SPECIAL ARTICLE

Inequality in India–I

Dipak Mazumdar, Sandip Sarkar, Balwant Singh Mehta

I
Examining the course of inequality in terms of average ndia lends itself as a particularly useful case to study the
per capita expenditure, it is seen that the period after the impact of globalisation on the course of inequality within
the economy. Although some attempts to open up were
reforms were initiated registered a dramatic increase in
made in the second half of the 1980s, serious steps towards
the relative growth of welfare in the top expenditure liberalisation date from the crisis of 1991 onwards. Over the
group, even as the poorest group progressed at a rate next two decades, the process continued in small steps.1 The
higher than the mean. The dip in the middle of the course of inequality in the economy can be traced through the
various rounds of the National Sample Survey Office (NSSO)
distribution disappeared later when a “ladder” pattern
data of households, conducted every five years.
of growth was observed, with each quintile group This paper begins with an examination of the traditional
showing a higher growth rate than the preceding one. theory, which predicts that globalisation would lead to de-
The major reasons for this changing pattern are creasing inequality in developing countries. It outlines why
this might not be the case as suggested in the literature. This
discussed in terms of the structure of growth in the
is examined with specific reference to the nature of Indian
Indian economy, particularly what happened in the labour markets. These aspects of the employment structure
tertiary and manufacturing sectors. The paper is being in India are elaborated upon, and the major features of
published in two parts. Part II will appear in the issue household inequality are outlined. Since incomes from vari-
ous sources are pooled together in the reported total income
of 12 August.
(expenditure) of the household, we are not able to say much
about the determinants of individual earnings from this
analysis.
In the second part, the paper looks at the part of the survey
that deals with wage earners. The determinants of labour
income are analysed. This exercise misses out the analysis of
earnings of a substantial proportion of the Indian labour
force—the self-employed. Since the earnings of such workers
are a mix of labour incomes and returns to capital and entre-
preneurship, this is not easy to address.

1 Globalisation and Inequality

Globalisation has been associated traditionally (in standard
textbooks) with decreasing inequality—at least within an
economy. The Heckscher–Ohlin model predicts that as an econ-
omy opens up to trade, it would be associated with increasing
demand for less-skilled labour, plentiful in low-income econo-
mies. Clearly, much depends on the precise nature of the
labour used in the tradable sector, and the associated changes
in the non-tradable sector that ensue as trade expands.

1.1 Nature of ‘Modern’ Labour Markets

Economic development means faster growth of the non-
household sector of the labour market. This leads us to the
first critique of the standard view on the lines of Adrian
Dipak Mazumdar (dipakmazumdar1932@gmail.com) is a visiting Wood’s (1994) work, which suggests that this “modern”
professor at the Institute for Human Development, Delhi. Sandip Sarkar labour market favours more educated labour over the mass of
(delhisandip@gmail.com) and Balwant Singh Mehta (balmehtalko@ “no education” labour. However, the difference between the
gmail.com) are with the IHD, Delhi.
two types of labour requires clarification.
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SPECIAL ARTICLE

The basic difference between a select labour force in the unstable labour (with a lower supply price) a degree of stability
non-agricultural formal sector and the mass of labour found in needed for industrial work (Mazumdar 1959).
the informal sector turns out to be not so much as to whether A second important feature is provided by the case of decen-
or not the former has received some education or not, but their tralised industrialisation in several East Asian countries, in-
ability to accept the discipline and the commitment needed for cluding Taiwan, Japan, and South Korea. These economies
industrial work of a modern economy. Thus, the attachment of were able to develop modern industries with a distinct bias to
such labour to the individual firm that enables it to acquire small enterprises that were often dispersed to smaller towns
firm-specific skills is crucial. This gives rise to the importance, and semi-agrarian areas, thus enabling single migrants with a
traditionally ascribed in the Indian industry, to “stable” labour, lower supply price to commute to work in manufacturing
selected out of the mass of floating migrant jobseekers, often enterprises in the “formal” sector, producing goods for the
called “casual” labour. While the importance of on-the-job globalised markets. India, by contrast, used migratory labour
training and the formation of a firm-specific stable labour disproportionately in the informal sector. The formal–informal
force are crucial in most developed countries as well, the dif- wage difference was thus smaller in East Asia than in India.3
ference in the non-traditional sector labour markets of devel-
oping countries can be emphasised as follows. In developing 1.3 The ‘Missing Middle’
countries, the urban labour market attracts both casual (non- Unlike several of the East Asian economies, India’s manufactur-
stable) and regular workers. The relative importance of casual ing sector is characterised not by a more or less even distribution
labour, a large number of whom are migratory with stronger of employment by size groups, but by a distribution with two
connections to the rural economy, would be much larger. The modes: one at the lower end with employment size below 10
wage differential between the two types of labour would also workers, and another at the high end with the number employed
tend to be much larger, reflecting the higher supply price of la- more than 500 workers. It should be emphasised that this
bour settled in towns. dualistic structure with a “missing middle” is found in the
As we shall see, the Indian experience does not show that “modern” non-household sector of manufacturing (that is, ex-
educated labour with computer skills is quantitatively the cluding the large informal sector of household manufacturing).
most important part of the labour force used in export expan- Theoretically, globalisation could cut both ways in its im-
sion. The reason for the wide gap in “skills” or quality of labour pact on this dualistic size structure. On the one hand, insofar
in the modern sector and the “no education” labour in the tra- as globalisation demands greater standardisation and quality
ditional sector is basically a question about the contents of the of products, manufacturing units would try to locate them-
education system. The failure to participate in the globalised selves in the high labour productivity sector, leaving the do-
manufacturing sector has been ascribed partly to the lack of mestic market to the household and small non-household
skills developed in the labour force, which has technically units. This would tend to increase the gap between the lower
gone through the primary or even the lower secondary rung of and upper modes of the dualistic structure. On the other hand,
the education system. The quality of education and, in particu- with the spread of industrialisation, one could expect an in-
lar, the discipline expected to be imparted through primary creasing supply of workers adapted to industrial work and dis-
schools, has not really been able to transform the schooled into cipline coming into the labour market. However, this trend
a qualitative category sufficiently different from “no educa- will be weakened if industrialisation is led by large-scale units
tion” labour. It follows that skill formation has to be imparted as is the case in India (since much of industrial skills are ac-
critically within the factories in the modern sector.2 quired through on-the-job training within the factories). We
examine which of these trends have affected India more
1.2 Institutional Factors strongly in recent years in Section 5.
While the point made above is generally valid for all newly
industrialising economies with a substantial transfer of labour 1.4 Importance of Non-tradable Sector
from rural to urban areas, certain specific features of the Indian A major characteristic of Indian growth in the last few decades
labour market could be singled out as exacerbating the is that it has been led by the tertiary sector. A large proportion
rural–urban divide. Two of the more important ones might of the tertiary sector has been “non-tradable,” centred on the
be mentioned here. domestic market.
The first is the prevalence of gender bias in industrial em- The dominance of the domestic tertiary sector in the Indian
ployment in India. Historically, the textile mills (as also other growth process provides a challenge to the Heckscher–Ohlin
industries) in India tended to show a bias towards using male interpretation of the relationship between growth and ine-
labourers and confining females to a few specific occupations. quality. In the traditional view, the tertiary sector is a sector of
This required attracting family migrants with a higher supply “free entry” for the mass of unskilled labour with a low supply
price to provide the core of stable labour needed by modern price. Thus, the dominance of this sector would imply a dispro-
factories. This scenario contrasts with that in Japan, where portionate demand for low-wage jobseekers and would help
female labour, in the few years before marriage, was used to mitigate inequality in the economy over time.
feed the needs of Japan’s textile factories. They were housed in Our examination of the trends in inequality by industrial
dormitories attached to the factories, thus giving the potentially sectors in Section 5 shows that there is little difference in the
48 JULY 29, 2017 vol liI no 30 EPW Economic & Political Weekly
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“dualistic” structure of household welfare (as measured by the estate assets that are not properly reported or documented. In
average per capita expenditure or APCE) in the manufacturing economies like that of India, where the expenditure on such
and tertiary sectors. One might hypothesise that this is be- assets is systematically undervalued by both the buyers and
cause the tertiary sector, along with a large mass of unskilled the sellers, the survey data will necessarily under-represent
low-income workers, also has a sizeable amount of skilled the expenditure levels of richer households. Thus, the inequal-
workers in financial and public services. But, a more detailed ity measure will be underestimated by an unknown extent.
examination of the sub-sectors within tertiary activities reveals However, available information on wealth inequality shows
that this is not so. Much of the increase in the share of employ- that the top 10% of households possess a little over half of the
ment in the tertiary sector is because of the increase in the total wealth (whether measured in terms of assets4 or net
sub-sector, “trade, hotels and restaurants.” worth5) in the country, while the bottom 10% possess a mere
It appears that an important element in the structure of 0.2% of the total wealth. The bottom 50% of the population
the tertiary sector is product market segmentation, which own less than 10% of the total wealth. The wealthiest have
differentiates “poor man’s goods” of low quality from “rich tended to consolidate between the two surveys (the top 10%
man’s goods.” Since the price differential between these two owned 51.94% of wealth in 2002 versus 50.79% in 1991), while
types of goods is substantial, this phenomenon is necessarily the bottom 10% have only lost their share (0.21% in 2002
associated with a bi-modal structure of incomes and in- versus 0.22% in 1991). Overall, there is a divergence in asset
creased inequality. This phenomenon mirrors the bi-modal holdings as the rich have pulled away from the poor in asset
structure in the manufacturing sector, which is accentuated accumulation after liberalisation (Jayadev et al 2007).
by the “missing middle.” In what follows, we divide the Indian experience into three
periods, determined by the availability of different rounds of
1.5 Limited Globalisation the NSSO Household Consumer Expenditure Surveys.6 Since
The Indian export sector is relatively small, and although the reforms of the largely closed economy are thought to date
not as extreme as some other countries, it has been reason- from 1991, we consider the first period 1883–1993 to be the
ably centralised. The large role played by the tertiary sector pre-reform decade. The second period 1993–2004 is the first
(Table 1) has meant that the domestic value added component phase of the post-reform era. India’s participation in the global
of India’s exports has been higher than the average in the world economy accelerated in the third period, 2004–11. According
economy. At the same time, much of Indian manufacturing— to official statistics, the gross domestic product (GDP) growth
except perhaps for diamond processing and processing rate accelerated over these three periods from 4.98% in the
of crude oil—is based Table 1: Exports as a Percentage of Gross first to 6.26% in the second, and 8.45% in the third.
on domestic resources. Domestic Product Indian growth, in the post-reform period (post 1993), has been
Indian manufacturing is Export/GDP 2000–01 2007–08 2010–11 2011–12
one of increasing inequality accompanied by significant decline
Manufacturing 2.8 2.5 3.3 3.8
still far from being inte- Tertiary 2.1 2.8 2.9 3.0 in poverty. In the pre- Table 2: Measures of Inequality (Average
Per Capita Expenditure, 1983 to 2011–12)
grated with the glo- Source: Asian Development Bank Economic Indicators, reform period (1983–93), Period GE(0) GE(1) GE(2) Gini
balised value chain. World Trade Organization, and Exim Bank, India, 2015. the growth pattern in Rural
This is in contrast with the experience of manufacturing ex- rural areas was pro-poor 1983 0.1690 0.1952 0.3244 0.3193
ports in China. Chinese export growth has been strongly in the sense that the 1993 0.1480 0.1840 0.4537 0.2982
fuelled by this sector, which also has strong dependence on APCE grew at a faster rate 2004 0.1724 0.2233 0.5312 0.3199
imported inputs. But the difference with India is its volume, for those at the lower end 2011 0.1619 0.2210 0.8810 0.3103
reflecting the much stronger integration of China with the of the consumption ex- Urban
1983 0.2226 0.2487 0.4217 0.3670
global value chain. Further, Chinese participation in the global penditure distribution. In
1993 0.2093 0.2387 0.4166 0.3568
market is not by any means dominated by products at the high urban areas, its distribu-
2004 0.2501 0.2902 0.5344 0.3891
end of technology. In fact, the Chinese success is at the lower tion was virtually neutral. 2011 0.2501 0.3033 0.6039 0.3901
end of consumer products. A substantial part of what we have Marked changes took Total
described as the “poor man’s goods” has been provided by place in the post-reform 1983 0.1876 0.2170 0.3698 0.3370
Chinese exports, in contrast to India’s presence in this sub-sec- period. The richer groups 1993 0.1967 0.2397 0.5042 0.3465
tor in the domestic market. In fact, India’s products are facing in rural areas were fa- 2004 0.2326 0.2920 0.6254 0.3758
growing competition from imports from China. The detailed voured, but the urban 2011 0.2309 0.3028 0.8415 0.3743
discussion of this phenomenon and its probable causes are areas had a much stronger GE shows Generalised Entropy measures. GE(0) gives
more weight to the lower tail of the income distribution,
large topics, which are beyond the scope of this paper. bias towards pro-rich GE(1) gives equal weight, and GE(2) gives more
growth (Mazumdar and weight to the upper tail of income distribution. For
GE(a), the parameter (a) varies from 0 to 1, GE
2 Inequality Trends at the Household Level Sarkar 2013). becomes less sensitive to income at the lower end of
The literature on inequality at the household level uses APCE of Table 2 presents the the distribution, and more sensitive to income at the
higher end.The cases of special interest are values of 0,
the households as a measure of household welfare. The limita- measures of inequality 1 and 2. With a=0, the measure corresponds to the
tions of this measure of inequality are fairly obvious. House- of the APCE. The overall mean log deviation, a=1 gives the Theil index of
inequality, and a=2 gives the half of the squared
hold expenditure surveys like the NSSO cannot include the Gini has been almost coefficient of variation.
spending of households on many types of financial and real stable during 2004–07, Source:Authors’calculations from NSSO, various rounds.
Economic & Political Weekly EPW JULY 29, 2017 vol liI no 30 49
SPECIAL ARTICLE

contrasted with 3 percentage points’ increase over 1993–2004. the poorest quintile had the highest growth rate. The rate
The entropy measures give an indication of the changes in dif- decreased successively in the next three quintiles, but picked
ferent parts of the income distribution. GE(0), which gives up in the top quintile. This was the period in which the evi-
greater weight to the lower part of the distribution, has re- dence points to the poorest and the richest, increasing their
versed its upward trend of the first decade of the post-reform household welfare at the expense of the middle-income groups.
period and more so in the rural sector, but the growing impor- Overall, the degree of inequality remained virtually stable.
tance of high incomes can be seen in both sectors, and particu- In the first post-reform period (1993–2004), the U-shaped
larly in the rural sector in the accelerated rate of increase of the pattern of growth rates by quintile groups is moderated with
GE(2) index. the dip in the middle being less marked. In fact, it is only
The kernel density function graphs (Figures 1 and 2) give a the top quintile that shows a relatively higher growth rate,
visual image of the shifts in the distribution of the APCE over with the growth of the APCE being almost uniformly spread
different NSSO rounds. Over the years, the peak has moved across other quintiles. Further, whatever dip is seen occurs
to the right and the mode of the distribution also has fallen for the second and the third quintiles, with the fourth quintile
substantially. joining the fifth in the category of higher growth rate. An
Figure 1: Kernel Density Functions for Rural Areas, 1983 to 2011–12 important point to emphasise is that the top quintiles had a
1983
much higher growth rate than the lowest, in contrast to the
.0015
1993–94
experience of the pre-reform period. The post-reform period
showed a decidedly upward movement in the measures of in-
.001
equality for all the three entropy measures, as well as for the
Density

2004–05 overall Gini (Table 2).

.0005
We see a total change in the pattern of quintile growth
2011–12 rates in the third period (2004–11). As the overall growth rate
0
0 1000 2000 APCE 3000 4000 5000 accelerates, the U-shaped pattern is replaced by a “ladder”
The APCE is deflated using consumer price index for agricultural labour (CPI-AL) for rural areas. with the relative growth rate steadily increasing for each suc-
Source: Authors’ calculations from NSSO, various rounds. cessive quintile. The experience of the lowest quintile sharing
Figure 2: Kernel Density Functions for Urban Areas, 1983 to 2011–12 relatively higher growth with the richest quintile that moder-
.0015
ated in the second period now disappears altogether. But,
since all groups get some of the fruits of growth, the overall
1993–94 measure of inequality stays virtually the same, except for the
.001
Density

1983
GE(2) measure, which is sensitive to high incomes. It registers
a large jump, and interestingly, more so in the rural areas
.0005
2011–12 (Table 2).
2004–05
The Asian Development Bank (ADB 2012) looked at the ex-
0 perience of select countries roughly over the period 1990–
0 1000 2000 3000 4000 5000
APCE
2010. The most common pattern observed in countries—in-
The APCE is deflated using consumer price index for industrial workers (CPI-IW) for urban areas. cluding in China, Indonesia, Sri Lanka and Lao Democratic
Source: Authors’ calculations from NSSO, various rounds.
Republic—was the “ladder,” that is, growth rates increasing
Figure 3: Growth of APCE across Quintiles (Relative to Average Growth) with successive quintile groups. India seemed to be excep-
150 Q1
Q3 tional insofar as the growth rate, besides being low overall,
Q2 Q4
Q5 increased conspicuously only at the highest quintile. This
100
was confirmed in the same study by a comparison of the con-
tinuous “growth incidence curve” (plotting growth rate
against per capita income or expenditure) for India and Indo-
50 nesia. The nearly constant value of growth in India, until it
took a sharp upward lift at about the 80th decile, contrasted
0 sharply with the decidedly upward-sloping curve for Indone-
1983 to 1993–94 1993–94 to 2004–05 2004–05 to 2011–12 sia. The ADB study, however, covered the Indian experience
Q1 is the bottom quintile and Q5 is the top quintile; other intermediate quintiles are in for a single period, covering the two end-points, 1993 and
ascending order. Average growth of the APCE in each period is taken as 100. 2010. As we have seen, the Indian experience registered sev-
Source: Authors’ calculations from NSSO, various rounds.
eral changes till the high-growth phase of 2004–11 when it
The bar graphs of the annualised rates of growth of the APCE, conformed to the ladder pattern observed in other countries.
for the five quintiles, relative to average (mean) growth, over the
three periods—1983 to 1993–94, 1993–94 to 2004–05 and 2004– 3 Determinants of Inequality
05 to 2011–12—are given in Figure 3.7 Some idea of the proximate determinants of inequality in the
The bars of quintile growth rates show significant differ- APCE can be formed from a Fields decomposition of the results
ences in the three periods. In the first (pre-reform) period, of the regression model “explaining” the value of the APCE.
50 JULY 29, 2017 vol liI no 30 EPW Economic & Political Weekly
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The results of the exercise of the “factor inequality weights” as Chinese researchers. One such exercise is done by researchers
per the Fields methodology are given in Tables 3 and 4. at the Chinese Academy of Social Sciences (Mazumdar 2010).
It is apparent that demo- Table 3: Factor Inequality Weights No claim is made that the sample surveys are strictly compara-
graphic factors, as seen in this for APCE in 2011–12, Including ble in the two countries. For one thing, the Chinese data set8
Household Size
model by “household size,” Rural Urban
refers to urban households alone and the dependent variable
have a considerable impact on Head age 0.004 0.006 is household income per capita (not expenditure, as in the
the explanatory power of the Household size 0.099 0.136 Indian sample survey). The technique of analysis is similar,
model (Table 3). It should be Social category 0.033 0.035 based on a decomposition exercise of a regression model to
noted that the earner–depend- Religion 0.009 0.005 explain the variance in household income (expenditure) per
ent ratio (which is partly re- Region 0.069 0.067 capita. Major observations from a rough comparison of the
sponsible for the variance in the Education of the results are summarised as follows:
household head 0.094 0.158
APCE) is negatively correlated Industry 0.017 0.020
(i) The explanatory variable of the Chinese model seems to be
with household size. Formal sector 0.034 0.045 greater, 41.9% in 2001 and 54.2% in 2005.
As in the case of the 2004–05 Residual 0.641 0.529 (ii) For India, the human capital variable explains more than
NSSO round, the major proxi- Source: Authors’ calculations from NSSO, 14% of the variance in both years, but it is still less than in the
mate determinant of inequality Household
2011–12.
Consumer Expenditure Survey,
Chinese model, which is close to 16%.
is education. In fact, the con- (iii) The significant role of the tertiary sector in increasing in-
Table 4: Factor Inequality Weights
tribution of “education of the for APCE in 2011–12, Excluding equality is apparent in China as in India. The service sector
household head” in 2011–12 Household Size dummies contribute 4.5% to 5% to explain the variance.
Rural Urban
might have increased due to (iv) A major difference in the experience of the two countries
Head age 0.003 0.001
the results obtained from the is the much larger role of the “region” dummies to explain in-
Social category 0.036 0.043
information technology (IT) Religion 0.010 0.009
equality in China. They account for a large 10%–15% of the
sector. But, IT is not the high- Region 0.079 0.075 variance in urban China compared to around 2.5% in urban
income employment-generating Education of the India. Admittedly, the difference in the definitions of “region”
industry in the tertiary sector, household head 0.095 0.159 in the two exercises might contribute to this large difference,
as IT, as a subgroup of the Industry 0.015 0.021 but it is large enough to constitute a major element of differ-
financial and business service Formal sector 0.039 0.050 ence between the two economies.
sector, has generated less than Residual 0.724 0.642
(v) The variable “informality” plays a significantly smaller role
Source: Authors’ calculations from NSSO,
1% of the total employment in Household Consumer Expenditure Survey, in the Chinese model at a maximum of 2% in the 2005 survey,
2009–10 (Sarkar and Mehta 2011–12. compared to 5% in urban India. Part of the difference is
2013). Table 8 (p 53) shows that two tertiary sectors—trade, accounted for by the difference in the nature of informal em-
hotel and restaurants (in 2011–12), and transport, storage and ployment in the two economies. In China, because of non-
communication (from 2004–05)—have substantially in- registration of a large proportion of urban immigrants, a good
creased their relative productivity in relation to agriculture. deal of these migrants (who will be in “informal” employment)
It can be inferred safely that, in addition to IT, sub-sectors are single migrants living with other migrants under the same
such as communication, and the high-end part of hotel and “household” roof. So, even if there are large differences in
restaurant have begun to create high-income employment in earnings between such migrants and other “formal” sector
the decade of 2000–10. workers, the difference in per capita household income is
Mazumdar (2010) also highlighted the contribution of “edu- likely to be much less because of the higher proportion of adult
cation of the household head,” particularly for urban areas in earners in such migrant households. In other words, while
2004–05. In the current analysis, we introduce an additional formal- and informal-sector earnings are put together in the
dummy variable (formal–informal sector), and it is seen to be analysis, the formal–informal earnings difference will be a
a significant explanatory variable, although some distance crucial factor in the explanation of the inequality in earning.
away from the importance of education. Other significant de- But, if we are explaining the inequality in the distribution of
terminants continue to be social category, industry, and re- per capita income (or expenditure) per household, the propor-
gion, for both the rural and the urban sectors. Note that the tion of earners in the household size (or some such measure of
variance explained by the model (with an identical set of ex- earning strength) is likely to be of greater importance. For the
planatory variables) has improved somewhat, though no high- Indian analysis, as mentioned, household size was not used
er than a maximum of 36% in the urban sector. along with the earner–dependent ratio of the household be-
cause there was likely to be significant (negative) relationship
3.1 Household Inequality in China and India between the two. While this is likely to be the case if the ma-
There is a great deal of interest on the comparative experi- jority of households were “nuclear,” the presence of a large
ence of India and China in the process of growth with ine- proportion of single migrant households in the urban labour
quality. The trend of increasing inequality has actually been market (with much of their nuclear families left behind in the
higher in China. Some analyses of sample surveys like those rural sector) is likely to complicate the picture. The arrange-
conducted by the NSSO in India have been undertaken by ment worked out by such migrants in terms of the households
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SPECIAL ARTICLE

they live with will be critical, and households would show second to construction as the major source of employment, but
more variance in terms of the earner–dependent ratio relative not so as regards the GDP. It is also clear from Table 5 that al-
to family size. It seems likely that the larger presence of such though construction has improved its relative share of employ-
migrants in urban China results in the “proportion of adults in ment from 2004–05 to 2011–12, it is the tertiary sector that has
the household” variable play an independent and significant the highest share of employment in the non-agricultural sector,
role in the explanation of per capita household income in the much more than construction and manufacturing, and even
Chinese case. Thus, we see that the “demographic” variables more so in the GDP.
in the Chinese model turn out to be much more important in One might be tempted to speculate that the leading role of
the decomposition of household income per capita. the tertiary sector in growth might be due to the well-publi-
cised growth of telecom services and their role in exports. Ajit
4 Employment and Earnings by Employment Sectors Ghose (2015) has, however, conclusively proved that this is not
Some researchers have reported a rather remarkable decrease so. Using input–output tables, Ghose concluded: “The contri-
in the rate of growth of aggregate employment. For example, bution of growth of services exports to growth of services
Kannan and Raveendran (2012: 78, Table 1) show that employ- output was just 6 per cent for the period 1981–2000, which
ment (both male and female) hardly seems to have increased increased to 13 per cent in 2000–12” (2015: 68).
over the two NSSO rounds (2004–05 and 2009–10) in spite of The dominance of services in Indian growth cannot be sup-
substantial growth in the GDP. This is primarily because of a ported by the hypothesis that there is a worldwide trend in
drastic decrease in the female work participation rate (WPR), modern manufacturing to add a growing component of services
which seems to have declined from 28.8% to 22.05% between to its finished product. Ghose’s calculations from the input–
2004–05 and 2009–10. Such massive changes in WPRs are not output exercise showed that “intermediate demand (including
unusual in the reported estimates. These are due to the uncer- splintering) for services from industry and agriculture has
tain and varying treatment of the workers in subsidiary status been small and declined between the periods. The rapid
combined with those in principal status. A similar problem was growth of services was clearly sustained very largely by the
found in the reported decline in employment between the growth of domestic final demand” (2015: 68).
1993–94 and 1999–2000 NSSO rounds. Mazumdar and Sarkar In low-income countries, consumer demand has a large
(2008: Chapter 4) established that this was largely due to de- component of services, since bulk-breaking and selling in
velopments in the market for subsidiary labour, particularly the small lots is important for low-income consumers (Bauer and
female agricultural workforce. Yamey 1957). But, the peculiarity of the Indian service sector is
The conclusion to be derived from this research is that it is that the value added per worker is not unduly low as this effect
not possible to be clear about employment trends that talk of would tend to produce. In fact, the relative value added per
different types of labour—principal and subsidiary, and across worker in the tertiary sector as a whole was much more than
gender and age groups. In the absence of such research, and that in both manufacturing and construction in 2011–12, and
since the detailed study of this topic is outside the scope of this grew rapidly over time (Table 8). The solution to this paradox
paper, we shall assume that aggregate growth of measured is provided by the hypothesis proposed in Section 1: there is a
employment does not affect seriously the composition of em- product market segmentation in the Indian consumer markets
ployment between sectors. Further, we would seek to mini- such that services catering to low-income consumers coexist
mise any problem that might arise from this assumption by with those demanded by higher-income groups, and the juxta-
confining ourselves to the sectoral distribution of employment position of the two pulls up the mean value added per worker.
of those in usual principal status only. This becomes clearer when we break down the composition
of the tertiary sector. The data on employment, value added
4.1 Dominance of Tertiary Sector and labour productivity by different categories of tertiary
Table 5 shows the changes in the proportions of employment activity are presented in Tables 6, 7 (p 53) and Table 8, together
and output in different periods. It also shows the percentage of with the aggregates for all three major sectors. The IT sector
employment and output in different sectors in 2011–12. We see is not the only high-income employment generating industry
that the tertiary sector in India dominated the non-agricultural in the tertiary sector. As pointed out earlier, trade, hotel and
sector during the first decade of the post-reform period. In the restaurants (in 2011–12) and transport, storage, and commu-
slow growth witnessed at the beginning of the century, it was nication (from 2004–05) have substantially increased their
relative productivity in relation to agriculture. In addition to IT,
Table 5: Changes in Employment and Output over Different Periods
Industry Employment Gross Domestic Product communication and the high-end part of the hotel and restau-
1993–94 to 2004–05 to 1993–94 to 2004–05 to rants subsectors have begun to create high-income employment
2004–05 2011–12 2011–12 2004–05 2011–12 2011–12
during 2000–12.
(in percentage points) (in %) (in percentage points) (in %)
Agriculture -3.9 -7.6 47.6 -4.4 -4.9 14.1
In spite of the recent spurt of the growth rate and increasing
Manufacturing 1.1 0.7 12.8 0.6 0.4 15.7 globalisation, the share of employment in manufacturing has
Construction 2.7 4.3 10.7 0.9 0.2 7.9 increased only marginally (Table 6). Much of the fall in the share
Tertiary 3.1 2.4 28.4 8 5.4 58.4 of the agricultural sector seems to have been absorbed by
Source: Authors’ calculations from NSSO, various rounds. construction, while the share of employment in the tertiary
52 JULY 29, 2017 vol liI no 30 EPW Economic & Political Weekly
 SPECIAL ARTICLE

sector has continued to increase. The share of GDP in manufac- Figure 4: Kernel Density Function for the Primary Sector, 1983 to 2011–12
turing has inched up by 0.4 percentage points, but the increase .0015
1983
1993–94
in the share of the tertiary sector is much more substantial in
2004–11. As a result, relative labour productivity of the ter- 2004–05
.001

Density
tiary sector—both as a whole and for its broad components—
has increased significantly. .0005
2011–12

Table 6: Share of Employment of Broad Industrial Sectors,

1983 to 2011–12, Usual Principal Status (%)
1983 1987–88 1993–94 1999–2000 2004–05 2011–12 0
0 1000 2000 3000 4000 5000
1 Agriculture 64.9 62.5 61.1 58.5 54.6 47.0 MPCE
2 Mining and quarrying 0.7 0.8 0.8 0.6 0.7 0.6 Source: Authors’ calculations from NSSO data, various rounds.
3 Manufacturing 11.3 11.5 11 11 12.1 12.8 Figure 5: Kernel Density Function for the Secondary Sector, 1983 to 2011–12
4 Electricity, gas and .0015 1993–94
water supply 0.4 0.4 0.5 0.3 0.3 0.5
5 Construction 2.7 4.2 3.7 4.9 6.4 10.7
.001 1983

Density
6 Trade, hotels and
restaurants 6.9 7.6 8 9.3 11.2 12.2
7 Transport, storage .0005
2004–05
and communication 3 3 3.3 4.1 4.5 4.7
8 Financial, insurance, real 2011–12
0
estate and business services 0.7 0.7 1.1 1.3 1.8 2.8
9 Community, social 0 1000 2000 3000 4000 5000
MPCE
and personal services 9.4 9.3 10.5 10 8.5 8.6
Source: Authors’ calculations from NSSO data, various rounds.
Tertiary sector (6–9) 20.0 20.6 22.9 24.7 26.0 28.4
Secondary sector (3–5) 14.4 16.1 15.2 16.2 18.8 24.0 Figure 6: Kernel Densityy Function for Tertiaryy Sector, 1983 to 2011–12
Primary sector (1–2) 65.6 63.3 61.9 59.1 55.3 47.6 .0015
Source: Authors’ calculations from NSSO data, various rounds.
Table 7: Sectoral Shares of Gross Domestic Product, 1983 to 2011–12 (%) .001
Density

1983
Industry 1983 1987–88 1993–94 1999–2000 2004–05 2011–12 1993–94
1 Agriculture 34.9 29.8 28.1 23.4 19 14.1
.0005 2004–05
2 Mining and quarrying 3 3.1 3.3 3 2.9 2.1
2011–12
3 Manufacturing 14.7 15.1 14.7 14.9 15.3 15.7
4 Electricity, gas and 0
water supply 1.6 1.9 2.2 2.3 2.1 1.9 0 1000 2000 MPCE 3000 4000 5000
5 Construction 6.9 6.9 6.8 6.7 7.7 7.9 Source: Authors’ calculations from NSSO data, various rounds.
6 Trade, hotels and
restaurants 12.1 12.8 12.6 14.7 16.1 16.9 5 Inequality by Industrial Sectors
7 Transport, storage
Further insights into the determinants of inequality at the
and communication 5 5.5 5.5 6.2 8.4 10.6
8 Financial, insurance, real
household level might be obtained by looking at inequality by
estate and business services 9.1 10.9 13.3 14.2 14.7 18.1 broad industrial sectors. It has been hypothesised that grow-
9 Community, social ing inequality in the Indian economy is essentially due to the
and personal services 12.7 14 13.6 14.6 13.8 12.8 pattern of economic growth that consists of three interrelated
Tertiary sector (6–9) 38.9 43.1 45 49.7 53 58.4
phenomena:9 (i) the growth process has been led by the ter-
Secondary sector (3–5) 23.2 23.9 23.6 23.9 25.1 25.5
tiary rather than the manufacturing sector, both in terms of
Primary sector (1–2) 37.9 33 31.4 26.4 21.9 16.2
Source: National Accounts Statistics (NAS), Government of India, various years.
employment and value added; (ii) inequality has been signifi-
cantly more pronounced in the tertiary sector; (iii) the rela-
Table 8: Relative Labour Productivity by Sectors, 1983 to 2011–12
Industry 1983 1987–88 1993–94 2004–05 2011–12 tively slow growth of manufacturing has been chiefly because
Agriculture 100 100 100 100 100 of the peculiar phenomenon of the “missing middle” in the
Mining and quarrying 793 818 888 1,173 1,137 Indian economy.
Manufacturing 243 275 289 362 386 The next section explores whether the accelerated growth
Electricity, gas and water supply 734 999 963 2,017 1,233 rate of the economy in the third period (2004–11) has done
Construction 476 345 396 345 238
anything to change the growth pattern in manufacturing
Trade, hotels and restaurants 326 352 343 412 432
mentioned in (iii). Here, we present evidence on the relative
Transport, storage
and communication 311 384 360 537 702 contribution of the three major sectors to aggregate household
Financial, insurance, real inequality in 2010–11, and examine if there has been any
estate and business services 2,409 3,249 2,617 2,345 1,956 significant change over the years. Figures 4, 5 and 6 show the
Community, social patterns of distribution of the APCE by the major sectors of
and personal services 252 315 281 467 464
activity of the household head for 2011–12.
Tertiary 362 438 427 585 641
Relative labour productivity is calculated by taking value added per worker in agriculture as 100.
While the visual impression conveyed by the KDF figures
Source: NAS and NSSO, various rounds. suggests that higher incomes have grown relatively more in
Economic & Political Weekly EPW JULY 29, 2017 vol liI no 30 53
SPECIAL ARTICLE

high APCE households, and more so in the tertiary sector we Figure 7: Employment Share of Tertiary Sector by Quintile Groups, Rural Areas
30
need to have a statistical measure of the contribution of each
25
type of household (distinguished by the main industry of ac- 2011–12
20
tivity of the household) to the overall inequality of all-house- 2004–05

Share
2004–05
15
hold welfare (as measured by the APCE). For this, it is not
10 1983
enough to get the weighted average of the inequality meas- 1993–94
5
ures of the APCE in the three types of households. We need to
0
rank the household in any activity not in terms of household 1 3 2 4 5
welfare (APCE) in that particular activity, but in terms of Quintiles
household welfare of all activities taken together. This can be Source: Authors’ calculations from NSSO data, various rounds.

done by the computation of “pseudo-Ginis” for each house- Figure 8: Employment Share of Tertiary Sector by Quintile Groups, Urban Areas
75
hold type.10 The result for the four years of NSSO surveys is
70
given in Table 9. 2004–05
65
Table 9 shows that the pseudo-Gini values are the highest for 60
1993–94
the tertiary sector for all the years, but that they had declined

Share
55
2011–12
somewhat in the last period. 50
1983
Table 9: Contribution to Inequality of Households by Sector of Activity, 45
1983 to 2011–12 40
Sector of 1983 1993–94 2004–05 20
2011–12
201
20 1 2 3 4 5
Activity Pseudo- Gini Pseudo- Gini Pseudo- Gini Pseudo- Gini Quintiles
Gini Gini Gini Gini Authors’ calculations from NSSO data, various rounds
Primary 0.162 0.078 0.174 0.071 0.166 0.051 0.141 0.026 phenomenon of growth with increasing inequality, and dif-
Secondary 0.461 0.081 0.446 0.076 0.33 0.065 0.253 0.057
fers markedly from the growth process observed in other
Tertiary 0.552 0.191 0.555 0.235 0.525 0.262 0.464 0.229
Asian countries, notably in the East Asian economies of
Pseudo-Gini measures inequality in terms of household welfare, not in terms of activity in a
particular sector, but in terms of the household welfare of activities in all sectors taken together. Japan, Taiwan, and Korea. The hypothesis developed at
Source: Authors’ calculations from NSSO data, various rounds. length in our earlier work (Mazumdar and Sarkar 2008) is
However, the absolute value of the pseudo-Gini for the indi- that it is the size distribution of enterprises in manufacturing,
vidual sectors is of less interest than their values relative to with the conspicuous “missing middle” responsible both for
each other. The contribution of each sector k to inequality is the slow growth of manufacturing and the unequal growth of
equal to Sk*Gk*Rk, where Gk*Rk is the pseudo Gini for sector k, the tertiary sector. Low-productivity manufacturing is the di-
Sk is the share of component k in total income, and G is the rect result of the bi-modal structure in the non-household
overall Gini for the economy (Lanjouw and Stern 1998: 390– subsector of manufacturing. This has discouraged adequate
91). It is seen that the Gk*Rk for the tertiary sector is by far the participation of the country in the booming export markets in
highest in the latest NSSO round, as the share of income origi- recent decades and, at the same time, has led to a relatively
nating from this sector has been increasing. For both these rea- sluggish development of the domestic market, in spite of
sons, the contribution of the tertiary sector to overall inequality India’s large population. Our earlier work (Mazumdar and
has increased substantially. Sarkar 2013) talked of the size structure data for 2005– 06.
The contribution of the different sectors to inequality can be What do the latest available data show?
explored by examining the relative contribution of the sectors Figure 9: Size Structure of Manufacturing Employment in India, 2010–11
to the quintiles of the total household APCE. Figures 7 and 8
499+ 24.7
show the employment share of the tertiary sector by quintile
groups for rural and urban areas, respectively. The employment 200–499 11.1
Size of Enterprise

share of the tertiary sector slopes upwards, suggesting that 100–199 7.8
higher-income groups are to be increasingly found in the ter- 50–99 6.5
tiary sector, and more so in the highest quintile, especially in the 10–49 9.5
urban areas. Although the absolute share of the tertiary sector
6–9 40.3
in the highest quintile is much higher in the urban sector, the
gap in this share between the pre-reform and the post-reform 0 5 10 15 20 25 30 35 40 45
Employment Share (%)
year is relatively higher in the rural areas. It is clear that ter- Source: Annual Survey of Industries (ASI), 2010–11 and Unorganised Manufacturing Sector
tiary employment growth—far from being an “absorber” of Enterprises Survey, NSSO, 2010–11.
low-income labour that is unable to get into more productive Figure 9 shows that in spite of the recent growth of newer
sectors—is being driven by high incomes created in this sector. industries in formal manufacturing, the basic size structure
became more U-shaped with the shifting of employment share
6 Size Structure of Employment in Manufacturing from the directory manufacturing establishments (DMEs;
Our major finding so far is that the pattern of growth in India employment size of 6– 9) to the highest size class of 499+
is led by the tertiary sector, both in terms of employment and without affecting the employment share of middle size classes
productivity (and earnings). This is a major factor driving the in any perceptible fashion.
54 JULY 29, 2017 vol liI no 30 EPW Economic & Political Weekly
 SPECIAL ARTICLE

The relative productivity of DMEs compared to the highest Indian growth experience can be causally connected to the
size class of 499+ remained unchanged at 8 in the last five peculiar pattern in manufacturing with its “missing middle,”
years (Table 10). However, Table 10: Productivity of Size Classes and with the large DME sector pulling down overall produc-
the productivity gap of (`) tivity in manufacturing with its dramatically low relative pro-
Size Class Labour Relative
smaller size classes within Productivity Productivity, ductivity. The latest data reveals that there has been relative-
the organised sector, as com- 499+=100 ly little change in this pattern. While the DME sector contin-
pared to the highest size 6–9 58,861 8 ues to account for 40% of all non-household manufacturing,
class of 499+, has lessened. 10 –49 2,76,813 36 the productivity gap between this sub-sector and the largest
Relative productivity of the 50 –99 3,60,218 47
(499+) units continues to be 8:1 in favour of the latter. New
100–199 3,43,890 45
10–49 size class was one- developments in manufacturing seem to have affected the
200 –499 4,95,044 65
fifth of highest size class in 499+ 7,61,051 100
size structure only marginally. Further, while the productivi-
2005–06. It got substantially All figures are in constant 2008–09 prices. ty differential by size groups within the organised sector have
reduced to one-third. In con- Data for size classes of factories employing 10 been reduced somewhat, the relative productivity of the mas-
or more workers is from ASI 2008–09. Figures
sequence, the productivity for size class 6–9 are of DMEs for 2010–11. sive DME sector remains as low as ever.
gap between the smallest Source: ASI, 2008–09 and NSSO, 2010–11. The policy conclusion is clear. Indian manufacturing des-
size class in the organised sector and the DME widened no- perately needs to increase the skill level of its industrial la-
ticeably. The reason for this changing phenomenon needs bour force if the manufacturing sector has to play a more
further investigation at a disaggregated level. leading role in the growth of output and employment. The
To conclude, the spurt in the growth rate of GDP from 2004 move away from tertiary sector-led growth to the historically
to 2009 has done little to alter the overall structure and dy- common experience of growth led by manufacturing is also
namics of the Indian economy. Manufacturing in the non- likely to be a significant factor in reducing inequality, particu-
household sector continues to be characterised by the con- larly by increasing incomes relatively more in the middle of
spicuous “missing middle.” Thus, the conclusion made in Ma- the distribution.
zumdar and Sarkar (2013) that resultant low productivity of
manufacturing is the proximate cause of the pattern of
growth led by the tertiary sector remains unaltered. The
Journal Rank of EPW
growth of the tertiary sector and inequality in income distri- Economic and Political Weekly is indexed on Scopus, “the largest
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7 Conclusions
Scopus has indexed research papers that have been published in EPW
The decade after the reforms were initiated (1993–2004) saw from 2008 onwards.
an increase in the relative growth of income at the upper end of
the distribution. At the same time, the poorest quintile also The Scopus database journal ranks country-wise and journal-wise. It
gained, as compared to the next two quintiles. The period from provides three broad sets of rankings: (i) Number of Citations, (ii)
H-Index, and (iii) Scimago Journal and Country Rank.
2004 to 2011 saw a reversal in this trend at the lower end, and
the quintile growth rates displayed a more usual “ladder” pat- Presented below are EPW’s ranks in 2015 in India, Asia and globally,
tern with successive quintile groups showing a higher growth according to the total cites (3 years) indicator.
rate than in the previous period.11 While the overall Gini has ● Highest among 37 Indian social science journals and second
remained more or less stable, there has been a sharp increase in highest among 187 social science journals ranked in Asia.
the entropy measure GE(2), which is more sensitive to high in- ● Highest among 38 journals in the category, “Economics,
comes, especially in the rural areas. Econometrics, and Finance” in the Asia region, and 37th among
Growth in India continues to be led by the tertiary sector. 881 journals globally.
Higher inequality in this sector has continued to fuel the in-
● Highest among 23 journals in the category,“Sociology and Political
crease in inequality and, in fact, has increased in its intensity.
Science” in the Asia region, and 17th among 951 journals globally.
The increase in the share of the tertiary sector in the top quin-
● Between 2009 and 2015, EPW’s citations in three categories
tile group in urban India has been quite dramatic in 2011–12.
(“Economics, Econometrics, and Finance;” “Political Science and
Looking at the individual sub-sectors within the tertiary sec-
International Relations;” and “Sociology and Political Science”)
tor, this is partly due to the high-earning financial and public
were always in the second quartile of all citations recorded
services coexisting with low-earning domestic services. We
globally in the Scopus database.
find that the dual structure exists even within the hotel, res-
taurant and trade sub-sector. This dualism is due to product For a summary of statistics on EPW on Scopus, including of the other
market segmentation with poor man’s goods coexisting with journal rank indicators please see (bit.ly/2dDDZmG).
rich man’s goods in the Indian consumer market. This is itself EPW consults referees from a database of 200+ academicians in
a result of unequal distribution of incomes. different fields of the social sciences on papers that are published in
The hypothesis advanced in our earlier work (Mazumdar the Special Article and Notes sections.
and Sarkar 2013) was that this role of the tertiary sector in the
Economic & Political Weekly EPW JULY 29, 2017 vol liI no 30 55
SPECIAL ARTICLE
notes the sample respondents (Deaton 1997). We as- Economic & Political Weekly, Vol 47, No 6,
sume that these changes have affected the pp 77–80.
1 Our earlier work (Mazumdar and Sarkar 2008, growth at different levels of the APCE equally, Lanjouw, Nicholas and Herbert Stern (1998): Eco-
2013; Sarkar and Mehta 2010) did not capture so that the growth rates of the APCE at the nomic Development in Palanpur over Five Dec-
the effects of the higher growth trajectory five quintiles relative to one another are not ades, United Kingdom: Clarendon Press.
India experienced since 2003–04. The gross affected.
domestic product (GDP) growth rate was over Mazumdar, Dipak (1959): “The Marginal Produc-
8 The Chinese surveys of urban households in tivity Theory of Wages and Disguised Unem-
9% for three consecutive years 2005–06 to
2001 and 2005 are conducted by the Institute ployment,” Review of Economic Studies, Vol 26,
2006–07, but fell substantially to 6.2% partly
of Population and Labour Economics, Chinese No 3, pp 190–97.
due to global recession, and partly because of
Academy of Social Sciences. — (1973): “Labour Supply in Early Industrialization:
tighter monetary policy aimed at curbing infla-
tion in 2011–12. 9 See Mazumdar and Sarkar (2013), Mazumdar The Case of the Bombay Textile Industry,” Eco-
(2010), and the references cited therein. nomic History Review, Vol 26, No 3, pp 477–96.
2 The detailed arguments and evidence for these
hypotheses had been set out by Mazumdar 10 See Mazumdar (2010: Appendix 4.A2) for an — (2010)” “Decreasing Poverty and Increasing In-
(1959, 1973) on the development of the labour explanation of the procedure. equality in India,” Tackling Inequalities in Bra-
market for the textile mills in Bombay (now 11 ADB (2012) documents the “ladder” pattern for zil, China, India and South Africa: The Role of
Mumbai). Indonesia, Lao People’s Democratic Republic, Labour Market and Social Policies, Paris: OECD
3 This theme has been extensively developed in China and Sri Lanka. Publishing, pp 158–208.
Mazumdar and Sarkar (2013). Mazumdar, Dipak and Sandip Sarkar (2008): Glo-
4 Total household assets consist of “physical balisation, Labour Markets and Inequality in
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5 Net worth is the total household assets net of the Hopkins University Press, World Bank. “Income Inequality in India: Pre- and Post-Re-
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6 We use four such rounds, 38th (1983), 50th Jayadev, A, S Motiram and V Vakulabharanam paper prepared for the National Association of
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56 JULY 29, 2017 vol liI no 30 EPW Economic & Political Weekly