Dynamics of reallocation within India’s income distribution

Abstract

It is well known that inequality has been rising in India in the recent past, but the assumption has been that while the rich benefit more than proportionally from economic growth, the poor are also better off than before. Our modelled outcomes (using the RGBM framework) cast doubt on this proposition. We find that the income share dynamics are consistent with a negative reallocation since the early 2000s, i.e., the Indian income distribution possibly entered a regime of perverse redistribution of resources from the poor to the rich. Our model suggests that the historically low-income shares of the bottom decile (~ 1%) and bottom percentile (~ 0.03%) are possibly due to a decline in real incomes in the 2000s. We find qualified support for these theoretical predictions using income distribution data. We characterize these findings in the context of increasing informalization of the workforce in the formal manufacturing and service sectors as well as the growing economic insecurity of the agricultural workforce in India. Significant structural changes will be required to address this phenomenon.