Poverty rose but income inequality fell

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

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

COVID-19 has turned Indian society upside down. More than two-thirds of the country is infected with COVID-19 and perhaps about five million people have died, directly or indirectly, from the pandemic. The economy has also taken a hit. While there is a V-shaped recovery, output remains about 10% lower than in 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 the most vulnerable, without contractual protection and adequate 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 200,000 households with a total of one million members of the Consumer Pyramids Household Survey through 2021.

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

Income inequality

However, income inequality declined. 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 in urban areas, respectively, and ₹22,500 and ₹7,500 in rural areas, respectively. While the upper quartile average monthly income in urban areas fell by almost 30% to ₹32,500 in July 2021, the lower quartile monthly income remained at pre-pandemic levels in July 2021. In rural areas, income in the top quartile fell by perhaps 20%, while income in the bottom quartile grew slightly over the same period. As a result, inequality, measured as the percentage change in top quartile income minus bottom quartile income, has fallen by 15-20 percentage points. This is a robust finding: Wealthier households saw greater income declines across 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 dynamic during the plague in 14th-century Europe. However, given how much the global economy has changed since then, the explanations for India’s experience will differ.

Three sources of income

To find out why inequality has declined 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 cart, farm or factory. Labor income is wages earned from timepieces or employment contracts.

Government payments to the poor cannot explain the decline in inequality. Certainly, the income support was not inconsiderable. Households received about ₹400 per month in urban areas and nearly ₹500 per month in rural areas during the lockdown and the Delta Wave. They received about half that amount during the rest of the pandemic. But even as government transfers of income were netted, income inequality fell by more than 20% points in July 2021.

Corporate profits play a bigger role than transfers. The rich saw a greater decline in corporate income and were more dependent on that income than the poor. While only 7% of a household’s income in the bottom quartile comes from a business, nearly 15% of a household’s income in the top quartile comes from a business. Unlike labor income, corporate income is volatile because it is subject to changes in demand, and thus total income. We find that upper quartile corporate income is four times more sensitive to overall economic performance than lower quartile corporate income. Given the major negative effect of COVID-19 on the economy, this suggests that some of the disproportionate losses of the rich are due to corporate income.

However, income from work 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. These are larger shares than government transfers or corporate profits. To explain the decline in labor income, we looked at supply-side explanations and then demand-side explanations.

Looking at the supply, you might suspect that the rich chose to work less than the poor, perhaps for fear of contracting COVID-19. That was our guess too, but it turned out to be wrong. When the economy shrank, people lost jobs and income. They tried to compensate for this by looking for other work, sometimes even in other professions. While this seems like a natural reaction for the bottom 25%, it was even more so for the top 25%. While the minimum amount the poor were willing to accept to take a job fell by about 40%, the minimum amount fell by more than 45% for the rich.

demand for labor

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

In production, the situation was reversed. This sector has a larger share of employees in the lower quartile than in the top quartile: 35% versus 15%. But production fell by less than 20% during the pandemic. The progressive contraction in demand for services overpowered the regressive contraction in demand for manufacturing.

To be clear, our analysis does not suggest that the pandemic was good for the Indian economy. With the loss of life and increasing poverty, it is one of the greater disasters that the country has faced. Reducing inequality would be a silver lining if it were achieved by reducing poverty rather than reducing the income of the rich.

Nevertheless, by understanding the decline in inequality during the pandemic, we can assess the prospects for inequality after it ends. Once the demand for services rises along with total income, both the labor demand of the rich and the business income of that 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

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