The Income of the Average Indian is Significantly Lower Than the Average Income of India - Vivek Kaul's Diary
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The Income of the Average Indian is Significantly Lower Than the Average Income of India

Apr 25, 2016

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The speeches of the Reserve Bank of India(RBI) governor, Raghuram Rajan, are always a pleasure to read. In his latest speech made on April 20, 2016, Rajan said: "India is the fastest growing large country in the world, though with manufacturing capacity utilization low at 70% and agricultural growth slow following two bad monsoons, our potential is undoubtedly higher. Growth, however, is just one measure of performance. The level of per capita GDP is also important. We are still one of the poorest large countries in the world on a per capita basis, and have a long way to go before we reasonably address the concerns of each one of our citizens."

Rajan further said: "We are often compared with China. But the Chinese economy, which was smaller than ours in the 1960s, is now five times our size at market exchange rates. The average Chinese citizen is over four times richer than the average Indian. The sobering thought is we have a long way to go before we can claim we have arrived."

The point that Rajan was trying to make was that: "As a central banker who has to be pragmatic, I cannot get euphoric if India is the fastest growing large economy...The central and state governments have been creating a platform for strong and sustainable growth, and I am confident the payoffs are on their way, but until we have stayed on this path for some time, I remain cautious."


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This was essentially a retort to politicians who keep tom-tomming India's dodgy economic growth numbers. While Rajan did not say that he does not believe in the economic growth numbers, he did try and make it clear that if India needs to reach anywhere, it needs strong and sustainable economic growth in the years to come. And achieving that is easier said than done.

Further, Rajan also made a more important point in his speech about India's low per capita income. What is per capita income? John Lanchester defines per capita income in his book How To Speak Money as: "The total Gross Domestic Product(GDP) of a country divided by the number of people in the country.

As he further writes: "It is a measure of how rich the country's citizens are on average - though it is a very rough measure of that, since a country's WEALTH is often very unevenly distributed."

The phrase to mark in the above paragraph is on average. The question is does an average always represent the right scenario? As Robert H Frank writes in Success and Luck-Good Fortune and the Myth of Meritocracy: "It is of course possible for most people to have a trait the measures higher than the corresponding mean value for the population to which they belong. Since a small number of people have fewer than two legs and no one has more, for instance, the average number of legs in any population is slightly less than two. So most people actually do have "more legs than average"."

How does the above paragraph apply in the context of the GDP? What it tells us is that the average income of India is not equal to the income of the average Indian. Now what does that actually mean?

Let me explain that through an example. Let's say on a given day in the city of Mumbai, an Ambani, an Adnani, a Birla and a Tata, walk into a local Udupi restaurant in Matunga. The restaurant is known for its soft idlis and fabulous coffee. And this has attracted the four industrialists to this small place.

The moment these four walk into the restaurant, the average income of the people seated in the restaurant goes up by leaps and bounds. If I may rephrase the last sentence, the per capita income of the restaurant goes up leaps and bounds, when the four industrialists walk into the Udupi restaurant.

But this increase in per capita income of the restaurant will have no impact on the incomes of the other people seated in the restaurant. (This example is essentially an adaptation of an example Charles Wheelan uses in his book Naked Statistics).

As Charles Wheelan writes in Naked Statistics: "The mean, or average, turns out to have some problems in that regard, namely, that it is prone to distortion by "outliers", which are observations farther from the center."

So basically, the Ambanis, Adnanis, Birlas and Tatas, of the world, essentially India's rich, push up the average income of India i.e. the per capita income. As Wheelan writes: "The average income...could be heavily skewed by the megarich."

In this scenario, the average income does not give us a correct picture. Further, it is safe to say, that the income of the average Indian is lower than the average income of India.

At this point it is important to introduce another term i.e. the median. As Wheelan writes: "The median is the point that divides a distribution in half, meaning that half of the observation lie above the median and half lie below."

Hence, the median income is the income of the average Indian. Given this, the median income is the right representation of the income of the average Indian. This is because the rich outliers (the Ambanis, the Adnanis, the Tatas and the Birlas) are taken into account. Data from World Bank shows that the top 10% of India's population makes 30% of the total income. And this pushes up the per capita income.

The trouble is that it is not so easy to find median income data in the Indian context. A survey carried out by Gallup in December 2013, put India's median income at $616. Data from the World Bank shows that India's per capita income during the same year was $1455.Hence, the median income was around 58% lower than the average income or the per capita income. And that is not a good sign at all.

This shows the tremendous amount of inequality prevalent in the country. The difference in the income of the average Indian and the average income of India is thus huge. In fact, I had written about this inequality in the column published on April 19.

In 2015-2016, the average income of those not working in agriculture was 4.9 times those working in agriculture (using GDP at current prices). If we were to use GDP at constant prices (at 2011-2012 prices), the ratio comes to 5.5. Constant prices essentially adjust for inflation.

And this is really a big worry!

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

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7 Responses to "The Income of the Average Indian is Significantly Lower Than the Average Income of India"

Borkar M.R.

Apr 26, 2016

Sir, Dr.Rajan is right but is not right also. The truth is Netas want to retain the chair, Industrialists want their empire to grow Babus want their trickle (extra money) to grow in
the flush. Why sould they bother? It does not hurt them. Five star hotel seminars cwill
continue to tell the poor how to remove the poverty rather how that has been removed in the last
60 years. The new fad of smart cities will reduce the land availabilty of crop increase the
number of people depending on jobs which will bring in more caos in the urban areas. Few reap
will abandon the country,stack their wealth in other places, even on other panets. Good luck.
Borkar .

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Suresh Baranwal

Apr 25, 2016

We should not expect improvement in the pathetic state of Indian poor till India loses its position among the most corrupt nations of the world.

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Suresh Baranwal

Apr 25, 2016

RBI Governor shouldn't have called a spade a spade.It hurt the people who are responsible for the pathetic state of our poor .

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Suresh Baranwal

Apr 25, 2016

Our politicians try their best to maintain India's position among the most corrupt countries of the world.Those who should be behind bars for crime and corruption make up more than 95% of the richest 10% of our society.The state of the poverty in India is pathetic.Mr Rajan has touched the raw nerves of those who are responsible for this state of our nation.

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parimal shah

Apr 25, 2016

The best way to gauge average Indian's income is to remove the top 1% of the income bracket while calculating the average. This will essentially take away the Tatas et al from the computation and will possibly give a more accurate figure of per capita income of average Indian. In short remove the top 1% or so of the outliers.
-Parimal

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Atanu Gupta

Apr 25, 2016

Now,it is really pleasure to read your article. It is real fact misguided by the people of India.People should know the fact. Projection wrong figure mislead the mass.

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Dinesh Nair

Apr 25, 2016

Average is undoubtedly the most abused parameter.
A study shows that on an average 9 out of 10 economists abuses Average everyday.

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