Income inequality

Income inequality

News: According to a recent SBI Research report, income inequality in India has decreased, indicating a positive trend of upward mobility and the growth of the middle class.

What is income inequality?
• Income inequality, also known as income disparity, refers to how unevenly income is distributed throughout a population. The less equal the distribution, the greater the income inequality. It’s a major dimension of social stratification and social class.
• Income inequality can be influenced by factors such as globalization, technology, gender, race, education, and taxation.

Key Findings:
• The Economic Research Department of the State Bank of India reports a decline in income inequality in India. The shift in taxpayers from lower to higher income tax brackets contributes to this decline.
• The decrease in Gini Coefficient (a measure of income inequality) has decreased from 0.472 in AY 2014-15 to 0.402 in AY 2022-23.
• The report attributes the decline in income inequality to significant upward mobility, with over 36% of individuals in the lowest income bracket in FY14 moving to higher income levels, resulting in over 21% increase in their income during FY14-FY21.
• Small firms transitioning into larger entities through MSME value chain integration.
• Consumption trends, such as the surge in food orders through platforms like Zomato, indicate a diminishing wealth gap.
• The share of top earners with income over Rs 10 crores and Rs 100 crores has declined from 2013-14 to 2020-21.

Key Terms:
Gini-coefficient
• The Gini Coefficient, also known as the Gini index or Gini ratio, is a statistical measure of economic inequality within a population. It was developed by Italian statistician and sociologist Corrado Gini.
• The Gini Coefficient measures the dispersion of income or distribution of wealth among the members of a population.
• A Gini Coefficient of 0 reflects perfect equality, where all values (income or wealth) are the same, while a Gini Coefficient of 1 (or 100%) reflects maximal inequality among values. In other words, a situation where a single individual has all the income or wealth while all others have none.

Lorenz Curve
• The Lorenz Curve is a graphical representation of income or wealth distribution within an economy. It was developed by Max O. Lorenz in 1905 to represent inequality in wealth distribution.

In a Lorenz curve:
• A straight diagonal line from the origin (0,0) to (1,1) represents perfect equality, where each percentage of the population holds the same percentage of income or wealth.
• The actual Lorenz curve lies beneath this line of perfect equality, showing the real distribution of wealth or income.
• The farther the Lorenz curve is from the line of perfect equality, the greater the inequality.
• The area between the line of perfect equality and the Lorenz curve is used to calculate the Gini Coefficient, a measure of inequality.

Kuznets Curve
• The Kuznets Curve is a hypothesis advanced by economist Simon Kuznets in the 1950s and 1960s. It is a graphical representation that shows the relationship between economic development and income inequality.
• According to this hypothesis, as an economy develops, market forces first increase and then decrease economic inequality. This is often represented as an inverted “U” shape curve.
• The x-axis typically represents economic development, time, or per-capita incomes, and the yaxis represents inequality or the Gini coefficient.