Inequality in India: Some Observations

Maitreesh Ghatak

The periodic debates and discussions on inequality in India in the public domain have started this year with a brief World Bank report (Poverty and Equity Brief: India, The World Bank, April 2025) that shows that inequality in India has gone down, apparently making it one of the least unequal countries in the world. This stands in stark contrast with reports from other sources, such as the World Inequality Database (WID) developed by Thomas Piketty and his colleagues, where India appears to have growing inequality and is one of the most unequal countries in the world. If we look at the share of the top 10% of income earners in overall national income, among the major economies, India is just below South Africa and Brazil, and well above the world average.

The puzzle can be resolved if one looks at the fine print. The World Bank report looks at consumer expenditure surveys, which were not being published in India since 2011-12 and have started being released under a new methodology recently and we have two rounds of data on that – for 2022-23 and 2023-24. The WID looks at income inequality and since there is no direct way to measure income for the whole population, they combine the consumer expenditure surveys with tax data, with some adjustments for the fact that a very small fraction of the population pays income taxes. Also, it is well-known that consumer expenditure surveys do not catch the relatively well to do. This provides the first clue as to why these two sources throw up a different picture– the consumer expenditure surveys miss out the top end of the distribution and to the extent inequality is rising as reflected in India’s presence in the list of the world’s richest, the World Bank numbers would underestimate inequality by missing out the range of income in which inequality is most likely to manifest itself. The second important point to note in this regard is the fact that in any country inequality of consumption expenditure tends to be less than that of inequality of income, which in turn tends to be less than that of inequality of wealth. Wealth reflects savings, returns from investments that accumulate over time as well as inheritance and so the long-run cumulative aspect of wealth accumulation makes wealth inequality greater than income inequality, reflecting current circumstances. Also, while consumption increases with income, the rate at which it increases tends to diminish as income grows, resulting in the well-known stylised fact that the savings rates of the rich tend to be higher than the poor–and this factor tends to make inequality in consumption typically less than inequality in income. Moreover, to the extent that income flows tend to vary, individuals typically try to maintain their consumption levels, and this too tends to make inequality in consumption expenditure less than that of income.

The main reaction of those on the right of the political spectrum in terms of their economic ideology is that economic growth necessarily leads to an increase in inequality as the wealthier classes are better able to take advantage of the expansion of economic opportunities that growth creates, but poverty also goes down. The reason for this, according to this view, is that growth also leads to an expansion of economic opportunities for all groups, which increases wages and incomes in the labour market and thereby the size of government coffers, which, in turn, raises the ability to spend on welfare policies. Therefore, according to this view, focusing on inequality is misleading at best, and counterproductive at worst.

The validity of this argument depends on whether the benefits of the growth process are indeed spreading to all classes of people. Are the incomes of the poorer classes rising at a sufficient rate despite inequality? Are employment and wages increasing at a sufficient rate in the labour market? Is the tax system progressive and public investment in areas where the poor benefit the most from is increasing? Let’s turn to evidence.

Research shows that the incomes of the top 1% and 10% income groups have grown at a higher-than-average rate of growth in the post-liberalisation era. Not only that, the growth rates of income of the bottom 50% and the middle 40% were both below the average growth rate. If the process of growth was inclusive, we should expect a higher rate of growth for those with lower incomes since by the laws of arithmetic, the lower the base, the easier it is to increase something by a certain percentage.

Given the incomes of the rich have been growing at a higher rate than the average, inequality–now at a historically high level–will continue to increase over time. Is this a problem that is inevitable in the era of globalisation and Artificial Intelligence (AI), and not exclusive to India? That happens not to be the case. For example, in China, the income growth rates of the top 1% and 10% groups have been broadly similar to that of India since the early 1980s, even though more recently, it has been higher for India. But the income growth rates of the middle 40% and bottom 50% have been much higher in China than in India over the last 30 years.

Turning to the labour market, recent research shows that compared to the overall income growth of the country, the labour market fails to show signs of dynamism in terms of the quality of job creation and wage growth. Self-employed workers who do not employ any workers, casual workers, and workers engaged in unpaid family labour constitute three-fourths of the country’s total working population and their proportion has increased over the past decade. In terms of wages, the growth rate of the average real income of the working class is negligible compared to the overall income growth of the country. Thus, the picture emerging from the labour market, as to whether the poorer classes are benefiting substantially from the growth process, does not look positive.

If we look at the tax system, 27% of central government tax revenue comes from Goods and Services Tax (GST), a little above 30% from income tax, and around 25% from corporation tax (the rest comes from customs, union excise duties, and service tax). However, the burden of GST falls proportionately more on the poor. There are several reasons for it. First, it is a consumption tax, and the poor spend a higher fraction of their income than the rich. Second, barring a few food items, others are not tax free. Third, many essential items like mobile recharge, transport, and cooking gas are taxable. Income tax kicks in only for annual income above 2.5 lakhs. Also, wealth tax has been abolished since 2016. In a country like India, where more than 90% of the population is outside the income tax net, the process of tax collection is not easy, but still, the picture of the tax system that emerges cannot be called progressive in any way.

Finally, let’s look at the pattern of allocation of government expenditure on areas that would directly benefit the poor. Since 2014, the share of social sector spending as a fraction of total government expenditure have been falling in 2014-15 it was 22%, and in 2024-25 it stands at 19%. The two years that does not fit this trend is the pandemic one (2020-21) and the year after. Within the category of social sector expenditure, spending on education as a proportion of total social sector spending has been consistently declining over the last decade. The corresponding proportion for health increased slightly from 2014-15 to 2017-18but since then, that too has been stagnant, and currently, stands slightly higher than the 2014 level (11% from 9%). Food subsidies and civil supplies as a fraction of social sector expenditure experienced a big bump up during the pandemic year but otherwise displays a downward trend. The fraction rural development expenditure, which includes the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) in social sector expenditure has been largely stagnant since 2014-15 around one-fifth. Once again, the overall picture that is emerging is not promising.

Finally, let’s not forget that the economy and politics are closely interrelated. There are other costs of inequality. The super-rich don’t just benefit because the tax system isn’t progressive enough. As the debate over electoral bonds suggests, they are politically active and, clearly, campaign contributions have economic leverage in terms of buying influence over government policy and decisions. So, if the “don’t worry about inequality, growth will take care of everything” narrative never sounded very convincing, it certainly does not do so right now.

[This essay partly draws on an early essay titled “Debating inequalities in the backdrop of elections”, Hindustan Times, April 27, 2024.]

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Frontier Autumn Number
Vol 58, No. 14 - 17, Sep 28 - Oct 25, 2025