ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Unpacking Inequality

A Regression-based Decomposition Analysis of Household Consumption in India

Gini coefficients show that the level of inequality was 0.303 in 2014 and declined to 0.261 in 2021, which fluctuates in the initial years and shows a decreasing trend after 2017. Most notably, the regression-based decomposition approach reveals that the level of education emerges as the primary contributor to explaining the level of inequality, playing a vital role in its reduction. This research highlights the urgent need for the government to intensify its focus on improving education levels in order to reduce the inequality in India effectively.

(Annex Tables A1 to A7 and Figure A1 accompanying this article are available on the EPW website.)

Understanding the dynamics and drivers of inequality is critical for devising effective strategies to promote inclusive and sustainable growth. For India, characterised by vast regional, social, and economic disparities, addressing inequality is of paramount importance. This paper aims to shed light on the consumption expenditure inequality in India during 2014–21 by utilising the Consumer Pyramids Household Survey (CPHS) data collected by the Centre for Monitoring Indian Economy (CMIE). By employing analytical techniques, including generalised entropy measures, Atkinson indices, and Gini coefficient, the research offers a comprehensive examination of the level and trends of household consumption expenditure inequality. Furthermore, the regression-based decomposition (RBD) approach is used to reveal the contribution of various household characteristics to total and percentage change in inequality. Inequality is crucial to investigate because it has significant implications for economic development, poverty reduction, macroeconomic and political stability, and the environment (Boyce 1994; Khan et al 2022; Stiglitz 2013; Milanovic 2015; Topuz 2022). It is important to differentiate between “inequality of opportunity” and “inequality of outcome.” Inequality of opportunity refers to differences in access to education, healthcare, employment, and other resources that affects an individual’s “freedom on choices/capabilities.” The inequality of outcome refers to differences in actual outcomes (functioning) such as income, wealth, and well-being that results from differences in opportunity (Sen 1985; Foster and Sen 1997; Aiyar and Ebeke 2020). Atkinson (2016) argues that a comprehensive understanding of inequality requires paying attention to both equally. However, the focus of our study is on the inequality of outcome, specifically consumption inequality. Sen (1995) emphasises that the measurement and interpretation of inequality depend on the choice of the “focal variable,” which can be income, consumption, wealth, happiness, and so on.

In India, the issue of inequality has also gained attention, with the government report titled State of Inequality in India, 2022 acknowledging the prolonged frustration and disappointment of people about their hopes and aspirations (EPW 2022a, 2022b). The editorial states that from 2017 to 2020, the share of top 1% earners increased from 6.14% to 6.84% and then to 6.82%, while the bottom 50% remained at around 22%. The report further suggests that although there has been some improvement in employment and income parameters in the pre-COVID-19 period, the benefits have been restricted to dominant groups at the expense of disadvantaged groups. The state of inequality report published by the Institute for Competitiveness (IFC) supports this observation (Kapoor and Duggal 2022).

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Updated On : 21st Nov, 2023
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