There has been a phenomenal rise in economic inequality in India, especially in the post-1991 liberalization period. A 2018 Oxfam study reports a significant increase in the consumption Gini index (a statistical measure of inequality) in both rural and urban areas from 1993-94 to 2011-12. According to the Global Wealth Report (GWR) 2017, put out by the Credit Suisse Research Institute, between 2002 and 2012, the share of the bottom 50% of the population in total wealth declined from 8.1% to only 4.2%. In contrast, over the same time period, the share of the top 1% in total wealth increased from 15.7% to 25.7%. Among the countries for which the GWR gives the share of wealth held by the top 1%, only Indonesia and the US have higher shares than India.
Given this dramatic rise in inequality, it is imperative to accurately measure the extent of economic mobility in India, which reflects the number of people moving up and down the economic ladder over time. Mobility becomes salient because the long-term welfare effects of rising inequality depend crucially on the level of economic mobility. Economic mobility (or a lack thereof) can attenuate (or accentuate) the adverse effects of inequality. Holding other factors fixed, an economy with much economic mobility—one in which households move more freely throughout the income/consumption distribution—will result in a more equal distribution of lifetime incomes and consumption than an economy with low mobility.
In a recent study, I, in collaboration with professors Daniel L. Millimet (Southern Methodist University, USA) and Hao Li (Nanjing Audit University, China), measure the extent of economic mobility in India using data from the 2005 and 2012 waves of the Indian Human Development Survey (IHDS). The IHDS is a nationally representative multi-topic household survey covering more than 40,000 households in each wave across India, with the second wave consisting mostly of those households which were also interviewed in the first wave.
To proceed, we divide the entire sample of households in each wave into three partitions: Partition one includes households whose consumption expenditure is below the official poverty line as recommended by the Suresh Tendulkar committee (these households are categorized as officially poor); partition two includes households with per capita consumption expenditure between 100% and 200% of the official poverty line (we call them “insecure non-poor" since these households, although not “poor", are at risk of poverty); and partition three includes all households with a per capita consumption expenditure exceeding 200% of the official poverty line (we call them “secure non-poor"). We then estimate how likely it is for a household from each partition in 2005 to end up in the same or another partition in 2012. These estimated quantities, in technical terms, are called transition probabilities, and the full set of transition probabilities gives us a proper estimate of the extent of economic mobility, specifically as it relates to poverty in India.
We find that for the population as a whole, the mobility rate is remarkably low. Specifically, we find that over the seven-year period, at least seven in 10 poor households remain poor, or move out of poverty but remain in an insecure non-poor state, whereas at most two in 10 poor households make it to the secure non-poor state. On the other hand, at most two in 10 non-poor households (insecure and secure non-poor combined) enter poverty.
As part of the research exercise, we also compare the mobility rates of various sub-populations, finding evidence of substantial heterogeneity.
First, Muslims are more vulnerable to falling below the poverty line over the seven-year period compared to Hindus or other religious groups; they are also less likely to achieve secure non-poor status from below poverty line, or remain secure non-poor.
Second, compared to upper-caste groups (Brahmin and non-Brahmin) and Other Backward Classes (OBCs), Scheduled Castes and Scheduled Tribes are less likely to escape poverty and more likely to move into poverty. Between upper castes and OBCs, the latter are more likely to move into poverty and less likely to become secure non-poor from below-poverty-line or remain secure non-poor.
Finally, rural households, compared to urban households, are more likely to remain in poverty. They are also less likely to escape poverty and more likely to enter poverty than urban households.
Our results for the population as a whole suggest that inequality in India can be characterized as chronic, since households belonging to the lower rungs of the economic ladder are likely to find themselves caught in a poverty trap. As a result, our findings suggest that poverty reduction efforts should focus on ways to improve the permanent economic status of households, possibly through acquisition of assets and capabilities, rather than on ways to deal with temporary volatility.
Our findings also challenge the conventional wisdom that marginalized groups in India are catching up with the rest on average. This finding, in particular, casts doubt over the efficacy of existing affirmative action and social programmes that have been put in place to help improve the economic status of marginalized groups in the country.
Punarjit Roychowdhury is assistant professor of economics at Indian Institute of Management, Indore