The speeches of the Reserve Bank of India governor, Raghuram Rajan, are always a pleasure to read. In his latest speech made on 20 April 2016, Rajan said:
Rajan further said:
The point that Rajan was trying to make was that:
This was essentially a retort to politicians who keep tom tomming India’s dodgy economic growth numbers. While Rajan did not say that he does not believe in the economic growth numbers, he did try and make it clear that if India needs to reach anywhere, it needs strong and sustainable economic growth in the years to come. And achieving that is easier said than done.
Further, Rajan also made a more important point in his speech about India’s low per capita income. What is per capita income? John Lanchester defines per capita income in his book How To Speak Money as: “The total Gross Domestic Product(GDP) of a country divided by the number of people in the country.
As he further writes: “It is a measure of how rich the country’s citizens are on average - though it is a very rough measure of that, since a country’s WEALTH is often very unevenly distributed.”
The phrase to mark in the above paragraph is on average. The question is does an average always represent the right scenario? As Robert H Frank writes in Success and Luck-Good Fortune and the Myth of Meritocracy:
How does the above paragraph apply in the context of the GDP? What it tells us is that the average income of India is not equal to the income of the average Indian. Now what does that actually mean?
Let me explain that through an example. Let’s say on a given day in the city of Mumbai, an Ambani, an Adani, a Birla and a Tata, walk into a local Udupi restaurant in Matunga. The restaurant is known for its soft idlis and fabulous coffee. And this has attracted the four industrialists to this small place.
The moment these four walk into the restaurant, the average income of the people seated in the restaurant goes up by leaps and bounds. If I may rephrase the last sentence, the per capita income of the restaurant goes up leaps and bounds, when the four industrialists walk into the Udupi restaurant.
But this increase in per capita income of the restaurant will have no impact on the incomes of the other people seated in the restaurant. (This example is essentially an adaptation of an example Charles Wheelan uses in his book Naked Statistics).
As Charles Wheelan writes in Naked Statistics: “The mean, or average, turns out to have some problems in that regard, namely, that it is prone to distortion by “outliers”, which are observations farther from the center.”
So basically, the Ambanis, Adanis, Birlas and Tatas, of the world, essentially India’s rich, push up the average income of India i.e. the per capita income. As Wheelan writes: “The average income...could be heavily skewed by the megarich.”
In this scenario, the average income does not give us a correct picture. Further, it is safe to say, that the income of the average Indian is lower than the average income of India.
At this point it is important to introduce another term i.e. the median. As Wheelan writes: “The median is the point that divides a distribution in half, meaning that half of the observation lie above the median and half lie below.”
Hence, the median income is the income of the average Indian. Given this, the median income is the right representation of the income of the average Indian. This is because the rich outliers (the Ambanis, the Adnanis, the Tatas and the Birlas) are taken into account. Data from World Bank shows that the top 10 percent of India’s population makes 30 percent of the total income. And this pushes up the per capita income.
The trouble is that it is not so easy to find median income data in the Indian context. A survey carried out by Gallup in December 2013, put India’s median income at $616. Data from the World Bank shows that India’s per capita income during the same year was $1455.Hence, the median income was around 58 percent lower than the average income or the per capita income. And that is not a good sign at all.
This shows the tremendous amount of inequality prevalent in the country. The difference in the income of the average Indian and the average income of India is thus huge. In fact, I had written about this inequality in the column published on April 19.
In 2015-16, the average income of those not working in agriculture was 4.9 times those working in agriculture (using GDP at current prices). If we were to use GDP at constant prices (at 2011-12 prices), the ratio comes to 5.5. Constant prices essentially adjust for inflation. And this is really a big worry!
This article was first published in Equitymaster.
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