“Current Affairs Pulse – 19/11/2017”

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Beyond Piketty: on income inequality

Demonetization and the GST aggravated income inequality!

• Both policies, it is asserted, are guaranteed to yield long-term benefits.
• Lack of robust evidence – Problem for both proponents and the critics as well.

Tracking income inequality:

• Tomas Piketty’s Capital in the Twenty-First Century, demonstrating that rising income inequality is a by-product of growth in the developed world.
• Lucas Chancel and Piketty (2017), in ‘Indian income inequality, 1922-2014: From British Raj to Billionaire Raj?’ – describes the evolution of income inequality in terms of income shares.

Some of the principal findings are:

o National income accruing to the top 1% income earners is now at its highest level since the launch of the Indian Income Tax Act in 1922.
o Top 1% of earnings;
 1. less than 21% — 1930s
2. dropping to 6% in the early 1980s
3. Rising to 22% today.
o Bottom 50% Earnings;
1. 1951-1980 period 28% of total growth and grew faster than the average, while the top 0.1% incomes decreased.
 2. 1980-2014 period, the situation was reversed top 0.1% of earners captured a higher share of total growth than the bottom 50%.
3. Sharp reduction in the top marginal tax rate, and transition to a more pro-business environment had a positive impact on top incomes.

India’s wealth gain:

• According to Credit Suisse Global Wealth Report 2017
o Number of millionaires in India is expected to reach 3,72,000.
o Total household income is likely to grow by 7.5% annually to touch $7.1 trillion by 2022.
• Since 2000, wealth in India has grown at 9.2% per annum, faster than the global average of 6% even after taking into account population growth of 2.2% annually.
• However, not everyone has shared the rapid growth of wealth.
• Based on the India Human Development Survey 2005-12.
o A high Gini coefficient of per capita income distribution, a widely used measure of income inequality, in 2005 became higher in 2012.
o More glaring is the disparity in ratios of per capita income
1. Between top 1% and bottom 50%, the ratio shot up from 27 in 2005 to 39 in 2012.
o Ratio of highest income
1. Between the top 1% and the bottom 50%, it nearly doubled, from a high of 175 to 346.

Poverty and inequality:

• Only in the more affluent States the Inequality measured in terms of share of income of the top 10% increased poverty sharply.
• Surprisingly, higher cereal prices did not have a significant positive effect on poverty.
• Because of GST & Demonetizationpoverty reduction slowed in 2016-17 due to deceleration of income growth.

In sum, regardless of the longer-term outlook and presumed but dubious benefits of the policy shocks, the immiseration of large segments of the Indian population was avoidable.