Inequality may not mean Poverty

What is the issue?

Increasing inequality in recent years has become an issue of concern in several countries of the world.
However, it need not necessarily mean that poverty is also increasing.
The trends in poverty reduction in India prove this point.

What is Gini coefficient?

Gini coefficient measures inequality of a distribution (income or wealth) within nations or States.
Its value varies anywhere from zero to 1.
Zero indicates perfect equality, and 1 indicates perfect inequality.
The poverty ratio is equally important as the Gini coefficient, in analysing issues relating to growth and distribution.

How is the inequality trend?

Consumption expenditure is a measure of economic wellbeing and is thus reflective of equality or inequality patterns.
The Gini coefficient of consumption expenditure for rural areas declined marginally between 1983-84 to 1993-94.
But it recorded a marginal rise during the high growth period of 2004-05 and 2011-12.
In the case of urban areas, it stayed the same from 1983-84 to 1993-94, and increased modestly from 2004-05 to 2011-12.
In general, inequality in rural areas declined.
But inequality increased in urban areas in the post-reform period (2004-05 to 2011-12).
The trend is particularly more pronounced in the high growth period.

What are the concerns with inequality measurements?

Consumption inequality - Income and wealth inequalities are much higher than consumption inequality.
The consumption Gini coefficient was 0.36 in 2011-12 in India.
On the other hand, inequality in income was high with a Gini coefficient of 0.55.
Also, the wealth Gini coefficient was 0.74 in 2011-12.
Thus, income Gini was about 20 points higher than consumption Gini.
While the wealth Gini was nearly almost 40 points higher than consumption Gini.
Data base - The data base for computing income inequality is not as solid as the base for consumption expenditure.
Using income tax data for computing income distribution has many problems.
In India, only 3-5% of people come under the income tax net.
How real do the data reflect the true picture of inequality is highly uncertain.
The differences between consumption Gini coefficient and income Gini coefficient, etc prove this point.

What are the trends in poverty decline?

Measure of poverty based on Consumer Expenditure data for the period 1983 to 2011-12 highlights a declining trend.
Pre-reform - In the pre-reform period (before 1991), overall poverty declined only marginally during 1983 to 1993-94.
In fact, the number of persons below the poverty line stayed almost the same at 320 million during this period.
Post-reform - Poverty declined faster in the post-reform period.
The decline was more evident in the 2004-2012 period as compared to 1993-2005.
2004-2012 was the period of highest economic growth since Independence.
This timeframe witnessed the fastest decline of poverty compared to earlier periods.

What do the trends in poverty suggest?

Clearly the post-reform period recorded a considerable decline in poverty when compared to the pre-1991 period.
A World Bank study shows that among other things, urban growth was the most important contributor to this rapid decline.
The contribution is true even for poverty reduction in rural areas in the post-1991 period.
There is a concern that the Tendulkar cut-off line for determining poverty ratio is low and needs to be raised.
But even if the poverty cut-off is raised to 1.5 times the Tendulkar cut-off, the reduction in poverty ratio is evident.

What does this imply?

Generally, in the early period of economic growth, distribution of income tends to worsen.
Only after reaching a certain level of economic development, an improvement in the distribution of income occurs.
Undoubtedly, inequality in itself has several undesirable economic and social consequences.
But, even if the indicators on inequality remain the same, the poverty ratio can be declining.
Thus, measuring inequality is not the same as measuring the changes in the level of poverty.
This has been particularly true of India, where poverty has declined in spite of rise in inequality.

Source: The Hindu