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POVERTY ROSE BUT INCOME INEQUALITY FELL
What the article is about?
- Talks about the impact of the pandemic, specifically on poverty and income inequality levels.
Syllabus: GS-I Poverty, Unemployment, Inequality, Impact of Pandemic on Society; GS-III Indian economy, Inclusive growth
Impact of the COVID-19 pandemic:
- Over two-thirds of the country has been infected by COVID-19 and perhaps five million or so people have died, directly or indirectly, from the pandemic.
- The economy too has taken a beating.
- Even though there has been a V-shaped recovery, output remains about 10% lower than in 2019.
- Poverty certainly rose during the COVID-19 pandemic.
- Extreme poverty, defined by the World Bank as the percentage of the population with an income below $1.90, rose from 7.6% in November 2019 to 11.7% in July 2021.
- However, income inequality actually fell.
- While the average monthly income of the top quartile in urban areas fell almost 30%, to ₹32,500 by July 2021, the monthly income of the bottom quartile in July 2021 remained at pre-pandemic levels.
- In rural areas, the top quartile income fell by perhaps 20%, while the bottom quartile income grew slightly during the same period.
- The result is that inequality, measured as the percentage change in the income of the top quartile minus the income in the bottom quartile, fell by 15-20 percentage points
- Richer households saw larger drops in income all along the income scale, in rural and urban areas, within each State, and even within caste groups.
Reasons for the fall in inequality:
- 3 sources of household income:
- government transfers, business profits, and labour income.
- Government transfers are cash or in-kind payments.
- Profits may be from any business, be it a food cart, a farm, or a manufacturing plant.
- Labour income is wages earned from hourly work or employment contracts.
- Business profits play a bigger role than transfers.
- The rich saw a larger decline in business income and depended more on that income than the poor
- Unlike labour income, business income is volatile because it is susceptible to changes in demand, and thus to aggregate income.
- Labour income, however, plays a critical role.
- Labour income is just over 65% and 80% of the income of the top 25% and bottom 25% of households.
- These are larger shares than those of government transfers or business profits.
- Disproportionate loss of labour income among the top quartile households is that demand for their labour fell more.
- During the pandemic, consumer spending on services fell by 30%- 40%, far more than the decline in spending on manufacturing or agriculture.
- The progressive contraction of demand for services swamped the regressive contraction of demand for manufacturing.
Conclusion:
- The analysis does not suggest that the pandemic was good for the Indian economy.
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- The loss of life and rise in poverty make it one of the larger disasters the country has borne.
- The reduction in inequality would be a silver lining if it were accomplished by lowering poverty rather than reducing the income of the rich.
