Income Inequality is a term that defines the income distribution pattern in a country or economy among its citizens. If the range (highest income minus the lowest income) is high, we say that the economy suffers inequality. This characteristic is evident in an underdeveloped-developing economy or sometimes in a capitalistic economy. [What is Income Inequality?]
Income inequality is most commonly measured by the Lorenz Curve. The calculation includes a cumulative percentage of total income and is plotted against the cumulative percentage of the corresponding population. The extent to which the curve sags below a straight (equality) diagonal line indicates the degree of inequality of distribution. [What is a Lorenz Curve?]
Since the New Economic Policies in 1991, the Indian Government paid special attention to poverty eradication. It has been a focal point for India for both, growth and development. India has a vast range of poverty alleviating programs starting from poverty eradicating programs like Pradhan Mantri Jan Dhan Yojana, Pradhan Mantri Gramin Awaas Yojana, Atal Pension Yojana, Pradhan Mantri Fasal Bima Yojana, Sarkari Yojana to employment opportunity enhancing programs like National Rural Employment Programme, Food for Work Programme, Rural Employment Generation Programme, Jawahar Rozgar Yojana, Jawahar Gram Samridhi Yojana, Integrated Rural Development Programme, Swarna Jayanti Shahari Rozgar Yojana, Sampoorna Grameen Rozgar Yojana.
Poverty in India has been linked to gender, religion, education, geographical location, occupation, and other qualitative factors. A deep dive into the literature is required to understand the dynamics and associations of these categorical variables with Indian poverty. As per the UNDP, poverty depends on three crucial factors:
- longevity of life
- basic education and
- access to essential economic services like safe drinking water, provision of medical and healthcare treatments so on.
According to World Bank, the Indian rural population is poorer in comparison to the Indian urban population since they suffer lack of education, employment opportunities, proper healthcare treatments, and sufficient public expenditures.
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Income inequality DATA
The data was downloaded from the official website of the Indian Human Development Survey. The website has easy access to household and individual data sets of 2004-2005 and 2011-2012. Due to the easy availability of the data sets, the two particular years were chosen for comparative studies.
The India Human Development Survey (IHDS) is an organization that conducts a national survey of 41,554 households in 1503 villages and 971 urban neighborhoods across India. The team surveys and collects data that covers multitopic areas like education, income, health, employment, economic status, marriage, fertility, gender relations, social capital, and so on. The survey of 2004-2005 and 2011-2012, both covered all states and Union territories of India. However, there was an exception i.e. Andaman & Nicobar and Lakshadweep.
There is continuous use of the individual data set in the article/paper. Merging the individual data sets of 2004-2005 and 2011-2012 was difficult. Both the files had to be sorted based on state Id, district id, PSU id, household id, Household split id and personal id. Overlapping data was difficult to extract. However, there are no household records without at least one individual record and no individual records without a household record.
IHDS was clear with which poverty line they were using. Since the poverty line keeps fluctuating; hence, the adjustment of the poverty line was on the basis of the month of interview by the IHDS team. The data and records are available in STATA, SPSS, and other econometrics compatible formats. Henceforth, running STATA commands and obtaining analyzed results were easy.
As per the primary survey conducted 23% do not belong to the poor category i.e. does not fall below the poverty line.
Indian population has 23% below the poverty line in the year 2004-05. Out of these about 69% resides in the rural area of the country. Lack of credit opportunity and education poverty pushes rural India below the poverty line. Even though Government has taken many initiatives to provide employment opportunities to this section of the society, the efforts to reap the benefits of such schemes have remained low.
Comparing the data sets of 2004-2005 and 2011-2012, it is evident that there has been a drop in the poverty percentage since 2004-2005. Indian Government had taken up plenty of measures to eradicate poverty since 2004. The focus of the public expenditure was to provide employment opportunities to underdeveloped and underprivileged societies. Employment opportunities like MNREGA and Pradhan Mantri Rojgaar Yojana had a dominating role in lowering poverty. Also, we must not ignore the fact that even in the educational sectors, seat reservations in colleges and universities for the minorities, and OBCs were high.
Comparision across the years
|Head count of surveyed individuals||100%|
|Below poverty line in 2004-2005 and 2011-2012||2.29%|
|Not poor in 2004-2005 but became poor in 2011-2012||11.89%|
|Average growth of the poverty line from 2004-2005 to 2011-2012||81.9%|
|Average growth of the household consumption from 2004-2005 to 2011-2012||40%|
|Average growth of household income from 2004-2005 to 2011-2012||8%|
Since the motive of this paper is the analyze income inequality, therefore an in-depth comparison across the years is compulsory. As we know census doesn’t cover every individual of the country. The absolute count of interviewed people with cross-sectional data (2005 and 2011) was 2,04,569. Merging the household and individual files was difficult. Both the files had to be sorted based on state Id, district id, PSU id, household id, Household split id and personal id. Overlapping data was difficult to extract. However, there are no household records without at least one individual record and no individual records without a household record.
The poverty line was adjusted based on the month of interview. Whether a person is poor or not is decided by the expenditure measure.
A person is declared below the poverty line if Expenditure per capita < poverty line
On comparing the data of the individuals and households, the following results were evident. As per the data, 2.29% of the people were below the poverty line both in 2004 and 2011. Almost 12% of the individuals who were not below the poverty line in 2004 were declared below the poverty line with the new Tendulkar poverty line of 2012. The approximate growth in household consumption was 40% whereas the income growth on average was 8%. Astonishingly, in 2011-2012 there was an increase in the poverty line by 80%. Thus, pushing many below the poverty line.
Tendulkar Poverty line is criticized severely as the line declares anybody with consumption expenditure less than INR 33 as poor. However, it does not prioritize who should receive the government benefits.
Income Inequality: Lorenz Curve
Lorenz Curve represents income inequality in the population. The extent to which the curve sags below a straight (equality) diagonal line indicates the degree of inequality of income distribution. The closer the curve to the straight line, the lower is the income inequality and vice versa.
In this paper, the data used to plot the Lorenz curve was Individual 2004-05 and 2011-12. Both the data sets had approximately 2,00,000 individual income information.
The Lorenz curve states that the inequality in 2011-12 was higher compared to 2004-05. This explains that the inequality gap has increased over time. While India is one of the fastest-growing economies in the world, it is also one of the most unequal countries. There has been a substantial rise in the income of the richer section of society. No proper literature claims could explain the reasons behind the growing inequality in India. However, most literature claims that inequality was higher in rural India as compared to urban.
The few obvious reasons for inequality in India are inadequate employment opportunities, the Indian taxing system, agricultural strategies which benefitted the richer farmers only, and the recession of 2009.
People spend huge expenses on their college education with the expectation of high-income opportunities. However, recent research proved that educated people also fell below the poverty line. We have used a PROBIT model to explain this.
Absolute poverty is the complete lack of the necessary means to meet basic personal needs, such as food, clothing, and shelter.
Extreme poverty is defined by the World Bank as living on less than US$1.90 per day. However, in India, a person is declared poor if the expenditure of a person per day is less than INR 47 in an urban area and INR 37 in a rural area.
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