Economic reforms in India were concomitant with a dramatic rise in income inequality

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Excerpts from the chapter “Income Inequality in India” in “World Inequality Report 2018”, prepared by the World Inequality lab, an international non-profit organization:

  • Income inequality in India has reached historically high levels. In 2014, the share of national income accruing to India’s top 1% of earners was 22%, while the share of the top 10% was around 56%.
  • Inequality has risen substantially from the 1980s onwards, following profound transformations in the economy that centered on the implementation of deregulation and opening-up reforms.
  • Since the beginning of deregulation policies in the 1980s, the top 0.1% earners have captured more growth than all of those in the bottom 50% combined. The middle 40% have also seen relatively little growth in their incomes.
  • This rising inequality trend is in contrast to the thirty years that followed the country’s independence in 1947, when income inequality was widely reduced and the incomes of the bottom 50% grew at a faster rate than the national average.
  • The temporary end to the publication of tax statistics between 2000–2010 highlights the need for more transparency on income and wealth statistics that track the long-run evolution of inequality. This would allow for a more informed democratic debate on inequality and inclusive growth in India.

India entered the digital age without inequality data

India introduced an individual income tax with the Income Tax Act of 1922, under the British colonial administration. From that date up to the turn of the twentieth century, the Indian Income Tax Department produced income tax tabulations, making it possible to track the long-run evolution of top incomes in a systematic manner. Given the profound evolutions in India’s economy since the country’s independence, this provides a rich data resource for researchers to access.Given the profound evolutions in India’s economy since the country’s independence, this provides a rich data resource for researchers to access.

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Research has shown that the incomes of the richest—the “top incomes”—declined significantly from the mid-1950s to the mid-1980, but this trend was reversed thereafter, when pro-business, market deregulation policies were implemented. Little has been known, however, about the distributional impacts of economic policies in India after 2000, when real income growth was substantially higher than in previous decades.

This is largely because the Indian Income Tax Department stopped publishing income tax statistics in 2000, but also because self-reported survey data often do not provide adequate information concerning the top of the distribution. In 2016, the Income Tax Department released tax tabulations for recent years, making it possible to track the evolution of income inequality during the high average income growth years post-2000.

Inequality rose from the mid-1980s after profound transformations of the economy

Over the past four decades, the Indian economy has undergone profound evolutions. In the late seventies, India was recognized as a highly regulated, centralized economy with socialist planning. But from the 1980s onwards, a large set of liberalization and deregulation reforms were implemented. Liberalization and trade openness became recurrent themes among Indian policymakers, epitomized by the Seventh Plan (1985–1990) led by Prime Minister Rajiv Gandhi (1984– 1989). That plan promoted the relaxation of market regulation, with increased external borrowing and increased imports.

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These free-market policy themes were then further embedded in the conditions attached to the International Monetary Fund’s assistance to India in its balance of payment crisis in the early 1990s, which pushed further structural reforms for deregulation and liberalization. This period also saw the tax system undergo gradual transformation, with top marginal income tax rates falling from as high as 97.5% in the 1970s to 50% in the mid-1980s.

The structural changes to the economy along with changes in tax regulation, appear to have had significant impact on income inequality in India since the 1980s. In 1983, the share of national income accruing to top earners was the lowest since tax records started in 1922: the top 1% captured approximately 6% of national income, the top 10% earned 30% of national income, the bottom 50% earned approximately 24% of national income and the middle 40% just over 46%.

But by 1990, these shares had changed notably with the share of the top 10% growing approximately 4  percentage points to 34% from 1983, while the shares of the middle 40% and bottom 50% both fell by 2 percentage points to around 44% and 22%, respectively. What came to be known as the first set of economic reforms were implemented from 1991 to 2000 and in practice were the continuation of the mid 1980s policy shift. These reforms placed the promotion of the private sector at the heart of economic policies, via denationalizations, disinvestment of the public sector and deregulation (de-reservation and de-licensing of public companies and industries), weighing the economy substantially in favor of capital above labor.

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These reforms were implemented both by the Congress government and its Conservative successors. These reforms were concomitant with a dramatic rise in Indian income inequality by 2000. The top 10% had increased its share of national income to 40%, roughly the same as that attributable to the middle 40%, while the share of the bottom 50% had fallen to around 20%. These pro-market reforms were prolonged after 2000, under the 10th and subsequent five-year plans. The plans ended government fixation of petrol, sugar and fertilizer prices and led to further privatizations, in the agricultural sector in particular. Inequality trends continued on an upward trajectory throughout the 2000s and by 2014 the richest 10% of the adult population shared around 56% of the national income. This left the middle 40% with 32% of total income and the bottom 50%, with around half of that, at just over 16%.

Indian inequality was driven by the rise in very top incomes

Inequality within the top 10% group was also high. The higher up the Indian income distribution one looks, the faster the rise in their share of the national income has been since the early 1980s. The income share of India’s top 1% rose from approximately 6% in 1982–1983 to above 10% a decade after, then to 15% by 2000, and further still to around 23% by 2014. The latest data thus shows that during the first decade after the millennium, the share of national income attributable to the top 1% grew to be larger than that pertaining to the bottom 50%. By 2014, the national income share of the bottom 50%—a group of approximately 390 million adults—was just two-thirds of the share of the top 1%, who totaled 7.8 million.

An even stronger increase in the share of national income was experienced by the top 0.1% and top 0.01%, whose shares grew fivefold and tenfold, respectively, from 2% and 0.5% to almost 10% and 5%, between 1983 and 2014. Income growth rates at the very top were extreme. These evolutions are consistent with the dynamics of Indian wealth inequality, which exhibit a strong increase in the top 10% wealth share in the recent period, in particular after 2002. Highly unequal income growth at the top mechanically drives wealth inequality across the population, which in returns fuels income concentration.

inequal5The recent surge in inequality mirrors inequality declines from the 1940s to the 1980s

After independence, Jawaharlal Nehru implemented a set of socialist policies, with strict government control over the economy, with an explicit goal to limit the power of the elite. The policies implemented by himself and his followers, including his daughter Indira Gandhi, up to the late 1970s, included nationalizations, strong market regulation and high tax progressivity. Nationalizations involved the railways and air transport in the early-1950s, oil in the mid-1970s and banking throughout the entire period, to cite but a few.

Along with the transfer of private to public wealth and their implicit reduction in capital incomes, nationalizations brought government pay-scale setting with them that compressed wage distributions. In the private sector, incomes were constrained by extremely high tax rates: between 1965 and 1973, top marginal income tax rates rose from 27% to almost 98%. These changes may have discouraged rent-seeking behavior at the top of the distribution, which can be seen as an efficient strategy in the presence of excessive bargaining power and rent-seeking activity. The impact on income inequality was substantial, as the top 1% income share decreased from 21% before the second World War to approximately 10–12% in the 1950s and 1960s and fell further to 6% in the early 1980s.

Revisiting “Shining India’s” income growth rates

How do these vast institutional and policy changes translate in terms of income growth rates for different groups of the population? The average growth of real incomes has varied notably between the different groups in the income distribution since the 1950s. The annual real incomes of the bottom 50% grew at a faster rate than the countrywide average during the 1960s and 1970s when socialist central planning dominated the Indian economy, and at a notably higher pace than the growth experienced by those in the top 10% and top 1% of earners. However, this dynamic changed dramatically during the 1980s and has remained as such ever since.

The 1980s saw a much higher average income growth rates than in the previous decades, but growth was only marginally higher for the bottom 90% of the population. High growth was in fact concentrated among the top 10%. This situation was prolonged throughout the 1980–2000s. During the 2000s, the annual real income growth of the top 1% was close to 8.5%, followed by the top 10% at around 7 % and the bottom 50% at less than 2.5 %. India’s countrywide average was 4.5 % over the decade. Between 1951–1980, the higher the group in the distribution of income, the lower the growth rate they experienced. Real per-adult incomes of the bottom 50% and middle 40% groups grew substantially faster than average income, increasing by 87% and 74% respectively, compared to the 65% growth of average income per adult.

Furthermore, the top 0.1%, top 0.01% and top 0.001% income groups experienced a significant reduction in their real incomes, falling -26%, -42% and -45% respectively over the 30-year period. The bottom 50% group captured 28% of total growth between 1951 and 1980, while the middle 40% captured almost half of total growth. It is particularly interesting to compare the pre-1980 with the post-1980 growth rates. From 1980 to 2014, the bottom 50% and middle 40% grew at 89% and 93%, respectively. Whereas average income growth is substantially higher after 1980, there is very little difference in growth rates for the bottom 50% and middle 40%. Since 1980, it is also striking that the top 0.1% earners captured more of the total growth than the bottom 50% (12% versus 11% of total growth).

The top 0.1% of earners represented less than 800000 individuals in 2014, this is equivalent to a population smaller to Delhi’s IT suburb, Gurgaon. It is a sharp contrast with the 389 million individuals that made up the bottom half of the adult population in 2014. At the opposite end of the distribution, the top 1% of Indian earners captured as much growth as the bottom 84%. The bottom 50% earned significantly less than the average income per adult, receiving less than one-third of the nationwide mean income before tax, while the average income of the middle 40% was around four-fifths the national average.

Those in the top 10% earned five times the national average, and when one examines further up the income distribution, the same exponential trend as seen in the growth statistics is evident. The top 1% of earners, for example, received around €134600 (Rs 3.12 million) per year on average, while the top 0.1% receive approximately €533700 (Rs 12.4 million), 22 and 86 times the average income for Indian adults, respectively. For the top 0.001%, this ratio is 1871.

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