Gini Coefficient is a measure of the income inequality in a country or between countries. In an economic context, it is important to understand what this coefficient or index is, how is it measured and what is India’s current status, for the IAS exam.
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What is the Gini Coefficient?
In economics, the Gini coefficient, also known as the Gini index or Gini ratio, is a measure of demographic distribution with the aim of projecting the income of a nation’s populace. The Gini coefficient is the most commonly used estimation of inequality.
The Gini Coefficient is named after Italian statistical and sociologist Corrado Gini who developed the coefficient.
How is the Gini Coefficient Measured?
The explanation is given below in points:
- A value of 0 indicates perfect equality (where everybody has the same wealth/income) and 1 indicates perfect inequality (that is, where one person owns all the wealth in a country).
- Practically, the value falls between 0 and 1 for most countries. In countries with high inequality, the value would be close to 1.
- A value below 0.4 is considered acceptable generally.
- There are multiple ways to calculate the Gini Coefficient.
- The two most popular methods are:
- Based on pre-tax (market) income
- Based on disposable income
- The second method takes into account taxes and social spending as well.
- The difference in both methods is an indicator of the efficacy of an economy’s fiscal policy in bringing down the rich-poor divide by means of social spending and taxation.
- Mathematically, the Gini Index is defined based on the Lorenz Curve. The Lorenz Curve is a graphical representation of the distribution of wealth/income. Read more on the Lorenz Curve on the given link.
Gini Coefficient Significance
Gini coefficient is useful because it projects negative values for income and wealth which standard measures of inequality are unable to provide. But it does have its fair share of limitations.
For example, it samples people at random points of their lives, which means that it can’t separate those whose financial futures are reasonably secure from those who do not have prospects, even in a large sample.
Other reasons why it is important is as follows:
- An increase in the Index implies that the government’s policies benefit the rich more than the poor and are not inclusive enough.
- So, a higher ratio may encourage the government to spend more on social welfare schemes and also increase the tax burden on the rich.
- It is important that the government tries to maintain a good ratio so that the rich-poor divide can be kept in check.
Gini Coefficient India
- As per the World Bank, India’s Gini Index is 35.2 (0.35) as of March 2020
- Currently, though, it is estimated to be close to 0.50, which is the highest value to date. Lesotho currently holds the distinction of the country having the highest Gini Coefficient at 0.632. The World Bank report indicates that India’s high population and uneven distribution of wealth is responsibly for its low performance in the index
Nations with high Gini Coefficient
The following table gives a ranking of the top 10 nations with a high Gini Coefficient:
Countries with the highest Gini coefficients
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The above details would be of help to candidates preparing for UPSC exams. You can know more about the topics asked in the exam by visiting the UPSC Syllabus page and also refer to the links given below for more articles.
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