SBI Research Unit Discredits K-Shaped Economic Recovery Theory, Notes Decline in Income Inequality

The Economic Research Department of SBI has released a report indicating a decline in income inequality in India. Contrary to discussions about a K-shaped post-pandemic recovery, the report highlights a shift of over a third of taxpayers into higher income tax brackets, leading to a decrease in income inequality. This challenges the narrative of a divided economic recovery, as previously suggested by economists like former RBI governor Raghuram Rajan.

The report cites a significant drop in income inequality, measured through the Gini coefficient, from 0.472 to 0.402 between FY14 and FY22. It notes that 36.3% of taxpayers have transitioned to higher income tax brackets, contributing to a 21.3% increase in income. Surprisingly, the top 2.5% of taxpayers’ contribution to total income has decreased from 2.81% to 2.28% during FY14-FY21.

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Moreover, the study reveals positive trends such as the transformation of 19.5% of small firms into larger entities via MSME value chain integration. Post-pandemic, consumption among the bottom 90% of the population has surged by Rs 8.2 lakh crore. The rural economy’s increased income has led to a shift from two-wheelers to four-wheelers among consumers.

Additionally, the report highlights interesting insights such as 15% of taxpayers in India being women and two crore family members from semi-urban areas consuming food via Zomato. Notably, this report marks the first instance in India where publicly available income tax data has been used to gauge inequality estimates.

The data from income tax returns indicates a significant rise in individual taxpayers earning between Rs 5 lakh and Rs 10 lakh, increasing by 295% between AY 2013–14 and AY 2021–22. Similarly, filings by those earning between Rs 10 lakh and Rs 25 lakh have surged by 291%. The total number of persons filing income tax has increased to 7.4 crore in AY23 from 7 crore in AY22, with 8.2 crore ITRs filed by December 31, 2023, for AY24.

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Moreover, the report outlines a decline in income disparity among those earning less than Rs 3.5 lakh, dropping from 31.8% to 15.8% during FY14-21. This signifies an increase in the share of this income group’s total income in comparison to their population by 16%.

Interestingly, despite an increase in the number of individuals earning over Rs 100 crore from 23 in FY14 to 136 in FY21, their combined income share decreased from 1.64% to 0.77% of the total income.

Lastly, post-pandemic, households have redirected their savings towards physical assets like real estate, according to the report. These findings provide a comprehensive overview suggesting a reduction in income inequality and noteworthy shifts in income distribution patterns in India.