India must fill data gaps on inequality before policy can address it properly
Summary
- Current estimates of inequality do not tell us much about the process of wealth concentration in the country, and how that varies across regions.
For a long time, India was considered to be a country with low levels of income inequality. While inter-caste inequality was recognized, inequality across income classes wasn’t seen as a big problem. The lack of income distribution data meant that economists relied on official consumption expenditure data to measure income inequality. When compared with other countries (which had data on income distribution), Indian levels of economic inequality appeared to be fairly benign.
Economists always knew that the Indian metric of inequality was problematic. Since the rich save more than the poor, the distribution of consumption expenditure across households tends to be less unequal than the distribution of income. Yet, these estimates were officially endorsed (by the erstwhile Planning Commission) and widely used.
Over the past two decades, the narrative on inequality has shifted considerably as new data-sets and innovative estimation techniques have forced a re-appraisal of economic inequality in the country. The first blow against the old consensus came from the India Human Development Survey (IHDS). The two IHDS rounds conducted in 2004-05 and 2011-12 provided nationally representative estimates of income distribution. They showed that consumption inequality was in line with the official estimates, and comparable to developing country peers, but income inequality in India was higher than in most parts of the world.
As concerns over economic inequality intensified globally, other attempts at estimating income and wealth inequality followed. Investment bank Credit Suisse began compiling estimates of wealth inequality across the globe after the 2008 global financial crash. Its 2023 report combines data from surveys, financial accounts, regulatory information and rich lists to rank countries based on wealth inequality. As in other years, India stands out as a country with an exceptionally high concentration of wealth.
A recent research paper by economists Ishan Anand and Rishab Kumar arrives at similar conclusions. Correcting for under-estimation of wealth in India’s official debt and investment surveys, their estimates suggest a marked rise in wealth inequality over the past decade. Estimates by French economist Thomas Piketty and his colleagues based on survey and tax data suggest that the share of the super-rich in India’s income pie has been growing since the 1980s.
Note, all these estimates have their share of problems. Survey data on income and wealth allow better assessment of inequality as compared to consumption surveys. Yet, they too provide underestimates of the true levels of income and wealth. Tax data tends to capture only a small fraction of the income distribution in developing countries. When such countries witness tax reforms that lead to better assessment of top income earners, the resulting improvement in tax collections can be misconstrued as evidence of growing inequality. Rich lists can help correct for the missing information on the super-rich (say the top 0.01%) but are unhelpful when it comes to estimating the true incomes and wealth of the rest of the affluent class (say the top 10% of income-earners).
Given the incomplete and often patchy data on which they are based, the new estimates of inequality are far from perfect. They do not tell us much about the process of wealth concentration in the country, and how that varies across regions.
One recent hypothesis on wealth concentration in India suggests that each urban centre is dominated by a few families. These ‘octopi’ families have their tentacles wrapped around most avenues of wealth creation, a report from wealth management firm Marcellus suggests. Fifty such families in a million-plus city or 20 families in a small town may end up controlling 80% of the wealth, it claims.
Often, members of such octopi families branch off into different lines of businesses. Gradually, a mini-conglomerate is built. It is then able to use its financial, social and political capital to consolidate its share of income and wealth flows. The hypothesis is interesting, but there isn’t enough data in the report to back it.
Nonetheless, it is in line with most other reports on the subject, which suggest that inequality in India is exceptionally high. Rather than scoff at such reports, policymakers need to study the issue closely. It is important to get a better handle of the magnitude and nature of the problem before we identify possible remedies.
Soon after independence, India’s national accounting pioneers made several attempts to compute the distribution of income and wealth. One such study by Moni Mukherjee paired consumption data from surveys with savings data from the Reserve Bank of India (RBI) to estimate decile-wise income shares. Such efforts need to be revived.
Officials from the ministry of statistics and programme implementation, RBI and the income tax department need to work together to create a new database on income and wealth distribution. Compared to individual researchers, official agencies are likely to require fewer assumptions to arrive at detailed estimates of income and wealth distribution across the country.
Economic inequality will likely remain a key challenge for India in the years to come. A well-prepared official database will help us have a reasoned debate, and arrive at a broad consensus to tackle this issue.
This is the first of a three-part series on measurement of inequality in India.
