The shape of income distribution and decomposition of the changes in income inequality in India

Abstract

Purpose Though Indian economy since 1980s has expanded very rapidly, yet the benefits of growth remain very unequally distributed. The purpose of this paper is to provide new evidence about the shape, intensity and decomposition of inequality change between 2005 and 2012. The authors find that Gini, as a measure of income inequality, has increased irrespective of geographic regions. Design/methodology/approach Based on a recent distribution analysis tool, “ABG,” the paper focuses on local inequality, and summarizes the shape of inequality in terms of three inequality parameters (α, β and γ) to examine how the income distributions have changed over time. Here, the central coefficient (α) measures inequality at the median level, with adjustment parameters at the top (β) and bottom (γ). Findings The results reveal that at the middle of distribution (α), there is almost the same inequality in both the periods, but the coefficients on the curvature parameters β and γ show that there is increasing inequality in the subsequent period. Finally, an analysis of decomposition of inequality change suggests that though income growth was progressive, however, this equalizing effect was more than offset by the disequalizing effect of income reranking. Research limitations/implications This paper shows how it can be possible both for “the poor” to fare badly relatively to “the rich” and for income growth to be pro-poor. Practical implications This paper stresses the significance of inequality reduction. Social implications Inequality reduction is very much imperative in ending poverty and boosting shared prosperity. Originality/value Perhaps, this research work is first of its kind to examine the shape and decomposition of change in income inequality in India in recent years.