What is the issue?
- The prevalent trend indicates that income inequality in India is rising independent of absolute incomes.
- The Gini Coefficient for the country is estimated to be close to 0.50, which would be an all-time high.
What is Gini coefficient?
- Gini Coefficient is a statistical measure to gauge the rich-poor income or wealth divide.
- It measures inequality of a distribution be it of income or wealth within nations or States.
- Gini Coefficients can be used to compare income distribution of a country over time as well.
- Its value varies anywhere from zero to 1, zero indicating perfect equality and one indicating the perfect inequality.
- A Gini figure below 0.40 is generally considered to be within tolerable limits by economic experts.
- There are many ways to measure itTwo popular ways are those based on pre-tax (or market) income and disposable income.
- The latter considers taxes as well as social spend before arriving at the figure.
- The difference between the two kinds of measures indicates the efficacy of a country’s fiscal policy in reducing the rich-poor divide through taxation and social spends.
Why is the coefficient significant?
- A general rise in Gini Coefficient indicates that government policies are not inclusive and may be benefiting the rich as much as (or even more than) the poor.
- For instance, a subsidy on passenger train tickets may entail a big budget outlay and may be targeted at the poor,but its benefit could actually be derived by the non-poor.
- It is important that rich-poor divide is kept in check to ensure that a larger section of society reaps benefits from economic growth.
- A higher Gini Coefficient also could mean temptation for an incumbent government to splurge more on welfare schemes and tax the rich more.
What is the way forward?
- This inequality, however, tends to be temporary as workers and investors soon catch up, resulting in improvement of their incomes.
- However, it is quite possible that the post-tax Gini Coefficient for India is lower, as government welfare schemes are focussed on the lower income groups.
- Also the progressive rates that India uses for income tax slabs could also narrow the disparity.
Source: Business Line
