What happened to poverty during the last decade has now become a fierce debate. The curiosity is justified, given how eventful the decade was, with major catastrophic events, both policy-induced and natural. first the drought in 2014 and 2015, then demonetisation and India’s hurried introduction of the Goods and Services Tax (GST) and finally the Covid pandemic; The impact on the economy is clearly visible, with the average growth rate falling to its lowest in three decades. However, the real issue of who gained and who lost is still a matter of debate. As far as poverty reduction is concerned, the balance of evidence is largely in favor of the vanishing past decade. But it also points to a decline in inequality.
Consumption expenditure from the Office for National Statistics has been the mainstay of inequality measurement. But in the absence of consumption survey after 2011-12, it becomes difficult to say anything conclusively. The previous survey in 2017-18 was abruptly rejected by the government without any valid explanation. Its leaked findings revealed an increase in poverty between 2011-12 and 2017-18. Follow-up Periodic Labor Force Survey (PLFS) data confirmed the declining trend in consumption expenditure and labor incomes after 2017-18. Data from the Consumption Survey also showed that inequality had actually decreased, albeit marginally.
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Based on comparable ‘modified mixed recall periods’, the rural Gini – used to measure inequality – fell from 28.7 in 2011-12 to 25.8 in 2017-18. The decline was greater in urban areas, with the Gini reading falling from 36.7 to 32.9. These numbers are not outliers and some evidence of this has emerged in subsequent PLFS surveys. The All India Debt and Investment Survey (AIDIS), which is used to track wealth inequality, reinforces this trend. Unlike the consumption and PLFS surveys, estimates of wealth inequality from the AIDIS do not show a sharp decline, but they do confirm that wealth inequality has not increased in 2019, or has remained stable at 2012 levels. Of course, there are other private surveys that suggest inequality may have increased, but even in these the increases seem modest.
In particular, there has been little debate on the trend of inequality relative to poverty. This is not surprising, as India is still a country of extreme poverty, despite claims of reduction. The issue, however, is not the extent of the decline in inequality, but what these trends represent and its implications for overall growth and income distribution in the economy.
It seems counter-intuitive that inequality fell in a period when there is overwhelming evidence of an increase in poverty. Although there is no clear explanation for this puzzle, it appears to be a case of “flattening down” a term used by Derek Parfitt and Professor S. The decline in inequality is not the result of any transfer of income from the rich to the poor or a sharp increase in their incomes, but rather a sharp decline in incomes among the middle class and the affluent. Analyzes of all available evidence support this explanation. It also fits with the broader trend of recession in our economy, which has affected not only the poor, but almost every section of the income spectrum, with the possible exception of the very rich. The PLFS earnings data also corroborates this by showing a sharp decline in the earnings of regular workers as compared to casual workers.
It is also likely that the poor were better positioned to withstand economic shocks and recessions because of the expansion of India’s social security base over the past two decades. There has been a massive expansion of the Public Distribution System after the National Food Security Act came into force and free rations were given during the pandemic. Even schemes like rural employment guarantee were helpful in saving the poor in these difficult circumstances.
So while welfare measures have provided basic protections to the poor, the decline in income-driven inequality of the non-poor calls into question the sustainability of economic growth over the medium to long term. Evidence in recent years confirms weak demand in the economy due to weak discretionary spending. Not only did this contribute to the slowdown, but it also delayed the revival of growth. If this continues, we may face further hurdles in the way of broad-based economic revival.
Of course, it is necessary to strengthen the social safety net for the poor. But any plan for economic revival will be incomplete without efforts to revive the purchasing power of India’s large middle class.
Himanshu is Associate Professor at Jawaharlal Nehru University and Visiting Fellow at the Center de Sciences Humanes, New Delhi.
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