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132 Economic Survey 2020-21 Volume 1

Figure 10: Correlation of inequality and growth (as reflected in
income per capita) with total fertility rate in Indian States

Total Fertility Rate, 2017 (All) Total Fertility Rate, 2017 (All)
3.5 3.5

3 3
2.5 2.5

2 2

1.5 1.5

1 1
0.20 0.25 0.30 0.35 0.40 25 55 85 115 145 175
Low Gini High NSDP Per Capita (₹, '000)

Source: Total fertility rate (2017) from Office of the Registrar General of India, Ministry of Home Affairs

Are the patterns similar across different types and measures of inequality and different
time periods?

4.7 Figure 11 depicts the relationship between the two types of inequality in Indian states
i.e., the inequality in the ownership of asset measured by the Gini coefficients based of assets
and inequality of consumption measured by the consumption based Gini. The graph suggests a
weak positive (0.33) relationship between the two inequalities in India, implying that the states
with greater consumption inequality are the ones facing greater asset inequality as well. Further,
the line of equality or the 45º line is used to conclude that in Indian states, asset inequality
is much higher than consumption inequality as the all the data points lie far above the line
of perfect equality. Inequality of consumption is what matters the most rather than inequality
of assets or inequality of income. The permanent income hypothesis posits that individuals
and households attempt to smooth their consumption over time by borrowing or saving. Thus,
while the income of an individual varies from year to year, consumption is more permanent as
individuals tend to smooth their consumption over time. Measures of calculating income do not
take into consideration all the available resources that result into well-being. Further, savings
and borrowing practices vary across the income groups as the propensity to save is typically
higher among the rich than among the poor. Therefore, inequality of income does not reflect the
true inequality that individuals and households as consumers encounter. Second, in the context
2
of inequality, the divergence in assets among the rich and the poor do not necessarily correlate
strongly with the divergence in consumption (Cochrane, 2020).

4.8 As shown in Appendix A, the correlation between socio-economic indicators and
inequality are robust irrespective of the measure of inequality used - Gini coefficient based on

2 Meyer Bruce. When It Comes to Inequality Consumption is What Matters. Income Inequality in America: Myths
and Facts. https://economics21.org/html/when-it-comes-inequality-consumption-what-matters-978.html