The Editorial Analysis- Poverty Rose but Income Inequality Fell

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.

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Poverty Rose but Income Inequality Fell- Relevance for UPSC Exam

GS Paper 2: Governance, Administration and Challenges- Welfare schemes for vulnerable sections of the population by the Centre and States and the performance of these schemes.

Background of Poverty Rose but Income Inequality Fell

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.
Even though there has been a V-shaped recovery, output remains about 10% lower than in 2019.
In macroeconomic crises, including the oil shock of 1990-91 or the global liquidity crisis of 2007-08, many expect the poor to bear the brunt of the pain.

Key Findings of Poverty and Inequality During Pandemic

Poor are the most vulnerable, without contractual protections and adequate safety nets. But there are signs that this pandemic has not followed that script.
Rise in Extreme Poverty: It rose from 7.6% in November 2019 to 11.7% in July 2021.
- Extreme Poverty: It is defined by the World Bank as the percentage of the population with an income below $1.90.
Decline in Income Inequality: In 2019, the average monthly income of households in the top 25% and bottom 25% of the income distribution was approximately ₹45,000 and ₹8,000, respectively, in urban areas, and ₹22,500 and ₹7,500, respectively, in rural areas.
- 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.

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Reason for decline in Inequality

Role of Government payments: to the poor cannot explain the decline in inequality.
- Households received roughly ₹400 per month in urban areas and nearly ₹500 per month in rural areas during the lockdown and the Delta wave.
- Even when government transfers were netted out from income, income inequality fell by over 20% points by July 2021.
Decline in Business Profits: It played a bigger role than transfers. The rich saw a larger decline in business income and depended more on that income than the poor.
- While just 7% of a bottom quartile household’s income is from a business, nearly 15% of a top quartile’s household’s income is from a business.
- Unlike labour income, business income is volatile because it is susceptible to changes in demand, and thus to aggregate income.
Labour income: 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.
- While the minimum amount that the poor were willing to accept to take a job fell roughly 40%, the minimum amount fell more than 45% for the rich.
Demand-fell in the service sector: The rich tend to work in the service sector, and demand for services fell more than demand for other sectors.
- While 30% of workers in bottom quartile households work in the service sector, 45% of workers from the top quartile households do.
- During the pandemic, consumer spending on services fell by 30%-40%, far more than the decline in spending on manufacturing or agriculture.
Manufacturing sector: It employs a larger share of bottom quartile workers than top quartile ones: 35% versus 15%.
- But manufacturing declined less than 20% during the pandemic.
- The progressive contraction of demand for services swamped the regressive contraction of demand for manufacturing.