Misconceptions about Income Distribution in India

Most of us don't know what the real India lives like

A long article this week, with lots of charts and numbers. If this was forwarded to you by someone, this is a newsletter I write regularly. Subscribe to get free email updates.

We are all Jon Snow, we know nothing.

You and me, we know that there is grave inequality in India. We just don’t know how grave. Reality is much worse than our perceptions. My understanding of our “perceptions” is based on a survey I created last week. The “reality” is based on the ICE 360° survey from 2016 conducted by PRICE on a carefully chosen representative sample of Indian households. See the appendix for more details of the perception, the reality, and some disclaimers.

If you haven’t gone through my survey, I would suggest that you do so. It will take about 5-7 minutes, and will improve your appreciation of this article.

Here are the results, comparisons, and other statistics.

Understanding The Rich People

85% of the participants of my survey came through my social media accounts, and are likely to be people like you. Most of them were from Indian metros, mostly in the 20 to 50 age group, and with monthly household incomes between ₹50k-5L.

85% of the participants feel that they are in the 90 to 99 percentile of India by monthly household income. In other words, they think that they are in the top 10% but not in the top 1%.

In reality, 88% of them are in the top 0.5%.

The average monthly household income of the top 1% of all Indian households was ₹66k in 2016. Accounting for inflation in the last four years (and not accounting for any contraction due to COVID), that still works out to ₹85k. So, if your household earns more than ₹85k per month, then you are in the top 0.5% of India.

That is most of us. Unfortunately, only about 5% of us are aware of this fact.

Why? Because 70% of us think that the average household income of the top 1% is more than ₹2.5L. In fact, a majority of us guess it is more than ₹5L (not shown in graph). Similarly, a majority of the respondents assume that the average income of the top 10% of households is more than a ₹1L. It is 45k (35k in 2016).

We think of the top 1% as super-rich people. A majority of the respondents estimate that all of the top 1% have 4-wheelers. And 70+% feel that at least 90% of the top 1%-ers have 4-wheelers. Only 61% had 4-wheelers in 2016, and that number has probably not grown a whole lot.

Some more quick facts:

  • 36% of the top 1% live in rural India.

  • Less than half of the top 1% have a college degree

  • Only 27% of the top 10% have a college degree.

The Rest of India

The average monthly household income for all of India is about 22k (16.8k in 2016). This is for a household of about 4.7 members. Household sizes also differ by income. The top 20% of India has an average income of ₹40k for a household of about 3.7 members. The bottom 20% has an average income of ₹9k for a household of 6.2 members. Yes, less income and more mouths to feed.

In the metros, we don’t really have the “rest of India”. 87% of all the people living in metros are from the top 40%. Even if we regularly interact with the poor people in our city (which most of us really don’t), we rarely, if ever, meet anyone from the bottom 60% of India. Your domestic helpers are very likely to be in the top 40% of India.

A lot of us think of ourselves as “middle-class”. In fact, the 2016 survey showed that 95% of the top 1% of Indians think of themselves as middle class or worse. Middle-India, defined as the people between the 20 to 80% income range, is not us by a long shot. 75% of middle-Indian breadwinners were illiterate or had studied just until primary school. As a result, their incomes were meagre. People with a graduate degree had an income that is 2.5 to 3x higher.

What does most of India do? Only 20% of them had a salaried job. And 80% of those were grade IV jobs—i.e. peons, gardeners, housemaids, etc. 22% were land-owning farmers or had an agri-business of some sort. 25% were labourers or daily-wage earners. By the way, migrants were only low single-digit percentage.

Spending

Rural India outspends urban India by a large margin. In overall household expenses, such as FMCG, consumer durables, and services rural India accounted for 57% of the spend. Much of that was on food—44% of a rural budget and 60% of an urban budget was spent on food. The other big budget items were

  • Health: A larger fraction for the poor than the rich)

  • Commuting: A larger fraction for the rich

  • Clothing and education: Same fraction of people’s budgets across levels, surprisingly.

How come rent is not a big part of the budget? That’s because only 11% of India lived in rental accommodation. What about home loans? Another area where we have a serious misconception:

The chart shows the perception vs reality for the percentage of Indian households with any outstanding loans (not just real estate). Only 27% had a non-trivial outstanding loan.

Why do we take loans? 40% of all loans were agricultural loans; 29% were for “social reasons”, meaning weddings and other family functions. Did I mention that Indians as a group spent far more (1.8 times) on wedding expenses than on all forms of entertainment put together? That’s right. The 2nd most common reason for a loan in is “log kya kahenge?” (What will people say?)

Home loans or other real-estate loans were just 18% of all loans. And only 27% of households had loans. So, by my calculation, only 5% of Indians have home loans. Please do correct me if I made a mistake.

Surprising? That’s because, in metros, 78% of all loans were home/real-estate loans. But the rest of India is not like us.

Amenities

In 2016, 87% of Indians had access to electricity, 87% had mobiles (this has probably increased even more). But only 53% had tap water, 65% had TVs, and just 29% had a fridge. And, as you can see in the graph below, about 50% used firewood for cooking, something most of us don’t realize.

We are still a nation of wood-burners.

Key Takeaways

Whether it is to feel gratitude, or empathy, or for developing a marketing strategy, here is what we should be aware of:

  • We are in the top 0.5% of a country of 1.3 billion people

  • We don’t know what the rest of India lives like. Hence, we don’t understand their likes, their behavior, and their thinking.

  • The world is not like you or me or our friends. Due to this, our instincts mislead us. So, whenever possible, look for data.

  • This applies to other domains also. Understanding reality is hard work. But worth it.

Appendix 1

Source of the Data

I have taken most of the “real” data from the ICE 360° survey conducted in 2016 by PRICE. They surveyed 60,000+ households that were carefully chosen to be a representative sample. Look here for more information about the methodology. Our census data would, of course, be the gold standard, but that is from 2011, and the next one will be in 2021.

I have inflated all the income figures by 30%. That’s the increase in India’s national income between 2016 and 2020. (This figure does not include any COVID impact.)

Warning: Wikipedia’s Income in India page gives numbers that are significantly higher than these numbers. However, as far as I can tell, those are based on the Gross National Income, which computes something else. The numbers I’ve used are about “disposable income” (i.e., the actual after-taxes money in hand). I have used these numbers because I see that as a more accurate depiction. Also, the respondents to my survey were reporting the same number.

I am not an expert in this area, so I might be mistaken. If you are an economist and think I’ve made a mistake, please leave a comment.

Leave a comment

Under-reporting?

It is possible that people in the 2016 survey did not report their full income. Considering this possibility, the ICE 360° survey compared the total income according to their method, with the totals reported in the national accounts, and reached the conclusion that in the top 1% there might be under-reporting by a factor of 1.7 times. I have not considered this adjustment factor because my survey is also a similar survey and could have similar under-reporting. If, however, I do use that multiplier, the absolute numbers change somewhat, but the overall conclusions of this article remain more or less the same.

About My Survey

The peoples’ perceptions in this article are based on the first 214 responses to my survey. Here is some data about the respondents:

Monthly household incomes of the respondents (x axis) vs. number of respondents (y axis). Incomes above 10L have all been clubbed into the last bar, which is why it looks unusually tall.

Bulk of the people are between 20 and 50, with peaks around 22 (fresh engineering graduates, I think) and 40 (professionals a few years junior to me).

Thanks

If you reached this far, thanks for reading. I would love to hear your thoughts, comments, complaints, either via email, or a comment below. If you think someone else would like this article, please feel free to forward it or share it on social media.

Share