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DR.

RAM MANOHAR LOHIYA NATIONAL


LAW UNIVERSITY

ECONOMICS

“INCOME INEQUALITY IN INDIA”

Submitted To Submitted By

Dr. Mitali Tiwari Aniket Sachan

Assistant Professor, Law B.A. LLB(HONS),

Dr. Ram Manohar Lohiya IInd semester

National Law University SECTION-“A”

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ACKNOWLEDGEMENT

I would like to express my special thanks of gratitude to my teacher Dr. Mitali Tiwari

who gave me the golden opportunity to do this wonderful project of Economics on the

topic “INCOME INEQUALITY IN INDIA”, Who also helped me in completing my project and

has rendered endless support, kind and understanding spirit during my project completion. I came

to know about so many new things I am really thankful to her. The completion of this project could

not have been possible without the participation and assistance of various people thus, I would

also like to thank my parents and friends who helped me a lot in finalizing this project within the

limited time frame.

I would also like to thank the Great Almighty, source of supreme knowledge for countless love

rendered on me.

ANIKET SACHAN

ROLLNO-28

BA LLB(HONS), IInd semester.

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Table of Contents
Table of Contents 3

CHAPTER 1: INTRODUCTION 4
CHAPTER 2: CAUSES OF INCOME INEQUALITY 7
UNEMPLOYMENT .................................................................................................................. 7

INFLATION .............................................................................................................................. 7

HIGHLY UNEQUAL ASSET DISTRIBUTION ...................................................................... 8

TAX EVASION ......................................................................................................................... 9

NEW AGRICULTURAL STRATEGY: ................................................................................... 9

GROWTH FACTOR ............................................................................................................... 10

CHAPTER 3: OXFAM REPORT 10


CHATER 4: SUGGESTION TO REDUCE INEQUALITY 12
PROGRESSIVE TAXATION: .................................................................................... 12

PAYMENT OF BONUS:............................................................................................. 13

CEILING ON LAND HOLDING: .............................................................................. 13

SOCIAL SPENDING: ................................................................................................. 13

PROMOTION OF LABOUR INTENSIVE MANUFACTURING: ........................... 14

CHAPTER 5: CONCLUSION 16
BIBLIOGRPAHY 17

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CHAPTER 1: INTRODUCTION
Income inequality is the gap between rich and poor i.e. is the differences in the distribution of

economic assets (wealth) and income within or between populations or individuals. It is the state

of an economy in which the shares of total income earned by the rich and poor are highly unequal.

As of Nov 2016, India is the second-most unequal country in the world.

The richest 1% of Indians own 58.4% of wealth. The richest 10 % of the Indians own 80.7 % of

the wealth. This trend is going in the upward direction every year, which means the rich are getting

richer and the poor are getting poorer.[2]Inequality worsened since the establishment of income tax

in 1922.

According to Global Wealth Report 2016 compiled by Credit Suisse Research Institute, the gap

between the world’s haves and have-nots does not appear to be getting any narrower and a mere

0.7% of the global population owns nearly half the world’s wealth. The report identified Russia as

the world’s most unequal country with a huge 74.5% of the nation’s wealth controlled by the richest

1% of people. In India and Thailand the top 1% own 58.4% and 58% of the wealth, while the

figure was 47.9 for Brazil and 43.8 for China, the ‘Independent’ reported.1

The contrast between China and India may also come as a surprise, given their similarities in terms

of huge populations and rapid growth. Their representation in the global bottom half is very

1
India second most unequal country in the world: Wealth Report.
(2018). https://www.hindustantimes.com/. Retrieved 10 March 2018, from
https://www.hindustantimes.com/india-news/india-second-unequal-country-in-the-world-wealth-
report/story-MGIa7MbWAdzhKFvwhtiIeI.html

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different, and the discrepancy is even greater in the bottom quintile which covers 31% of Indians

but only 7% of Chinese, the report said. Personal wealth in India is dominated by property and

other real assets, which make up 86% of estimated household assets, it said.

The report said that while wealth has been rising in India, not everyone has shared in this growth.

“There is still considerable wealth poverty, reflected in the fact that 96% of the adult population

has wealth below US $10,000, whereas this percentage is only 68% in China,”2

Recently there was a recent index in which India rank was also not satisfactory. India has been

ranked 132nd among 152 nations in a new index tracking commitment to reducing income

inequality.3 The index prepared by Development Finance International, Inc. and Oxfam ranks

nations on the basis of their welfare spending, the progressive nature of their tax system and

prevailing wage inequality in the labour market.

While the period 1951 to 1980 saw the poor narrowing the income gap with the well-to-do, the trend

has reversed over the period 1980-2014, they say. The Gini Coefficient for the country is estimated to

be close to 0.50, which would be an all-time high.

Gini Coefficient is a popular statistical measure to gauge the rich-poor income or wealth divide. It

measures inequality of a distribution — be it of income or wealth — within nations or States. Its

2
India second most unequal country in the world: Wealth Report. (2018). https://www.hindustantimes.com/ .
3
Prasad, G. (2018). India ranks 132 in commitment to narrow income inequality. http://www.livemint.com/ .
Retrieved 10 March 2018

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value varies anywhere from zero to 1; zero indicating perfect equality and one indicating the

perfect inequality. Gini Coefficients can be used to compare income distribution of a country over

time as well. An increasing trend indicates that income inequality is rising independent of absolute

incomes.

Chart 14: India not only has one of the highest levels of inequality in the region, but it also

shows very large increases in inequality since 1990. Its net Gini index of inequality (based on

income net of taxes and transfers) rose from 45.18 in 1990 to 51.36 in 2013. Only two countries

in the Asia-Pacific region—Papua New Guinea and China—are more unequal. Indeed, the net

Gini coefficient in India is much higher than the average of 43.69 for Latin America

4
Chakravarty, M. (2018). Just how high is income inequality in India?. Retrieved 11 March 2018, from
http://www.livemint.com/Opinion/JKZYjYjixRipa95tw2AOXK/Just-how-high-is-income-inequality-in-India.html

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CHAPTER 2: CAUSES OF INCOME INEQUALITY

UNEMPLOYMENT
Increasing unemployment, underemployment and disguised unemployment are responsible for

inequalities of income. The main reason for low level of income of the majority of Indian people

is unemployment and underemployment and the consequent low productivity of labour. Low

labour productivity implies low rate of economic growth which is the main cause of poverty and

inequality of the large masses of people. In fact, inequality, poverty and unemployment are inter-

related. Since sufficient employment could not be created through the process of planned

economic development, it was not possible to increase the income levels of most people in India

People at the bottom could raise their economic status and to an extent reduce the distance

separating them from those at the top, if they could get work. In other words, if they did not possess

adequate earning assets, they could at least earn from their labour. But there too the situation was

not favourable. For long the increase in employment opportunities remained less than the rise in

the labour force.

INFLATION

Another cause of inequality is inflation. During inflation, few profit earners gain and most wage

earners lose. This is exactly what has happened in India. Since wages have lagged behind prices,

profits have increased. This has created more and more inequality. Moreover, during inflation,

money income increases no doubt but real income falls. And this leads to a fall in the standard of

living of the poor people since their purchasing power falls.

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No doubt, inequality has increased due to rise in prices. During inflation workers in the organised

sector get higher wages which partly offset the effect of price rise. But wages and salaries of

workers in unorganised sectors (such as agriculture and small-scale and cottage industries) do not

increase. So their real income (purchase income) falls. This is how inequality in the distribution

of income increases between the two major sectors of the economy — organised and unorganised.5

HIGHLY UNEQUAL ASSET DISTRIBUTION


In India a few own a large chunk of income – earning assets. Some others, who do not own, or

own a part of the assets they operate, organise finances through banks, cooperatives, etc, and

acquire/hire productive assets.These inequalities enable the few to get incomes in the form of rent,

interest and profit. As these assets accumulate and pass on from generation to generation, the

earning capacity of these increases continuously.

As for rural areas, the ownership pattern of the most important asset, namely, land, is highly

unequal. The marginal households (with holdings less than 1 hectare), which account for as many

as 72 per cent of the rural households own very little about 17 per cent of the land.At the other

end, there are those with large holdings (of more than 10 hectares) who are about 1 per cent of the

rural households. But they have under their ownership as much as 14 per cent of the area.6

5
Inequality of Income and Wealth in India: Causes and Measures. (2018). Economics Discussion. Retrieved 10
March 2018, from http://www.economicsdiscussion.net/india/inequality-of-income/inequality-of-income-and-
wealth-in-india-causes-and-measures/12840

6
What are the Important Causes of Income Inequalities in India?. (2018). Your Article Library. Retrieved 10 March
2018, from http://www.yourarticlelibrary.com/economics/what-are-the-important-causes-of-income-inequalities-in-
india/3041

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Private ownership of property and inheritance laws is mainly responsible for highly unequal

distribution of assets.

TAX EVASION
In India, the personal income tax rates are very high. High tax rates encourage evasion and

avoidance and give birth to a parallel economy. This is exactly what has happened in India

during the plan period. Here, the unofficial economy is as strong as (if not stronger than) the

official economy. High tax rates are responsible for inequality in the distribution of income and

wealth. This is due to undue concentration of incomes in a few hands caused by large- scale tax

evasion. On the other hand, the indirect taxes give maximum revenue to the government. But

they are regressive in nature. Such taxes have also created more and more inequality over the

years due to growing dependence of the Government on such taxes.

NEW AGRICULTURAL STRATEGY:

No doubt, India’s new agricultural strategy led to the Green Revolution and raised agricultural

productivity. But the benefits of higher productivity were enjoyed mainly by the rich farmers and

landowners. At the same time, the economic conditions of landless workers and marginal

farmers deteriorated over the years. Most farmers in India could not enjoy the-benefits of higher

agricultural productivity. As a result, inequality in the distribution of income in the rural areas

has increased.

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GROWTH FACTOR
As development proceeds, the earnings of different groups rise differently. The incomes of the

upper-income and middle-income groups rise more rapidly than those of the poor. This happens

in the early stages of growth through which India is passing at present.

The explanation lies in the shift of population from agriculture which is a slow growing sector to

the modern large industrial sector which grows more rapidly. Again, there is the capital-intensive

nature of the development of the modern sector. Since this absorbs less labour, wages form a

smaller proportion of total income. Hence, the income spread is not wide enough. On the other

hand, the capital-intensive type of growth leads to concentration of income in those few hands

who supply capital.

CHAPTER 3: OXFAM REPORT


In signs of rising income inequality, India’s richest 1 per cent now hold a huge 58 per cent of the

country’s total wealth — higher than the global figure of about 50 per cent, a new study showed

on Monday.

The study, released by rights group Oxfam ahead of the World Economic Forum (WEF) annual

meeting here attended by rich and powerful from across the world, showed that just 57 billionaires

in India now have same wealth (USD 216 billion) as that of the bottom 70 per cent population of

the country. Globally, just 8 billionaires have the same amount of wealth as the poorest 50 per cent

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of the world population. According to latest survey released by the international rights group

Oxfam, richest 1% in India cornered 73% of the wealth generated in country in 2017.7

The survey shows worrying picture of rising income inequality. It was released as part of report

titled ‘Reward Work, Not Wealth’, revealing how global economy enables wealthy elite to

accumulate vast wealth even as hundreds of millions of people struggle to survive on poverty pay.

Nisha Agrawal, CEO of Oxfam India said: “It is alarming that the benefits of economic growth in

India continue to concentrate in fewer hands. The billionaire boom is not a sign of a thriving

economy but a symptom of a failing economic system. Those working hard, growing food for the

country, building infrastructure, working in factories are struggling to fund their child’s education,

buy medicines for family members and manage two meals a day. The growing divide undermines

democracy and promotes corruption and cronyism.”8

Women workers often find themselves at the bottom of the heap. Across the world, women

consistently earn less than men and are concentrated in the lowest paid and least secure forms of

work. By comparison, 9 out of 10 billionaires are men. In India, there are only four women

billionaires and three of them inherited family wealth.

Oxfam calculated that if India were to reduce inequality by a third, more than 170 million people

would no longer be poor. Government spending on health, education and social protection is

woefully low. The tax structure looks reasonably progressive on paper, but in practice, much of

7
Richest 1 percent bagged 73 percent of wealth created last year - poorest half of India got 1 percent, says Oxfam
India. (2018). Oxfam India. Retrieved 11 March 2018, from https://www.oxfamindia.org/pressrelease/2093
8
Richest 1 percent bagged 73 percent of wealth created last year - poorest half of India got 1 percent, says Oxfam
India. (2018). Oxfam India. Retrieved 11 March 2018, from https://www.oxfamindia.org/pressrelease/2093

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the progressive tax is not collected. On labour rights and respect for women in the workplace,

India also fares poorly.

CHATER 4: SUGGESTION TO REDUCE INEQUALITY


The Oxfam report relased in 2017 also provided some steps which need to be undertaken to reduce

income inequality. According to it inclusive growth should be promoted by ensuring that the

income of the bottom 40% of the population grows faster than of the top 10% so that the gap

between the two begins to close. This can be done by encouraging labour-intensive sectors that

will create more jobs, investing in agriculture and effectively implementing the social protection

schemes that exist.9

Seal the leaking wealth bucket by taking stringent measures against tax evasion and avoidance;

taxing the super-rich by re-introducing inheritance tax, increasing wealth tax, reducing and

eventually do away with corporate tax breaks; creating a more equal opportunity country by

increasing public expenditure on health and education.

Bring data transparency, produce and make available high quality data on income and wealth.

Regularly monitor the measures the government takes to tackle the issue of rising inequality.

Progressive taxation: Where corporations and the richest individuals pay more to the state in

order to redistribute resources across society, is key. Tax can play a progressive role, or a

regressive one, depending on the policy choices of the government.

9
Richest 1 percent bagged 73 percent of wealth created last year - poorest half of India got 1 percent, says Oxfam
India. (2018). Oxfam India. Retrieved 11 March 2018, from https://www.oxfamindia.org/pressrelease/2093

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Payment of Bonus: Firstly, the payment of bonus (called annual payment) has been made

compulsory in every industry.

Ceiling on Land Holding: Secondly, a ceiling on landholdings has been imposed in the rural

areas. Each household (or family) is allowed to hold a certain amount of land. Any surplus above

this is taken over by the Government and is redistributed among the landless workers and marginal

farmers. Moreover, in 1976 a ceiling on urban property has also been imposed.

Social Spending: On public services such as education, health and social protection, is also

important. Oxfam has for many years campaigned for free, universal public services.

Two key indicators are: how much has a government committed to spend on education, health and

social protection? And how progressive are the spending levels? The following chart shows the

money India has spent on public services over the past eight years; the horizontal lines represent

expenditure as a percentage of GDP, and vertical bars expenditure in rupees.10

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Inequality in India: what's the real story?. (2018). World Economic Forum. Retrieved 11 March 2018, from
https://www.weforum.org/agenda/2016/10/inequality-in-india-oxfam-explainer/

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Image: Economic Survey 2014-15, Statistical Appendix, Government of India

According to a forthcoming Oxfam report (to be published in 2017), India performs relatively

poorly on both counts. Its total tax effort, currently at 16.7% of GDP, is low (about 53% of its

potential) and the tax structure is not very progressive since direct taxes account for only a third

of total taxes.

When it comes to the second indicator (levels and progressivity of social-sector spending), India

compares less well. Only 3% of GDP goes towards education and only 1.1% towards health.

Promotion of Labour Intensive Manufacturing: The failure to promote labour-intensive

manufacturing like; Construction, Textile, Clothing, Footwear etc. is the single most reason of

rising inequalities. The Labour-intensive manufacturing has the potential to absorb millions of

people who are leaving farming.

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The proportion of the labour force in agriculture has come down, but the workers who have left

farms have not got jobs in modern factories or offices. Most are stuck in tiny informal enterprises

with abysmal productivity levels. If India could somehow reverse this trend and promote labour-

intensive manufacturing than inequality could fall.

Skill Development: The development of advanced skills among the youth is a prerequisite if India

wants to make use of its demographic dividend. The skilling of youth by increasing investment in

education is the only way we can reduce inequality. India needs to become a Skill-led economy.

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CHAPTER 5: CONCLUSION
The government should follow the following measure to minimize income inequality. Although it

cannot be eliminated in one go but steps could be ensured to minimize it and make it tend to

minimal. Policies that can affect the level of economic inequality include redistribution between

rich and poor, making it easier for people to climb the ladder of opportunity; and estate taxes,

which are taxes on inheritances. Pushing too aggressively for economic equality can run the risk

of decreasing economic incentives. However, a moderate push for economic equality can increase

economic output, both through methods like improved education and by building a base of political

support for market forces.

The dream of ending poverty: Oxfam has calculated that if India stops inequality from rising

further, it could end extreme poverty for 90 million people by 2019. If it goes further and reduces

inequality by 36%, it could virtually eliminate extreme poverty.

India – along with all the other countries in the world – has committed to attaining the Sustainable

Development Goals by 2030, and to ending extreme poverty by that year. But unless we make an

effort to first contain and then reduce the rising levels of extreme inequality, the dream of ending

extreme poverty for the 300 million Indians – a quarter of the population – who live below an

extremely low poverty line, will remain a pipe dream.

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BIBLIOGRPAHY
Inequality in India: what's the real story?. (2018). World Economic Forum. Retrieved 11
March 2018, from https://www.weforum.org/agenda/2016/10/inequality-in-india-oxfam-
explainer/

Inequality of Income and Wealth in India: Causes and Measures. (2018). Economics
Discussion. Retrieved 10 March 2018, from
http://www.economicsdiscussion.net/india/inequality-of-income/inequality-of-income-
and-wealth-in-india-causes-and-measures/12840

What are the Important Causes of Income Inequalities in India?. (2018). Your Article
Library. Retrieved 10 March 2018, from
http://www.yourarticlelibrary.com/economics/what-are-the-important-causes-of-income-
inequalities-in-india/3041

India second most unequal country in the world: Wealth Report. (2018). Retrieved 10
March 2018, from https://www.hindustantimes.com/india-news/india-second-unequal-
country-in-the-world-wealth-report/story-MGIa7MbWAdzhKFvwhtiIeI.html

Richest 1 percent bagged 73 percent of wealth created last year - poorest half of India
got 1 percent, says Oxfam India. (2018). Oxfam India. Retrieved 11 March 2018, from
https://www.oxfamindia.org/pressrelease/2093

Chakravarty, M. (2018). Just how high is income inequality in India?. Retrieved 11


March 2018, from http://www.livemint.com/Opinion/JKZYjYjixRipa95tw2AOXK/Just-
how-high-is-income-inequality-in-India.html

All you wanted to know about...Gini Coefficient. (2018). @businessline. Retrieved 11


March 2018, from https://www.thehindubusinessline.com/opinion/columns/slate/all-you-
wanted-to-know-aboutgini-coefficient/article9895692.ece

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