Explained: The rich-poor gap in India

Why in news?

Recently World Inequality Report has been released by World Inequality Lab. The findings flags India as a poor and very unequal country

What are the key findings?

The latest World Inequality Report flags India as a poor and very unequal country, with the top 10% holding 57% of national income in 2021, and the bottom 50% holding just 13%.
The report also flags a drop in global income during 2020.
Half the dip was in rich countries, and half in low-income and emerging countries. It attributes this primarily to the impact of “South and Southeast Asia, and more precisely” India.

What are the Key findings for India?

Income and Ownership - It says India’s middle class is relatively poor holding 29.5% of the total national income, compared with the top 10% and 1% who own 65% and 33% respectively.
The top 10% earned over 20 times more than bottom 50%. The bottom 50% owns a mere 6%.
Pre-tax national income - The share of the top 10% and bottom 50% in pre-tax national income has remained broadly constant since 2014.
The quality of inequality data released by the government has seriously deteriorated, making it particularly difficult to assess recent inequality changes
As per the recent Multi-dimensional Poverty Index prepared by Niti Aayog, one in every four people in India was multi-dimensionally poor.
Bihar has the highest such proportion (51.91%), followed by Jharkhand (42.16%) and Uttar Pradesh (37.79%).

What is the trend regarding global income?

National income vs Private income: Countries have become richer in last 40 years but their governments have become significantly poorer. This trend got magnified due to the pandemic.
As per the report there is a drop in global income, which was impacted significantly due to India.
When India is removed from the analysis the global bottom 50% income share actually increased slightly in 2020.
The share of wealth held by public actors is close to zero or negative in rich countries, meaning that the totality of wealth is in private hands.
This trend has been magnified by the Covid crisis because governments borrowed 10-20% of GDP from the private sector.

How is inequality distributed globally?

Ownership basis - The poorest half of the global population “barely owns any wealth” (2% of the total), whereas the richest 10% owns 76%.
The richest 10% currently takes 52% of global income, and the poorest earns just 8%.
Region specific - The Middle East and North Africa (MENA) are the most unequal regions in the world.
Europe has the lowest inequality levels.
Top 10%’s income share in various regions
- Europe - 36%
- MENA – 58%
- East Asia – 43%
- Latin America – 55%

What Private Wealth to National Income Ratio tells on inequality?

Private Wealth to National Income Ratio – It is defined as the ratio net financial assets of all households in a country to national income of a country.
Increase in this ratio indicates that either private wealth increases or national income decreases.
Global wealth was equal to 510 trillion euros in 2020. It is about 600% of national income.
The ratio rose from around 450% in the early 1990s to about 600% today indicating increase in private wealth.
High-income countries - In high-income countries, in 1970, private wealth–national income ratios ranged between 200-400%.
During global financial crisis 2008 these ratios averaged to 550%.
Emerging economies - Large emerging economies such as China and India experienced faster increases than wealthy countries.
This is due to transition from communism (in China and Russia) or from a highly regulated economic system (in India).
In India, private wealth increased from 290% in 1980 to 560% in 2020.
Global inequalities seem to be about as great today as they were at the peak of Western imperialism in the early 20th century, the report said.
The rise in private wealth has also been unequal within countries and at world levels.
Since the mid-1990s, the top 1% globally took 38% of all additional wealth accumulated, whereas the bottom 50 per cent captured just 2%.
The wealth of the richest individuals on earth has grown at 6 to 9% per year since 1995, whereas average wealth has grown at 3.2% per year.

What are other findings regarding inequalities?

Women - Women’s share of total incomes from work was about 30% in 1990, and is less than 35% now, the report notes.
Inequalities within countries are now greater than those between countries.
Within countries, the gap between the average incomes of the top 10% and the bottom 50% almost doubled from 18 times in 1820 to 41 times in 1910.
Ecological inequalities - global income and wealth inequalities are “tightly connected to ecological inequalities and to inequalities in contributions to climate change”. The top 10% of emitters is responsible for close to 50% of all emissions, while the bottom 50% contributes 12%.

What the report recommends?

Taxing the rich - The report has suggested levying a modest progressive wealth tax on multimillionaires.
The report wants people to be grouped based on their wealth as people
- owning more than $1 million
- who own over $10 million
- own over $100 million
- own more than a billion dollars
It recommends a global effective wealth tax rate of
- 1.2% for wealth over $1 million
- 0.6% for wealth between $1-10 million
- 1.1% rate for wealth group $10-100 million
- 5% rate for wealth between $1 billion and $10 billion.

Reference