Understanding the share in national income of bottom 20% of the Income pyramid

The world reduced poverty by 75% over last 30 years while India reduced it by only 50%.

Last night I put the following tweet on twitter that has been interpreted by some to mean that the poor didn’t benefit at all from the Economic Reforms initiated by PVNR and Dr. Manmohan Singh in 1990-91. Such is not the case. The tweet is reproduced below:

I should have added the word “proportionately” in the header but didn’t. The tweet is accurate in all other respects.

To put the thing in perspective I offer you four more charts that will hopefully help everybody understand the true picture in its correct perspective.

First the annual GDP growth rate of India vs the world, since 1990:

While India’s growth rate of GDP has been respectably higher at 6% pa compared to the World GDP growth rate of 3% pa, India’s starting base is so low that even after 30 years of growing at twice the world’s rate we are way behind the world as the following chart will show:

Mind the above is comparison in terms of PPP in constant 2017 USD. So much about the hype that we are the 4th largest economy and emerging super-power. We are way behind the world and the distance doesn’t look like it is narrowing.

Within this GDP, and GDP growth context, let us look at the share of income of the highest 20% of the Income pyramid and the lowest. Since data at the world level for the world level isn’t available, I have used the US data to give perspective to Indian numbers.

There are only 4 data points available for India. As you can see, in the US the share of the top 20% of national income rose from 44% in 1990 to 47% in 2020. That’s an increase of 3 percentage points over 30 years.

In India, in more or less 20 years, the share of the top 20% rose from 41% to 44%; an increase of 3 percentage points up until 2010. We can safely add another 1% point minimum to that number to arrive at 45% for 2020. So the share of national income accruing to the top 20% in the income pyramid rose at a higher rate than in the US by 25%. And we say US is a Capitalist country!

The chart for the bottom 10% of in the income pyramid is given below, along with that of the US for perspective.

The lowest 10% in the income pyramid got about 3.8% of India National Income in 1990s. This share fell from 3.8% to 3% by 2010. There is no data for 2020, but given the Modi years of joblessness, and the funneling of income from the bottom half of the pyramid to the top through regressive indirect taxes, and tax cuts for corporates, safe to say, the share of the bottom 10% has fallen below 3%.

In contrast, in the US, the share of the bottom 10% in national income declined from 2% in 1990s to 1.7% in 2020. India pauperized its poor faster than the US over last 30 years.

So was there no reduction in poverty in last 30 years in India? That is not the correct conclusion from the above data which shows the changes in relative shares of various income groups in the national cake.

But since the overall GDP grew by about 6% in India, and 3% in the world, there was a sharp reduction in poverty, and that’s what’s captured in the following graph. But do remember, this reduction in poverty comes from GROWTH, the great leveler, and NOT redistributive policies, which usually don’t work.

About 47% of Indians were poor in 1990s, as measured by the number of people earning less than $1.90 per day at 2011 prices. This number fell from 47% in 1990s to 22% in 2010. India more than halved its poverty count in the 20 years following reforms. There is no data after 2010, thanks to Modi’s “no data” policy. But I would say the numbers have remained flat since then because of poor growth since 2014, and the regressive policies of the Modified Era. So the number of poor today is probably 20%.

Worth drilling this into our heads. This huge reduction in poverty come from GROWTH, not redistribution. Growth is the great leveler as far as poverty goes. But should we be happy with this achievement?

The world, [not the US, the World] reduced its its poor from 36% in the 1990s to 9% in 2020. The world reduced its poor by labour three-fourths or 75% compared to our 50%. So despite our growth being twice that of the world average, we did far less poverty reduction than the rt of the world. Or simply put, the world is a lot more fairer to its poor than we Indians are.

That’s something to think about.

Sonali.