State of Inequality in India Report

In News

• Recently, the Institute for Competitiveness released a report titled “The State of Inequality in India”.

Major suggestions by the report

• Universal basic income (UBI) scheme:
  • It has suggested that the Government should launch a guaranteed employment programme for the urban unemployed and roll out a universal basic income (UBI) scheme to reduce income gaps.
• Raise minimum income:
  • The report also recommended steps to raise minimum income and more government spending on the social sector to make vulnerable sections immune to sudden shocks.
• Labour force participation:
  • Looking at the difference between the labour force participation rate in rural and urban areas, we can understand that the urban equivalent of schemes like MGNREGS that are demand-based and offer guaranteed employment should be introduced so that the surplus-labour is rehabilitated.
• Expenditure towards social services:
  • The Government must allocate more percentage of the expenditure towards social services and the social sector to make the most vulnerable population resilient to sudden shocks and stop their descent into poverty.
• Mapping the poverty:
  • The most important aspect of measuring poverty in a multi-dimensional context requires mapping the mobility in and out of poverty.
• Periodic Labour Force Survey (PLFS):
  • The results of the three rounds of the Periodic Labour Force Survey (PLFS) noted that in the three years excepting for very marginal changes, the top 1 percent of population held 6-7 per cent of the total income earned, while the top 10 per cent held a third.
  • The share of the top 1 percent of the population in the country’s total income increased from 6.14 per cent to 6.82 per cent.
• The report shows a relatively better picture of the country’s income pyramid than in the World Inequality Report (WIR) 2022:
  • According to the WIR, India stood as a poor and very unequal country, with an affluent elite.
  • In 2021, the top 10% of the population had 57% of the total national income and the top 1% held 22%.
  • The bottom half of the population held just 13% of the national income in 2021.

Major challenges cited by the report

• No data to measure income inequality:
  • In India, we have never had comprehensive data and we will never have data measuring income inequality.
  • The closest was NCAER data many years ago.
• Very old and outdated data:
  • Unfortunately, it’s the case that the last comprehensive NSS data on consumption and expenditure is for 2011-12.
• No exact poverty figures:
  • In the absence of data on consumption expenditure, a clear articulation of the poverty line, we do not know what poverty numbers are.
  • All kinds of people do some kind of extrapolation on the basis of 2011-12 data, on the basis of assumed Tendulkar poverty line and come up with all kinds of estimates.
• The pandemic then led to a decline in national income in 2020-21:
  • Given the increased pace of formalisation of the economy during the last two years, many analysts reckon the income gap may have widened since 2019-20.

Advantages of Minimum Wages

• Standard of living: Higher earnings would improve the overall standard of living for minimum wage workers by providing them with a more appropriate income level to handle the cost of living increases.
• Reduction in poverty: a much larger number of individuals and families will move out of poverty if they earned more money.
• Improved employee morale resulting from higher wages.
• Employees who are more inclined to stay with a company longer could benefit from greater advancement and from an overall reduction in job-related relocation expenses.
• A boost to economic growth is another potential advantage of increasing the minimum wage, as consumer spending typically increases along with wages.

Disadvantages of increasing the minimum wage

• Higher prices: raising the minimum wage would likely result in wages and salaries increasing across the board, thereby substantially increasing operating expenses for companies that would then increase the prices of products and services to cover their increased labour costs.
• Potential job losses: Many economists and business executives who point out that labour is a major cost of doing business argue that businesses will be forced to cut jobs to maintain profitability.
• Increased labour market competition: the possibility that a higher minimum wage would result in increased labour market competition for minimum wage jobs.

Steps to raise minimum income

• Monetary policy that targets full employment, with wage growth matching productivity gains.
• Targeted employment programs: To obtain full employment for all, we will need to undertake policies that can direct jobs to areas of high unemployment.
• Public investment and infrastructure: Undertaking a sustained program of public investment can create jobs and raise our productivity and growth.

What is Universal Basic Income (UBI)?

• A basic income is an income unconditionally granted to all citizens on an individual basis, without means test or work requirement.
• It is a form of minimum income guarantee that is being paid irrespective of any income from other sources.
• The idea was endorsed by former chief economic advisor Arvind Subramanian in the Economic Survey for FY17 in place of subsidy transfer.
• He had calculated the economic cost of the UBI at 4.9 per cent of GDP.
• The International Monetary Fund endorsed the idea of India launching a fiscally-neutral UBI scheme by eliminating food and fuel subsidies.

• Components: It have three components:
  • Universality: UBI for all
  • Unconditionality: UBI without any conditions.
  • Agency: UBI can make a citizen move away from being a subject of government welfare programmes to agents of its own change.

Significance of UBI

• It will guarantee to each individual a minimum income for a dignified life with access to basic goods.
• The payments could help stabilise the economy during recessionary periods.
• It will promote social justice by reducing poverty.
• Increase the purchasing power of every poor which will further increase aggregate demand.
• Easy to implement because no identification of the beneficiary is involved.
• Reduce the wastage of government money because its implementation is very simple.

Challenges of UBI

• Disincentivization to the work and the work productivity may decrease.
• It can cause more social problems like more alcohol consumption, tobacco consumption etc.
• Inflation could be triggered because of the increase in demand for goods and services.

Way Forward

• What we do have and what we should have is data on distribution of consumption expenditure.
• The only data which can be used now is PLFS which is what this report mostly uses.

Source: IE