Dynamics of reallocation within India's income distribution

TL;DR

This paper models income reallocation in India, revealing persistent negative redistribution from the poor to the rich since the early 2000s, contradicting common assumptions about economic growth benefits.

Contribution

It introduces a stochastic model capturing the dynamics of income redistribution, providing evidence of perverse resource flow and quantifying income declines among the poorest groups.

Findings

Income shares of bottom decile and percentile are at historic lows.

Real incomes of the bottom decile and percentile have declined significantly.

Negative reallocation has persisted since the early 2000s.

Abstract

We investigate the nature and extent of reallocation occurring within the Indian income distribution, with a particular focus on the dynamics of the bottom of the distribution. Specifically, we use a stochastic model of Geometric Brownian Motion with a reallocation parameter that was constructed to capture the quantum and direction of composite redistribution implied in the income distribution. 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. Findings from our model refute this, as we find that since the early 2000s reallocation has consistently been negative, and that the Indian income distribution has entered a regime of perverse redistribution of resources from the poor to the rich. Outcomes from the model indicate not only that income shares of the bottom decile (~1%) and bottom percentile (~0.03%) are at historic lows, but also that real incomes of the bottom decile (-2.5%) and percentile (-6%) have declined in the 2000s. We validate these findings using income distribution data and find support for our contention of persistent negative reallocation in the 2000s. 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.