SBI research unit debunks K-shaped economic recovery theory, says income inequality has declined

Income disparity in India has decreased, with more than a third of taxpayers moving to higher income tax brackets and top taxpayer payments dropping, according to a research by the SBI's Economic Research Department, debunking notions of a K-shaped post-pandemic recovery.

Some areas of the economy may experience great growth while others continue to fall in a K-shaped recovery. Some economists, including former Reserve Bank of India governor Raghuram Rajan, have described India's post-pandemic economic expansion as K-shaped.

According to an SBI research report, the K-shaped recovery appears to be "at best flawed, prejudiced, ill-conceived, and fanning the interests of select quarters to whom India's remarkable ascendance, signalling more the renaissance of the new global south, is quite unpalatable."

The report said: "Income inequality captured through the Gini Coefficient (one of the most widely used measures of income inequality) of taxable income has declined significantly from 0.472 to 0.402 during FY14-FY22." 

While 36.3 percent of taxpayers moved from the lower income tax bucket to the higher income tax bucket, resulting in 21.3 per cent more income, the top 2.5 per cent of taxpayers' contribution to income fell from 2.81 per cent to 2.28 per cent between FY14 and FY21 (April 2013-March 2014 fiscal year to April 2020-March 2021 fiscal year).

It went on to say that through MSME value chain integration, 19.5 per cent of small enterprises have transformed into larger firms, and consumption of the lowest 90 per cent of the population has increased by Rs 8.2 lakh crore since the epidemic.

People are swapping two-wheelers for four-wheelers as their income in the rural economy rises.

It is estimated that up to 15 per cent of Indian taxpayers are women, and added that approximately two crore family members consume food through Zomato in semi-urban areas.  

For the first time in Indian history, the report used publicly available income tax data to determine inequality.

Income-tax returns (ITRs) filed by individual taxpayers earning between Rs 5 lakh and Rs 10 lakh increased by 295 per cent between assessment years (AY) A 2013-14 and AY 2021-22, indicating a favourable trend of migration to a higher range of gross total income.

The number of ITRs filed by individuals earning between Rs 10 lakh and Rs 25 lakh has climbed by 291 per cent, while the total number of people reporting income tax has increased to 7.4 crore in AY23 from 7 crore in AY22. By December 31, 8.2 crore ITRs for AY24 had been filed.

One of the most generally used metrics of income disparity is the Gini Coefficient. Individual income inequality has declined from AY15 (FY14) to AY23 (FY22), according to the Gini Coefficient assessed using ITR data on taxable income of people, from 0.472 to 0.402. Furthermore, based on historical trends, SBI predicts that the Gini Coefficient would fall to 0.402 in AY23.

According to income tax data, 36.3 per cent of individual ITR payers in AY15 (FY14) who earned less than Rs 3.5 lakh left the lowest income bracket and moved up. 15.3 per cent migrated from Rs 3.5 lakh to Rs 5 lakh, and 4.2 per cent shifted from Rs 5 lakh to Rs 10 lakh in the income group of Rs 10 lakh to Rs 20 lakh and the rest further upwards.

It said 21.1 per cent of the gross income of the lowest income group of lower than Rs 4 lakh has shifted upwards, with 6.6 per cent gross income shifted towards Rs 4 lakh to Rs 5 lakh group, 7.1 per cent towards Rs 5 lakh to Rs 10 lakh group, 2.9 per cent towards Rs 20 lakh to Rs 50 lakh group, and 0.8 per cent in Rs 50 lakh to Rs 1 crore group.

The income disparity of people earning less than Rs 3.5 lakh has declined from 31.8 per cent to 15.8 per cent during FY14-21, signifying that the share of this income group in the total income in comparison to their population has increased by 16 per cent, the report said.

On the share of top taxpayers in income, the report said that in FY14, the combined income of 23 individuals with income of more than Rs 100 crore was 1.64 per cent of the total income of FY14. Even though the number of such individuals has increased to 136 in FY21, the share of their combined income in FY21 has fallen to 0.77 per cent.

According to the report, post-pandemic, households are reconfiguring their savings towards physical assets, including real estate.