Income inequality dips since FY17; formalisation, Covid alter trend: SBI

Contrary to what many think, the Covid pandemic may have been a leveller in terms of income inequality, with the poor getting protected through measures such as food transfers, SBI Research says in its latest Ecowrap note. "Against... the cacophony that income inequality in India has worsened during pandemic, given that India has a large presence of informal economy, does not stand the test of data scrutiny," says the note.

The data shows that India has done quite well during the pandemic in terms of navigating income shocks across deciles of the population. Though India's official poverty ratios are till the year 2011-12, independent estimates using the Periodic Labour Force Survey (PLFS) show India's poverty ratio has declined to 17.9% in 2020-21 from 21.9% in 2011-12, with poverty in urban areas lower than in rural ones.

"There is now a large debate of how the ongoing Covid-19 pandemic may have exacerbated global income inequality, partly reversing the decline of the previous two decades. Most importantly, within-country income inequality may have also increased because of job and income losses among lower-income population groups," says the note, written by Soumya Kanti Ghosh, SBI's chief economic adviser.

Studies in India have also revealed that inequality declined during the pandemic. The SBI report attributes two reasons to support the argument. Firstly, the gap between GDP (gross domestic product) and GDI (gross domestic income) in national accounting parlance needs to be more aligned within a specified range. "Data from different economies indicate that the gap between GDP and GDI (officially known as “the statistical discrepancy”) is typically about 1%. However, estimates show that since late 2020 the discrepancy between GDP and GDI has been much larger in the case of the U.S." But, what is the case with India, which doesn't have GDI but NSO provides data on GNI?

For India, the average gap between GDP and GNI was around 1.1% during FY12 to FY20. However, this gap increased marginally to 1.3% in FY21 and then 1.6% to FY22. When compared the difference from pre-pandemic levels, both GDP and GNI were 1.3% higher, which indicates income decline during the pandemic and subsequent rise was strikingly similar to output decline and then a rapid recovery, says the report.

"This shows that any impact on income decline was relatively short-lived during the pandemic," it adds.

Secondly, using output and income data for 33 states for the decade ending FY21 shows that the output growth, as measured by gross state domestic product (GSDP), has steadily increased over the decade, with a minor blip in FY21. But the estimated Gini coefficient, a measure of income inequality has been declining even before pre-pandemic and has moved in a very narrow range. "The decline in income inequality has been significant since FY17, the year of big bang formalisation that started with demonetisation, RERA reforms and GST reform in FY18," says the report.

The SBI report says at a broader level, the Gini coefficient remains constant — in the range of 0.57 to 0.58 — throughout the period (FY12 to FY21). In the Indian context, it is thus an incorrect conjecture to assume that inequality has worsened during the pandemic, claims the SBI report.