Macro Moves

What is Income Inequality?

Created on 13 Aug 2022

Wraps up in 6 Min

Read by 750 people

Updated on 11 Sep 2022

Have you heard of the saying “the grass always looks greener on the other side”? We’ve all grown up feeling that our parents were biased toward our siblings or that our teachers treated us unfairly. From an early age, we begin to despise this unevenness in treatment. Sadly, as we grow up, this innocent jealousy grows into what we experience as inequality; or an imbalance between the have and the have-nots.

No two people are identical. But when one person breaks their back just to earn enough for a single meal while another enjoys a 5-course meal at a 5-star restaurant, it is time to stop overlooking this disparity and start questioning its economic implications. Shall we dig deeper? 

What is Economic Inequality?

No one knows equal-unequal portions better than siblings with one dessert to share! Inequalities can be seen from many perspectives, be it gender, race or age, but when we talk about the disparities in the distribution of income, wealth and opportunity between different groups of society, it is known as economic inequality.

Essentially, it refers to the gap between the rich and the poor or the comparison between what the most well-off individual has over the least earning. 

As you can see from the above graph, contrary to popular belief, inequality does not equate to poverty. Even though it is expected that a poverty reduction (observe year 2 in the image) will reduce economic inequality, it may have an opposite effect as the rich may become richer in a greater proportion, thereby increasing the disparity gap. 

But poverty is not the only contributor to this imbalance. Let’s look into the rest. 

What are the Causes of Economic Inequality in India?

“The rich get richer, and the poor get poorer”  is not just a cliche anymore. Several market and social factors contribute to this gap's widening. Let’s look at some of these causes-

1. Labor Market

A major cause of economic inequality in most market economies, especially developing economies such as India, is wage disparity, which is influenced by the supply and demand of labour. When demand for workers is high, but their supply is low, it leads to increased competition between employers which drives up wages to attract more workers.

Similarly, a high supply but low demand results in competition between workers, which drives down wages as there is always someone willing to work for lower rates, such as in India, where there is lots of unemployment. Most end up taking up low-paid, unskilled jobs, whereas the rich who can afford getting qualified attain higher positions, thereby increasing income inequality. 

2. Education

Moving along the same lines, we know that education influences an individual's occupational choice, level of pay and opportunity, which negatively correlates with economic inequality. Generally, good education, considered a passport to being rich, comes at an unaffordable price to those who need it the most.

In India, where educational levels are deficient, and even basic education is a privilege, the level of investment in education and its return determines whether the income gap increases or decreases. 

3. Information Technology and Innovations

In modern economies, the increasing importance and dependence on information technology have been identified as the main drivers of economic inequality. Advancing IT plays into the phenomenon of labour substitution, where manual work previously performed by unskilled or semi-skilled workers is now completed with the help of technology, rendering them unemployed.

Moreover, those who can develop or invest in information technologies are saving more and earning more by making supplementary income. 

4. Inflation

During inflation, workers in the organised sector get higher wages which partly offset the effects of the price rise. However, in India, the majority population works in the unorganised sectors (agriculture, cottage industries, and small-scale industries). Workers' income does not increase as per indexation in these sectors; therefore, the standard of living decreases as real income decreases. Inequality in income distribution between sectors also increases. 

5. Wealth Condensation

This is a theoretical process by which newly-created wealth remains concentrated in the hands of those with existing wealth. These individuals or entities have the means to invest their wealth into sources that would regenerate better returns.

For example, the Green Revolution primarily benefited wealthy farmers and landowners who could increase their productivity by deploying new agricultural strategies on their land. In contrast, the landless and marginal farmers with no self-assets (comprising the majority of Indian farmers) were left worse off. 

6. Gender, Religion and Culture

India is a diverse nation, and each Indian takes pride in its diversity. But sadly, “unity in diversity” has become a mere saying! In a country with so many cultures and ideologies, differences are inevitable, and when these differences take over, they lead to discrimination.

This discrimination being passed on from generations, especially based on gender roles and religion, leads to significantly lesser opportunities for a certain section of people and leaves no room to improve their standard of living.

7. Tax Evasion

In India, high personal income tax rates encourage tax avoidance and evasion. This undue concentration of income in the hands of few high-earning individuals caused by large-scale tax evasions adds to economic inequality. On top of that, the tax that could be used for the benefit of the less fortunate in the economy never reaches the government, all because the rich hoard their wealth.

Who can fix Economic Inequality and How?

This gap is big enough to make the economy fall and must be bridged effectively! But how do we do this? Nordic countries (Denmark, Norway, Sweden, Finland, Iceland, Faroe Islands, Greenland, and Åland) have the evenest economic distributions. Our government can also absorb practices from their model, which includes progressive taxes, welfare safety nets for all, fundamental rights to quality education and healthcare, etc. 

a. The government should increase its public expenditure. Investing more in providing free and quality public services like health and education, social security benefits, and employment guarantee schemes can help increase savings among poorer sections of society.

b. Government should spend more on research and development.

c. More focus should be placed on employment generation. In a labour-intensive country such as ours, it makes sense to promote manufacturing and self-employment, which has the potential to absorb a more significant chunk of society. 

d. A minimum floor wage rate must be set, which is fair and satisfies the needs of workers and their families. 

e. Tax benefits must be provided to companies that share more of their profits with their employees. 

f. The oppressed and discriminated sections must be uplifted by targeted credit and investments. 

But can the government alone fix this problem? We as members of society have certain responsibilities towards it. First and foremost, there is a dire need to change our attitudes and thought processes. We must be empathetic, inclusive and just towards all and teach our future generations the same.

A little help goes a long way; we must help the needy because we never know what could be the turning point in someone’s life. We become better citizens by being more aware of our economic and social climate.

There is a need to break discriminatory generational trends. In addition to self-awareness, self-motivation and action can also help reduce this disparity. 

The Bottom Line

We’ve all heard stories of “rags to riches” and love the happy endings, but those don’t happen to everyone. In reality, imbalances and inequality exist, which are not always mitigated. Although the government can take steps to curb the issue, it is much larger and deep-seated and needs to be uprooted from within the society at large to find a long-term solution.

It's easy to not care about the rickshaw driver when you’re driving a car and yet, at the same time, envy the one with the plane. The least we can do is appreciate what we have and, yes, of course, work towards self-improvement.

An Article By -

Yashi Ojha

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Yashi is currently pursuing Chartered Global Management Accounting. Her creative, artsy heart but number-crunching mind has led her to financial content writing. She would prefer to be the observer & the listener in the room so she can soak in all the knowledge from the rest, but wouldn’t compromise on being the funniest.

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