Context: It is estimated on the basis of a model made out of a combination of NSSO, Demonetisation data World’s Bank poverty line that the 21-day national lockdown in India will leave the bottom 47 percentile of India’s population cash starved.
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- It has also noted that the population between the 47th percentile and up to 87th percentile will be left with only half the cash they had before the lockdown.
- The percentiles translates in real terms to the poorest 500 million cash starved Indians and another 500 million left with just half their reserves.
- The estimates are based on the World Bank’s poverty line which has set $3.2 for living a day for a lower middle-income country such as India,Egypt, and the Philippines.
Socio-Political significance of Cash inequality
- It provides a tool to many people in order to deal with prevalent political and social inequality.
- It enables them to negotiate their freedom using money.
- For the population reeling under poverty, possession of cash to pay back money lenders or landlords translates to having the choice between freedom and slavery.
- Money gives them choice, the freedom of not getting their labour exploited.
- Currently, an ongoing humanitarian crisis is forcing the poorest Indians to return to their homes by foot, in packed vehicles, hungry and cashless.
- But , the great inequality of cash, will again force them to migrate back to cash-rich centres again, despite lockdowns and fears of a deadly virus outbreak.
- The informal economy is hit the most, and with the crisis of cash starvation, they will also lose agency to negotiate for fair wages, decent working conditions, and basic human rights.
Economic Significance of Cash inequality
- Cash inequality, a basic economic instrument, showcases how unequal the society is.
- The top 1% in India held 62% of all the currency in circulation, whereas the top 0.1% held 33%, a third of ₹17-lakh crore in circulation at the time of demonetisation.
- To estimate this cash inequality, a model has been created combining demonetisation and National Sample Survey Office (NSSO) data to which a generalised Pareto interpolation technique was applied.
- The Gini coefficient of cash holding in India is as high as 0.71.
- In the Ginni coefficient, 0 indicates perfect equality and 1 indicates perfect inequality.
- Other measurements of inequality such as the Atkinson Index [A(1)=0.624] and the Generalised Entropy Index (It has been proposed as a measure of income inequality in a population [GE(1)=3.108] ) also show a very high inequality of cash holding.
- It all points that in India, cash is heavily concentrated at the top.
Trends in Cash Holding
- The 10% districts at the top of the ladder held 764 times more currency than the bottom 10% districts.
- The districts at the top are situated in Tier I and II cities while the bottom 60 districts, mostly comprising hill and tribal districts, held only 0.2% of all the cash.
- In an analysis of 60% of all districts, i.e. Gini coefficient was found greater than or equal to 0.7, which means that even within districts, cash is concentrated very unequally.
- In numbers, it means that there are 10.9 million cash-rich Indians in the top 1%, that is almost equal to the population of Belgium.
Need for Remonetisation
- The findings in the 2016 Economic Survey ,which introduced the concept of Universal Basic Income, reveal that the population up to the 77th percentile does not have access to formal loans.
- Losing cash reserves will force poor people into income traps with lowering of real wages
- Lost wages can only be recovered by longer working hours.
- The ₹1.7-lakh crore stimulus package announced is well intentioned but doesn’t perform well with respect to bridging gaps in the cash inequality.
- An increase of ₹20 in MGNREGA wages or the transfer of ₹1,500 over three months via Jan Dhan accounts, will barely compensate for the loss of jobs due to lockdown.
WayForward - Remonetise India
- With the multidimensional pressures (Informal economy, Corporates) expected on Indian economy, a social and economic argument to remonetise India.
- On the execution front, a direct cash transfer of ₹2.5-lakh crore just to replenish people’s cash needs will do the needful.
- It will put money directly in the hands of the population up to the 87th percentile.
Lorenz Curve and Gini Coefficient
- It was developed in 1905, by Max O. Lorenz for representing wealth distribution.
- The Lorenz curve represents the distribution of Income/Wealth in an economy.
- The Lorenz curve shows the cumulative share of income from different sections of the population.
- If there was perfect equality – if everyone had the same salary – the poorest 50% of the population would gain 50% of the total income.
Image Source: Wikipedia
Limitation of the Lorenz Curve
- If the number of curves increases, then it would be difficult to ascertain the level of inequality, as the curves might intersect.
Another indicator, the Gini Coefficient, which is calculated from the Lorenz Curve.
The Gini Coefficient measures the degree of income equality in a given population.
The Gini Coefficient varies on a scale from 0 (perfect equality) to 1 (perfect inequality).
A higher value of Ginni coefficient indicates higher income inequality, and vice versa.
- Gini Coefficient = (A/(A+B))
- Mathematically, It is the ratio of two geometrical areas
- = (Area between Lorenz curve of that country and line of equality/ Area of half square in which the Lorenz curve lies)
- The closer the Lorenz curve is to the line of equality, the smaller area A is, and lower will be the Gini coefficient.
- If there is a high degree of inequality, then area under A will be a bigger percentage of the total area.
- A rise in the Gini coefficient shows a rise in inequality, it shows the Lorenz curve is further away from the line of equality.
Atkinson’s inequality measure or Atkinson’s index
- This is the most popular welfare-based measure of inequality.
- It presents the percentage of total income that a given society would have to forego in order to have more equal shares of income between its citizens.
- This measure depends on the degree of society aversion to inequality (a theoretical parameter decided by the researcher), where a higher value entails greater social utility or willingness by individuals to accept smaller incomes in exchange for a more equal distribution.
- An important feature of the Atkinson index is that it can be decomposed into within and between-group inequality.
- Moreover, unlike other indices, it can provide welfare implications of alternative policies and allows the researcher to include some normative content to the analysis.
World Bank’s Poverty line
Source: World Bank, NPR.org
image Source: The Hindu