inequality stack up against the income inequality in other countries? Some of the answers are quite surprising, and may show that India's income inequality is not as bad as it seems at first glance.

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First, let's compare India versus other countries. A useful statistic we can look at is the ratio of the average income of the richest 10% to the average income of the poorest 10%. Effectively, how many times greater is a rich person's income compared to a poor person's income? For India, this figure is 8.6. That is, the income of the richest 10% is 8.6 times higher than the income of the poorest 10%. Does this seem very high?

Compared to most countries, it is actually on the low end of the scale. For example, for the US this figure is 15.9. For the UK, this figure is 13.8. For China, this figure is 21.6, and for Brazil this figure is 40.6! Compared to these three countries, India's income inequality is considerably lower. The country with the lowest inequality is Japan, for whom this figure is 4.5. The most unequal countries by this measure are primarily in Africa and South America.

These statistics tell us that while India does have considerable income inequality, most other major economies have higher income inequality. In particular, other emerging economies have much higher income inequality. Another way we can analyze income inequality in India is by looking at different states. As we know, some states are considerably richer than others. But are the poorer states catching up?

The richer states (i.e., those with the highest average income per person) include Maharashtra, Delhi, Haryana, Goa, Gujarat, and Punjab. The poorer states include Uttar Pradesh, Bihar, Madhya Pradesh, Manipur, and Nagaland. The poorest of these states is Bihar. Any guesses as to which state had the highest growth rate in income per person?

Most of us would probably guess that places like Maharashtra, Delhi, Karnataka, or Gujarat had the highest growth rates, as these are the places that have seen more development and investment than others. The correct answer is none of these places. In fact, the state with the highest growth rate in income per person is Bihar, also the poorest state. Most of the poorer states have growth rates that are sometimes higher or roughly equal to the growth rate of the country as a whole. The only exceptions are states with political problems like Kashmir and some states in the northeast, where growth remains well below the average.

The purpose of this article is to highlight many of the misconceptions about income inequality in India. Compared to other major economies, India's income distribution is less unequal than others. Furthermore, many of the poorer states in India have high growth rates implying eventual convergence.

What is important to point out is that income inequality is a relative measure only. It is not about absolute income levels. Poverty is still widespread in India, and this is a problem that needs to be solved over time. The gap between rich and poor is greater in the US than in India. However, the poor in India are much worse off than the poor in the US, and this is the important distinction to make.

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