Dynamics of Reallocation Within India’s Income Distribution

We investigate the nature and extent of reallocation occurring within the Indian income distribution, with a particular focus on the dynamics of the bottom of the distribution. We argue that income evolution is appropriately modeled using Geometric Brownian Motion (GBM). Specifically, we use the mechanism of GBM with a reallocation parameter that quantifies the extent and direction of reallocation in the distribution, as proposed by Berman et al. We find that since the early 2000s reallocation is negative, meaning that incomes are exponentially diverging and that there is a perverse redistribution of resources from the poor to the rich. It is well known that inequality has been rising in India in the recent past, but the assumption has been that while the rich benefit more than proportionally from economic growth, the poor are also better off than before. Our work refutes this as we find that India has moved from a regime of progressive to regressive redistribution, where continued impoverishment of the poor is directly spurring multiplicative income growth of the rich. Outcomes from the model suggest that income shares of the bottom decile (~1%) and bottom percentile (~0.03%) are at historic lows. We characterize these findings in the context of increasing in-formalization of the workforce in the formal manufacturing and service sectors, as well as the growing economic insecurity of the agricultural workforce in India. Significant structural changes will be required to address this phenomenon