Inequality may not mean Poverty

What is the issue?

• Increasing inequality in recent years has become an issue of concern in several countries of the world.
• However, it need not necessarily mean that poverty is also increasing.
• The trends in poverty reduction in India prove this point.

What is Gini coefficient?

• Gini coefficient measures inequality of a distribution (income or wealth) within nations or States.
• Its value varies anywhere from zero to 1.
• Zero indicates perfect equality, and 1 indicates perfect inequality.
• The poverty ratio is equally important as the Gini coefficient, in analysing issues relating to growth and distribution.

How is the inequality trend?

• Consumption expenditure is a measure of economic wellbeing and is thus reflective of equality or inequality patterns.
• The Gini coefficient of consumption expenditure for rural areas declined marginally between 1983-84 to 1993-94.
• But it recorded a marginal rise during the high growth period of 2004-05 and 2011-12.
• In the case of urban areas, it stayed the same from 1983-84 to 1993-94, and increased modestly from 2004-05 to 2011-12.
• In general, inequality in rural areas declined.
• But inequality increased in urban areas in the post-reform period (2004-05 to 2011-12).
• The trend is particularly more pronounced in the high growth period.

What are the concerns with inequality measurements?

• Consumption inequality - Income and wealth inequalities are much higher than consumption inequality.
• The consumption Gini coefficient was 0.36 in 2011-12 in India.
• On the other hand, inequality in income was high with a Gini coefficient of 0.55.
• Also, the wealth Gini coefficient was 0.74 in 2011-12.
• Thus, income Gini was about 20 points higher than consumption Gini.
• While the wealth Gini was nearly almost 40 points higher than consumption Gini.
• Data base - The data base for computing income inequality is not as solid as the base for consumption expenditure.
• Using income tax data for computing income distribution has many problems.
• In India, only 3-5% of people come under the income tax net.
• How real do the data reflect the true picture of inequality is highly uncertain.
• The differences between consumption Gini coefficient and income Gini coefficient, etc prove this point.

What are the trends in poverty decline?

• Measure of poverty based on Consumer Expenditure data for the period 1983 to 2011-12 highlights a declining trend.
• Pre-reform - In the pre-reform period (before 1991), overall poverty declined only marginally during 1983 to 1993-94.
• In fact, the number of persons below the poverty line stayed almost the same at 320 million during this period.
• Post-reform - Poverty declined faster in the post-reform period.
• The decline was more evident in the 2004-2012 period as compared to 1993-2005.
• 2004-2012 was the period of highest economic growth since Independence.
• This timeframe witnessed the fastest decline of poverty compared to earlier periods.

What do the trends in poverty suggest?

• Clearly the post-reform period recorded a considerable decline in poverty when compared to the pre-1991 period.
• A World Bank study shows that among other things, urban growth was the most important contributor to this rapid decline.
• The contribution is true even for poverty reduction in rural areas in the post-1991 period.
• There is a concern that the Tendulkar cut-off line for determining poverty ratio is low and needs to be raised.
• But even if the poverty cut-off is raised to 1.5 times the Tendulkar cut-off, the reduction in poverty ratio is evident.

What does this imply?

• Generally, in the early period of economic growth, distribution of income tends to worsen.
• Only after reaching a certain level of economic development, an improvement in the distribution of income occurs.
• Undoubtedly, inequality in itself has several undesirable economic and social consequences.
• But, even if the indicators on inequality remain the same, the poverty ratio can be declining.
• Thus, measuring inequality is not the same as measuring the changes in the level of poverty.
• This has been particularly true of India, where poverty has declined in spite of rise in inequality.

Source: The Hindu