Income inequality in India shrank during the pandemic, says US-based report


The covid pandemic pushed millions of Indians into poverty, but the period post the initial strict lockdown also saw a decline in income inequality in the country, according to a new report released by a US-based bureau.

The National Bureau of Economic Research (NBER), a non-profit that focuses on conducting and disseminating research on economics, published a report titled ‘Inequality in India declined during Covid’.

The paper said the pandemic in India was associated with a decline in inequality in two senses. The first was that Indians from higher income groups had larger relative reductions in income than the poor, and the second was that consumption inequality also declined, albeit only marginally so.

The non-peer-reviewed study was led by three scholars — Arpit Gupta from the Stern School of Business, University of New York, and Anup Malani and Bartosz Woda from the University of Chicago Law School.

The researchers’ main source of data was the Consumer Pyramids Household Survey (CPHS), conducted by the Centre for Monitoring Indian Economy, which comprises a sample of 1.97 lakh households, with monthly information on their finances available from January 2015 to July 2021.

The study’s most remarkable finding — that income inequalities have declined in the months since the lockdown was lifted — seem to stand in contrast with what other recent studies have said about income inequalities in India.

According to the World Inequality Report 2022, the top 10 percent of Indians had about 96 times more income on average than the bottom 50 percent. Similarly, Oxfam International claimed that in 2021 India’s top 1 percent owned about 77 percent of the country’s wealth.

The NBER paper, however, qualifies its findings by noting that Gini coefficients — a statistical measure of the amount of inequality that exists in a population — “paint a less rosy picture of inequality” during the pandemic, specifically a “return to pre-pandemic levels of inequality by July 2020”.

Secondly, the decline in inequality actually began in 2018, a trend that was “interrupted” by the lockdown, but which then resumed.

Income inequality is basically the average gap between the incomes of the rich and the poor. This ‘inequality’ falls if the incomes of the rich fall, or if the incomes of the poor rise.

According to the study, income poverty in urban areas jumped from 40 percent before the pandemic to nearly 70 percent during the lockdowns. Poverty was defined, in this case, by the World Bank’s $1.9 a day (or less) benchmark. After the lockdown, poverty fell and income and consumption increased, “but it did not recover to pre-pandemic levels”, the researchers said.

“In rural areas, the relative income of individuals from top-quartile households fell more before, fell further during, and remained more depressed after the lockdown compared to incomes of those from lower quartiles. Urban areas show a similar pattern, except that the dip during the lockdown was identical across quartiles,” the study said.

Similarly, the study shows that consumption inequality also decreased during the lockdown period, but not as fast as income inequality.

Before the pandemic, a 10 percent fall in income would result in a 0.98 percent decline in consumption expenditure, which means for every Rs 100 reduction in income, a person would cut consumption by Rs 9.8. During the pandemic, the authors found that a 10 percent reduction in income would result in a fall in consumption of 0.869 percent, or that for every Rs 100 reduction a person would reduce their consumption by Rs 8.6 — a very small difference.

The authors attributed this largely to “consumption smoothing”, which refers to the tendency to adjust spending and saving habits by maintaining stable consumption habits.

According to the study, the sources of income of India’s rich derive “disproportionately” from services and capital income (basically wealth derived from wealth, like dividends and interest), both of which were “disproportionately impacted during the pandemic”. Unlike for the rich, capital incomes do not form a major share in the incomes of poorer households.

The authors further noted that labor demand was a factor. “A larger fraction of top-quartile income is from the service sector… and that sector experienced the largest drop in consumer expenditure during the pandemic,” the study said.

The employment rate fell more for the poorer sections of society during the lockdown, but they also recovered more quickly. In fact, employment rate “recovered almost completely for all quartiles — except the top quartile — after the lockdown,” the study said.