Poverty increased but income inequality decreased


There are signs this pandemic has not followed the usual script – that the poor are bearing the brunt of the pain

There are signs this pandemic has not followed the usual script – that the poor are bearing the brunt of the pain

COVID-19 has turned Indian society upside down. Over two-thirds of the country has been infected with COVID-19 and around five million people have died directly or indirectly from the pandemic. The economy has also suffered. Although there has been a V-shaped recovery, production remains about 10% lower than 2019.

In macroeconomic crises, including the 1990-91 oil shock or the 2007-08 global liquidity crisis, many expect the poor to bear the brunt of the pain. They are most vulnerable without contractual protections and proper safety nets. But there are signs that this pandemic has not followed that script.

Poverty has certainly increased during the COVID-19 pandemic. We examined monthly data from nearly 2,00,000 households totaling one million members from the Consumer Pyramid Household Survey through 2021.

We found that extreme poverty, defined by the World Bank as the percentage of the population earning less than $1.90, increased from 7.6% in November 2019 to 11.7% in July 2021.

income inequality

However, income inequality actually fell. In 2019, the average monthly income of households in the top 25% and bottom 25% of the income distribution was around £45,000 and £8,000 respectively in urban areas and £22,500 and £7,500 in rural areas. While the average monthly income of the top quartile in urban areas fell by almost 30% to ₹32,500 by July 2021, the monthly income of the bottom quartile remained at pre-pandemic levels in July 2021. In rural areas, top quartile income fell by perhaps 20%, while bottom quartile income rose slightly over the same period. The result is that inequality, measured as the percentage change in top-quartile income minus bottom-quartile income, has fallen by 15 to 20 percentage points. This is a robust result: wealthier households experienced larger income declines along the income scale, in rural and urban areas, within each state, and even within caste groups.

This remarkable finding is not unprecedented. Historians observed the same dynamics during the plague of 14th-century Europe. However, given how much the global economy has changed since then, explanations for India’s experience will vary.

Three sources of income

To find out why inequality has fallen during the pandemic, we examined three sources of household income: government transfers, corporate profits, and labor income. Government transfers are payments in cash or in kind. Profits can come from any business, be it a food truck, farm, or manufacturing facility. Labor income is wages earned through hourly work or employment contracts.

Government payments to the poor cannot explain the fall in inequality. Certainly the income support was not negligible. Households received around £400 a month in urban areas and almost £500 a month in rural areas during lockdown and the Delta Wave. During the rest of the pandemic, they received about half of that. But even when government transfers were deducted from income, income inequality fell by over 20 percentage points by July 2021.

Corporate profits matter more than transfers. The rich saw a greater drop in business income and depended more on that income than the poor. While only 7% of income for a household in the bottom quartile comes from a business, nearly 15% of income for a household in the top quartile comes from a business. Unlike labor income, business income is volatile as it is susceptible to changes in demand and therefore total income. We find that top-quartile corporate income is four times more dependent on the economy’s overall performance than bottom-quartile corporate income. Given the major negative impact of COVID-19 on the economy, this suggests that some of the disproportionate losses of the wealthy are being caused by business revenue.

However, earned income plays a crucial role (table). Labor income is just over 65% and 80% of the income of the top 25% and bottom 25% of households, respectively. These are larger proportions than government transfers or corporate profits. To explain the fall in labor income, we looked at supply-side and then demand-side explanations.

Looking at the supply, one might suspect that the rich have chosen to work less than the poor, perhaps out of fear of catching COVID-19. That was our guess too, but it turned out to be wrong. As the economy shrank, people lost jobs and income. They tried to compensate by looking for another job, sometimes even in other professions. While this appears to be a natural response for the bottom 25%, it was even more true for the top 25%. While the minimum amount the poor were willing to accept to get a job dropped by about 40%, the minimum amount the rich were willing to accept dropped by more than 45%.

demand for labour

The better explanation for the disproportionate loss of labor income among households in the top quartile is that the demand for their labor has fallen more sharply. The wealthy tend to work in the service sector, and demand for services has fallen more than demand for other sectors. While 30% of workers in the bottom quartile households work in the service sector, 45% of workers in the top quartile households do so. During the pandemic, consumer spending on services fell by 30% to 40%, far more than the decline in spending on manufacturing or agriculture.

In manufacturing, the situation was reversed. This sector employs a larger proportion of workers in the bottom quartile than in the top quartile: 35% versus 15%. But production fell less than 20% during the pandemic. The progressive contraction in demand for services overwhelmed the regressive contraction in demand for manufacturing.

To be clear, our analysis does not suggest that the pandemic has been good for the Indian economy. The loss of life and the increase in poverty make it one of the major disasters the country has to cope with. Reducing inequality would be a silver lining if achieved by reducing poverty rather than reducing the incomes of the rich.

However, if we understand the decline in inequality during the pandemic, we can assess the prospects for inequality once it ends. Once the demand for services rises along with overall income, both the demand for work from the wealthy and the business earnings of this group are likely to return. There is a risk that inequality will return to pre-pandemic levels.

Anup Malani is the Lee and Brena Freeman Professor at the University of Chicago. Arpit Gupta is an Assistant Professor at NYU Stern School of Business, USA Bartek Woda is a Research Specialist at the University of Chicago

Leave a Reply

Your email address will not be published. Required fields are marked *