Source of Inequality in consumption Expenditure in India: A Regression Based Inequality Decomposition Analysis

Higher economic growth in India has bypassed a major percentage of population, whose share in income and benefits has been low. In recent years, the Central Government has been laying more emphasis on redistributive policies (such as, ‘inclusive growth’ strategy) in addition to keeping high the growth momentum. However, along with higher economic growth India has also been experiencing the higher level of inequality over the years. Due to lack of officially provided income data, a considerable number of studies have used consumption data to measure the level of inequality in India. However, much less is known about the driving force behind the trend of the increasing inequality and their quantitative contribution. In this back drop, the present paper estimates the Regression based inequality decomposition (Morduch and Sicular, 2002; Fields, 2003; Fiorio and Jenkins,2007) by considering unit level National Sample Survey data on consumption expenditure for the years 2004-05 and 2011-12 for rural and urban India separately. The main objective behind this exercise is to investigate the relevant household level characteristics which stand as the major source of consumption inequality in India. Regression results show that the estimated regression coefficients match with the expected signs, and most of them are statistically significant at 1 percent level. The decomposition based regression analysis finds that household size is responsible for the maximum share of inequality in the total inequality of the average MPCE and predicted MPCE in the both urban and rural areas in 2004-05 and 2011-12. In addition, factors like higher level of education, share of workers engaged in less productive jobs (such as, casual labour and agricultural worker), regular salary earning member of a household, higher level of land possessed by the households, and households having hired dwelling unit are also contributing to the higher level of inequality in the total inequality of the average MPCE and predicted MPCE. Finally, the paper suggests that in order to avoid the negative consequences of rising inequality in India, government must ensure higher level of education, higher level of employment opportunities, equal land distribution, and housing for all for any meaningful reduction of the level of inequality and for an equal and brighter India tomorrow.