Tuesday, February 10, 2009

Inequality in India

The IMF have recently released a working paper on inequality in India, India: Is the Rising Tide Lifting All Boats? Underlining the continuing importance of the role of pro-active Government policies, it claims, "Experiences across Indian states suggest an important role for economic policy in shaping the inclusiveness of growth. States with higher financial development, more flexible labor markets, and higher average education experienced greater relative gains for the poor and also raised the ability of the poor to gain from the growth process. Improving infrastructure may also lead to a growth process that is more inclusive of the poor."

The report draws from NSSO data that poverty declined considerably in both rural and urban India over the 1993-94 to 2004-05 period. Its incidence fell from 35.8% to 27.5% for the whole country, 36.8% to 28% for rural areas and 32.8% to 25.8% for urban areas. While inequality was stable (in urban India) and declining (in rural India) in the 1980s, this trend was reversed in the 1990s. The Gini coefficient rose from 0.303 to 0.325 for the entire country in the 1993-94 to 2004-05 period, from 0.285 to 0.298 for the rural areas and from 0.343 to 0.378 for the urban areas. This indicates that urban inequality widened significantly during the period. Interestingly, while inequality was stable (in urban India) and declining (in rural India) in the 1980s, this trend was reversed in the 1990s. During the 1982-83 and 1993-94 period, the proportional decrease in poverty between was much higher in all categories and the Gini Coefficient fell significantly from 0.312 to 0.285 in the rural areas and by a smaller level across the country.

The highest income increases in the 1990s have mainly arisen in three sectors - stock markets, real estate and gold. All three of these are owned by a very small proportion of people, thereby partially explaining the significant increases in inequality across the 1990s.

The report concludes that the distribution of consumption growth across the country has varied signifcantly in the 1980s and 1990s, contributing to the growing inequality. It points out, "In the 1980s, the growth rate of consumption of the bottom of the income distribution was substantially higher than that of the top. In contrast, in the 1990s, the top of the population enjoyed a substantially larger share of the gains from economic growth compared to the previous decade. This had significant effects on income inequality, which grew within states, across states, and between rural and urban areas."

Contrasting "good inequalities" (Widening income gaps, arising from an increase in the skill premium, increases the incentive for investment in education and may eventually narrow over time as the factor supply responds and younger generations invest more in their human capital) and "bad inequalities" (that prevent individuals from connecting to markets, and limit investment and accumulation of human and physical capital, such as geographic poverty traps, patterns of social exclusion, lack of access to credit and insurance, etc), the report claims that the "the focus of policy makers should be on how to increase access to and quality of schooling and other social services, ease bottlenecks for participation of the poor in economic activities and remove potential sources of "bad inequalities"."

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