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Poverty Rose But Income Inequality fell

Context

There are signs the pandemic has not followed the usual script in India where the poor have borne the major brunt. Despite rise in poverty, the income inequality has reduced.

Relevance

GS-III: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.

Dimensions of the Article

  • Rising Poverty and Economic Shocks
  • Income Inequality
  • Income Sources and their relation with Inequality
  • Way Forward

Rising Poverty and Economic Shocks

  • Poverty has risen during the pandemic which has been the case in previous economic crisis like Gulf War 1991 or the Liquidity Crisis of 2007-08.
  • Most vulnerable groups are the poor without contractual protections and adequate safety nets.
  • Extreme Poverty defined by World Bank as the percentage of population below $1.90 rose from 7.6% in November 2019 to 11.7% in July 2021.

Income Inequality

  • Income Inequality actually fell.
  • Average monthly income of the top quartile in urban areas fell almost 30% to Rs 32,500 by July 2021.
  • Monthly income of the bottom quartile in July 2021 remained at pre-pandemic levels.
  • In rural areas, the top quartile income fell by perhaps 20%, while the bottom quartile income grew slightly during the same period.
  • Results show that Income Inequality by 15-20 percentage points.
  • Richer households aw larger drops in income all along the income scale.
  • Historians has observed the same dynamic during the plague in 14th Century Europe.

Income Sources and their relation with Inequality

  • Three sources of income household income: government transfers, business profits and labour income.
  • Government Transfers can’t explain the decline in inequality.
  • Even when Government transfers were excluded from the income inequality fell over 20% by July 2021.
  • Business profits and Labour Income plays a bigger role.
  • Rich saw larger decline in their businesses and depended more on that income.
  • In the labour income scenario was similar. When job losses occurred rich tended to take a income hit of up to 45% where as the poor took the hit up to 40%.
  • Rich tend to work more in the service sector which contracted more as compared to manufacturing and agriculture.

Way Forward

This decline in income inequality would have been a silver lining if it was accompanied by reduction in poverty. But rather it is based on the reduced income of the rich. This gives us an illusion which we must be wary of. Policymakers must still address the income inequality holistically.

Source – The Hindu

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