Inequality and Growth: Conflict or Convergence? | Economic Survey & Government Reports - UPSC PDF Download

 Page 1


CHAPTER
04
Poverty is the parent of revolution and crime.
—Aristotle
The Economic Survey 2019-20 argued that ethical wealth creation – by combining the 
invisible hand of markets with the hand of trust – provides the way forward for India to 
develop economically. An often-repeated concern expressed with this economic model 
pertains to inequality. Some commentary, especially in advanced economies post the 
Global Financial Crisis, argues that inequality is no accident but an essential feature 
of capitalism. Such commentaries, thus, highlight a potential conflict between economic 
growth and inequality. Could the fact that both the absolute levels of poverty and the 
rates of economic growth are low in advanced economies generate this conflict? If so, 
could it be that a developing economy such as India can avoid this conflict – at least in 
the near future – because of the potential for high economic growth, on the one hand, and 
the significant scope for lifting millions out of poverty, on the other hand? This question 
becomes pertinent especially because of the inevitable focus on inequality following the 
COVID-19 pandemic. 
In this chapter, the Survey examines if inequality and growth conflict or converge in the 
Indian context. By examining the correlation of inequality and per-capita income with a 
range of socio-economic indicators, including health, education, life expectancy, infant 
mortality, birth and death rates, fertility rates, crime, drug usage and mental health, the 
Survey highlights that both economic growth – as reflected in the income per capita at 
the state level –and inequality have similar relationships with socio-economic indicators. 
Thus, unlike in advanced economies, in India economic growth and inequality converge 
in terms of their effects on socio-economic indicators. Furthermore, this chapter finds 
that economic growth has a far greater impact on poverty alleviation than inequality. 
Therefore, given India’s stage of development, India must continue to focus on economic 
growth to lift the poor out of poverty by expanding the overall pie. Note that this policy 
focus does not imply that redistributive objectives are unimportant, but that redistribution 
is only feasible in a developing economy if the size of the economic pie grows.
Inequality and Growth: Conflict 
or Convergence?
Page 2


CHAPTER
04
Poverty is the parent of revolution and crime.
—Aristotle
The Economic Survey 2019-20 argued that ethical wealth creation – by combining the 
invisible hand of markets with the hand of trust – provides the way forward for India to 
develop economically. An often-repeated concern expressed with this economic model 
pertains to inequality. Some commentary, especially in advanced economies post the 
Global Financial Crisis, argues that inequality is no accident but an essential feature 
of capitalism. Such commentaries, thus, highlight a potential conflict between economic 
growth and inequality. Could the fact that both the absolute levels of poverty and the 
rates of economic growth are low in advanced economies generate this conflict? If so, 
could it be that a developing economy such as India can avoid this conflict – at least in 
the near future – because of the potential for high economic growth, on the one hand, and 
the significant scope for lifting millions out of poverty, on the other hand? This question 
becomes pertinent especially because of the inevitable focus on inequality following the 
COVID-19 pandemic. 
In this chapter, the Survey examines if inequality and growth conflict or converge in the 
Indian context. By examining the correlation of inequality and per-capita income with a 
range of socio-economic indicators, including health, education, life expectancy, infant 
mortality, birth and death rates, fertility rates, crime, drug usage and mental health, the 
Survey highlights that both economic growth – as reflected in the income per capita at 
the state level –and inequality have similar relationships with socio-economic indicators. 
Thus, unlike in advanced economies, in India economic growth and inequality converge 
in terms of their effects on socio-economic indicators. Furthermore, this chapter finds 
that economic growth has a far greater impact on poverty alleviation than inequality. 
Therefore, given India’s stage of development, India must continue to focus on economic 
growth to lift the poor out of poverty by expanding the overall pie. Note that this policy 
focus does not imply that redistributive objectives are unimportant, but that redistribution 
is only feasible in a developing economy if the size of the economic pie grows.
Inequality and Growth: Conflict 
or Convergence?
122 Economic Survey 2020-21   V olume 1
INTRODUCTION
4.1 The Economic Survey 2019-20 argued that ethical wealth creation – by combining 
the invisible hand of markets with the hand of trust – provides the way forward for India to 
develop economically. An often repeated concern expressed with this economic model pertains 
to inequality. In the advanced economies, Wilkinson and Pickett (2009), Atkinson (2014) and 
Piketty (2020) show that higher inequality leads to adverse socio-economic outcomes but 
income per capita, a measure that reflects the impact of economic growth, has little impact. 
Some commentary, especially in advanced economies post the Global Financial Crisis, argues 
that inequality is no accident but an essential feature of capitalism. Such commentaries, thus, 
highlight a potential conflict between economic growth and inequality
1
. The significant reduction 
in poverty that high economic growth has delivered in India and China presents the most striking 
challenge to this notion of conflict between economic growth and inequality. Could the fact 
that both the absolute levels of poverty and the rates of economic growth are low in advanced 
economies generate this conflict? If so, could it be that a developing economy such as India can 
avoid this conflict because of the potential for high levels of economic growth, on the one hand, 
and the significant scope for poverty reduction, on the other hand, ? This question becomes 
pertinent especially because of the inevitable focus on inequality following the COVID-19 
pandemic.
4.2 The question remained important for India even before the pandemic. Choices in economic 
policy always present inherent trade-offs. Resolving these trade-offs in a manner that suits the 
specific economic context of the day is, therefore, critical to lay out clear policy objectives. 
The advanced economies may choose to focus on alleviating inequality given their stage of 
development, their potential rate of economic growth and the absolute levels of poverty that 
they face. Thus, they may resolve the trade-off between growth and inequality by leaning 
towards alleviating inequality. However, despite facing the same trade-off, the policy objective 
of focusing on inequality may not apply in the Indian context given the differences in the stage 
of development, India’s higher potential rate of economic growth and the higher absolute levels 
of poverty. Given these motivations, in this chapter, the Survey examines if inequality and 
growth conflict or converge in the Indian context in an effort to identify the correct policy 
objective for India.
4.3 By examining the correlation of inequality and per-capita income, which reflects the 
impact of economic growth, with a range of socio-economic indicators, the Survey highlights 
that both economic growth and inequality have similar relationships with socio-economic 
indicators. Thus, unlike in advanced economies, in India economic growth and inequality 
converge in terms of their effects on socio-economic indicators. Furthermore, this chapter finds 
that economic growth has a far greater impact on poverty alleviation than inequality. Therefore, 
given India’s stage of development, India must continue to focus on economic growth to lift the 
poor out of poverty by expanding the overall pie. Note that this policy focus does not imply that 
1
See Wilkinson and Pickett, 2009; Picketty, 2013 among others for the research on inequality, mostly focused on 
advanced economies.
Page 3


CHAPTER
04
Poverty is the parent of revolution and crime.
—Aristotle
The Economic Survey 2019-20 argued that ethical wealth creation – by combining the 
invisible hand of markets with the hand of trust – provides the way forward for India to 
develop economically. An often-repeated concern expressed with this economic model 
pertains to inequality. Some commentary, especially in advanced economies post the 
Global Financial Crisis, argues that inequality is no accident but an essential feature 
of capitalism. Such commentaries, thus, highlight a potential conflict between economic 
growth and inequality. Could the fact that both the absolute levels of poverty and the 
rates of economic growth are low in advanced economies generate this conflict? If so, 
could it be that a developing economy such as India can avoid this conflict – at least in 
the near future – because of the potential for high economic growth, on the one hand, and 
the significant scope for lifting millions out of poverty, on the other hand? This question 
becomes pertinent especially because of the inevitable focus on inequality following the 
COVID-19 pandemic. 
In this chapter, the Survey examines if inequality and growth conflict or converge in the 
Indian context. By examining the correlation of inequality and per-capita income with a 
range of socio-economic indicators, including health, education, life expectancy, infant 
mortality, birth and death rates, fertility rates, crime, drug usage and mental health, the 
Survey highlights that both economic growth – as reflected in the income per capita at 
the state level –and inequality have similar relationships with socio-economic indicators. 
Thus, unlike in advanced economies, in India economic growth and inequality converge 
in terms of their effects on socio-economic indicators. Furthermore, this chapter finds 
that economic growth has a far greater impact on poverty alleviation than inequality. 
Therefore, given India’s stage of development, India must continue to focus on economic 
growth to lift the poor out of poverty by expanding the overall pie. Note that this policy 
focus does not imply that redistributive objectives are unimportant, but that redistribution 
is only feasible in a developing economy if the size of the economic pie grows.
Inequality and Growth: Conflict 
or Convergence?
122 Economic Survey 2020-21   V olume 1
INTRODUCTION
4.1 The Economic Survey 2019-20 argued that ethical wealth creation – by combining 
the invisible hand of markets with the hand of trust – provides the way forward for India to 
develop economically. An often repeated concern expressed with this economic model pertains 
to inequality. In the advanced economies, Wilkinson and Pickett (2009), Atkinson (2014) and 
Piketty (2020) show that higher inequality leads to adverse socio-economic outcomes but 
income per capita, a measure that reflects the impact of economic growth, has little impact. 
Some commentary, especially in advanced economies post the Global Financial Crisis, argues 
that inequality is no accident but an essential feature of capitalism. Such commentaries, thus, 
highlight a potential conflict between economic growth and inequality
1
. The significant reduction 
in poverty that high economic growth has delivered in India and China presents the most striking 
challenge to this notion of conflict between economic growth and inequality. Could the fact 
that both the absolute levels of poverty and the rates of economic growth are low in advanced 
economies generate this conflict? If so, could it be that a developing economy such as India can 
avoid this conflict because of the potential for high levels of economic growth, on the one hand, 
and the significant scope for poverty reduction, on the other hand, ? This question becomes 
pertinent especially because of the inevitable focus on inequality following the COVID-19 
pandemic.
4.2 The question remained important for India even before the pandemic. Choices in economic 
policy always present inherent trade-offs. Resolving these trade-offs in a manner that suits the 
specific economic context of the day is, therefore, critical to lay out clear policy objectives. 
The advanced economies may choose to focus on alleviating inequality given their stage of 
development, their potential rate of economic growth and the absolute levels of poverty that 
they face. Thus, they may resolve the trade-off between growth and inequality by leaning 
towards alleviating inequality. However, despite facing the same trade-off, the policy objective 
of focusing on inequality may not apply in the Indian context given the differences in the stage 
of development, India’s higher potential rate of economic growth and the higher absolute levels 
of poverty. Given these motivations, in this chapter, the Survey examines if inequality and 
growth conflict or converge in the Indian context in an effort to identify the correct policy 
objective for India.
4.3 By examining the correlation of inequality and per-capita income, which reflects the 
impact of economic growth, with a range of socio-economic indicators, the Survey highlights 
that both economic growth and inequality have similar relationships with socio-economic 
indicators. Thus, unlike in advanced economies, in India economic growth and inequality 
converge in terms of their effects on socio-economic indicators. Furthermore, this chapter finds 
that economic growth has a far greater impact on poverty alleviation than inequality. Therefore, 
given India’s stage of development, India must continue to focus on economic growth to lift the 
poor out of poverty by expanding the overall pie. Note that this policy focus does not imply that 
1
See Wilkinson and Pickett, 2009; Picketty, 2013 among others for the research on inequality, mostly focused on 
advanced economies.
123 Inequality and Growth: Conflict or Convergence?
redistributive objectives are unimportant, but that redistribution is only feasible in a developing 
economy if the size of the economic pie grows. In sum, for a developing country such as India, 
where the growth potential is high and the scope for poverty reduction is also significant, the 
focus must continue on growing the size of the economic pie rapidly at least for the foreseeable 
future.
GROWTH, INEQUALITY, AND SOCIO-ECONOMIC OUTCOMES: 
INDIA VERSUS THE ADV ANCED ECONOMIES
4.4 In the advanced economies, Wilkinson and Pickett (2009), Atkinson (2014) and Piketty 
(2020) show that higher inequality leads to adverse socio-economic outcomes but income per 
capita, a measure of economic growth, has little impact. This section examines whether these 
findings apply to India. For this purpose, Figures 1-7 display simultaneously the correlation of 
socio-economic outcomes with inequality and income per capita across advanced economies 
and across Indian states. In each figure, the top panel displays these correlations for the Indian 
states while the bottom panel displays the same for the advanced economies; the chart on 
the left displays the correlation with inequality while the chart on the right displays the same 
with income per capita. These figures demonstrate clearly across a range of socio-economic 
outcomes the stark contrast between India and the advanced economies in the correlation of 
socio-economic outcomes with inequality and income per capita. Across the Indian states, it is 
observed that both inequality and income per capita correlate similarly with socio-economic 
outcomes. In these figures, inequality across Indian states is measured as the Gini coefficient of 
consumption. As it is demonstrated in the Appendix to the chapter, the results remain robust to 
using other measures of inequality. 
4.5 Figure 1 shows clearly that the index of health outcomes correlates positively with 
both inequality and income per capita across the Indian states. However, across the advanced 
economies, inequality correlates negatively with the index of health and social outcomes while 
income per capita correlates positively. Thus, while the conflict between growth and inequality 
is clearly seen across the advanced economies, inequality and growth converge in their effects 
on health among Indian states. Figures 2-5 show the same result using the index of education, 
life expectancy, infant mortality and crime respectively. It is clearly evident from Figure 6 that 
neither inequality nor income per capita among Indian states correlate strongly with drug usage; 
however, inequality correlates strongly with drug usage in the advanced economies. On mental 
health, Figure 7 shows that the effects of inequality and income per capita remain similar across 
the Indian states and the advanced economies. 
Page 4


CHAPTER
04
Poverty is the parent of revolution and crime.
—Aristotle
The Economic Survey 2019-20 argued that ethical wealth creation – by combining the 
invisible hand of markets with the hand of trust – provides the way forward for India to 
develop economically. An often-repeated concern expressed with this economic model 
pertains to inequality. Some commentary, especially in advanced economies post the 
Global Financial Crisis, argues that inequality is no accident but an essential feature 
of capitalism. Such commentaries, thus, highlight a potential conflict between economic 
growth and inequality. Could the fact that both the absolute levels of poverty and the 
rates of economic growth are low in advanced economies generate this conflict? If so, 
could it be that a developing economy such as India can avoid this conflict – at least in 
the near future – because of the potential for high economic growth, on the one hand, and 
the significant scope for lifting millions out of poverty, on the other hand? This question 
becomes pertinent especially because of the inevitable focus on inequality following the 
COVID-19 pandemic. 
In this chapter, the Survey examines if inequality and growth conflict or converge in the 
Indian context. By examining the correlation of inequality and per-capita income with a 
range of socio-economic indicators, including health, education, life expectancy, infant 
mortality, birth and death rates, fertility rates, crime, drug usage and mental health, the 
Survey highlights that both economic growth – as reflected in the income per capita at 
the state level –and inequality have similar relationships with socio-economic indicators. 
Thus, unlike in advanced economies, in India economic growth and inequality converge 
in terms of their effects on socio-economic indicators. Furthermore, this chapter finds 
that economic growth has a far greater impact on poverty alleviation than inequality. 
Therefore, given India’s stage of development, India must continue to focus on economic 
growth to lift the poor out of poverty by expanding the overall pie. Note that this policy 
focus does not imply that redistributive objectives are unimportant, but that redistribution 
is only feasible in a developing economy if the size of the economic pie grows.
Inequality and Growth: Conflict 
or Convergence?
122 Economic Survey 2020-21   V olume 1
INTRODUCTION
4.1 The Economic Survey 2019-20 argued that ethical wealth creation – by combining 
the invisible hand of markets with the hand of trust – provides the way forward for India to 
develop economically. An often repeated concern expressed with this economic model pertains 
to inequality. In the advanced economies, Wilkinson and Pickett (2009), Atkinson (2014) and 
Piketty (2020) show that higher inequality leads to adverse socio-economic outcomes but 
income per capita, a measure that reflects the impact of economic growth, has little impact. 
Some commentary, especially in advanced economies post the Global Financial Crisis, argues 
that inequality is no accident but an essential feature of capitalism. Such commentaries, thus, 
highlight a potential conflict between economic growth and inequality
1
. The significant reduction 
in poverty that high economic growth has delivered in India and China presents the most striking 
challenge to this notion of conflict between economic growth and inequality. Could the fact 
that both the absolute levels of poverty and the rates of economic growth are low in advanced 
economies generate this conflict? If so, could it be that a developing economy such as India can 
avoid this conflict because of the potential for high levels of economic growth, on the one hand, 
and the significant scope for poverty reduction, on the other hand, ? This question becomes 
pertinent especially because of the inevitable focus on inequality following the COVID-19 
pandemic.
4.2 The question remained important for India even before the pandemic. Choices in economic 
policy always present inherent trade-offs. Resolving these trade-offs in a manner that suits the 
specific economic context of the day is, therefore, critical to lay out clear policy objectives. 
The advanced economies may choose to focus on alleviating inequality given their stage of 
development, their potential rate of economic growth and the absolute levels of poverty that 
they face. Thus, they may resolve the trade-off between growth and inequality by leaning 
towards alleviating inequality. However, despite facing the same trade-off, the policy objective 
of focusing on inequality may not apply in the Indian context given the differences in the stage 
of development, India’s higher potential rate of economic growth and the higher absolute levels 
of poverty. Given these motivations, in this chapter, the Survey examines if inequality and 
growth conflict or converge in the Indian context in an effort to identify the correct policy 
objective for India.
4.3 By examining the correlation of inequality and per-capita income, which reflects the 
impact of economic growth, with a range of socio-economic indicators, the Survey highlights 
that both economic growth and inequality have similar relationships with socio-economic 
indicators. Thus, unlike in advanced economies, in India economic growth and inequality 
converge in terms of their effects on socio-economic indicators. Furthermore, this chapter finds 
that economic growth has a far greater impact on poverty alleviation than inequality. Therefore, 
given India’s stage of development, India must continue to focus on economic growth to lift the 
poor out of poverty by expanding the overall pie. Note that this policy focus does not imply that 
1
See Wilkinson and Pickett, 2009; Picketty, 2013 among others for the research on inequality, mostly focused on 
advanced economies.
123 Inequality and Growth: Conflict or Convergence?
redistributive objectives are unimportant, but that redistribution is only feasible in a developing 
economy if the size of the economic pie grows. In sum, for a developing country such as India, 
where the growth potential is high and the scope for poverty reduction is also significant, the 
focus must continue on growing the size of the economic pie rapidly at least for the foreseeable 
future.
GROWTH, INEQUALITY, AND SOCIO-ECONOMIC OUTCOMES: 
INDIA VERSUS THE ADV ANCED ECONOMIES
4.4 In the advanced economies, Wilkinson and Pickett (2009), Atkinson (2014) and Piketty 
(2020) show that higher inequality leads to adverse socio-economic outcomes but income per 
capita, a measure of economic growth, has little impact. This section examines whether these 
findings apply to India. For this purpose, Figures 1-7 display simultaneously the correlation of 
socio-economic outcomes with inequality and income per capita across advanced economies 
and across Indian states. In each figure, the top panel displays these correlations for the Indian 
states while the bottom panel displays the same for the advanced economies; the chart on 
the left displays the correlation with inequality while the chart on the right displays the same 
with income per capita. These figures demonstrate clearly across a range of socio-economic 
outcomes the stark contrast between India and the advanced economies in the correlation of 
socio-economic outcomes with inequality and income per capita. Across the Indian states, it is 
observed that both inequality and income per capita correlate similarly with socio-economic 
outcomes. In these figures, inequality across Indian states is measured as the Gini coefficient of 
consumption. As it is demonstrated in the Appendix to the chapter, the results remain robust to 
using other measures of inequality. 
4.5 Figure 1 shows clearly that the index of health outcomes correlates positively with 
both inequality and income per capita across the Indian states. However, across the advanced 
economies, inequality correlates negatively with the index of health and social outcomes while 
income per capita correlates positively. Thus, while the conflict between growth and inequality 
is clearly seen across the advanced economies, inequality and growth converge in their effects 
on health among Indian states. Figures 2-5 show the same result using the index of education, 
life expectancy, infant mortality and crime respectively. It is clearly evident from Figure 6 that 
neither inequality nor income per capita among Indian states correlate strongly with drug usage; 
however, inequality correlates strongly with drug usage in the advanced economies. On mental 
health, Figure 7 shows that the effects of inequality and income per capita remain similar across 
the Indian states and the advanced economies. 
124 Economic Survey 2020-21   V olume 1
Figure 1: Correlation of inequality and growth (as reflected in income per capita) 
with health outcomes: India versus Advanced Economies
States in India
20
30
40
50
60
70
80
0. 20 0. 25 0. 30 0. 35 0. 40
Gini
Health Index
Wor s e
B et t er
Low Hi g h
30
40
50
60
70
80
25 55 85 115 145 175
NSDP Per Capita (?, '000)
Health Index
B et t er
Wor s e
Advanced Economies
GBR
AUS
AUT
BE L
CAN DNK
FIN
FRA DE U
GRC
IRL
IT A
JPN
NL D
NZ L
NOR
PRT
E SP
SW E
CHE
U SA
- 1 .5
- 1 .0
- 0 .5
0 .0
0 .5
1 .0
1 .5
2 .0
2 .5
3 .0 4 .0 5 .0 6 .0 7 .0 8 .0 9 .0
Income Inequality
Index of health & social problems
Low Hi g h
B et t er
Wor s e
GBR
AUS
AUT
BE L
CAN
DNK
FIN
FRA
DE U
GRC
IRL
IT A
JPN
NL D
NZ L
NOR
PRT
E SP
SW E
CHE
U SA
- 1 .5
- 1 .0
- 0 .5
0 .0
0 .5
1 .0
1 .5
2 .0
2 .5
20 40 60 80 100
National Income Per Capita ($, '000)
Index of health & social problems
B et t er
Wor s e
 Source: States in India: Health Index (2017-18) is from NITI Aayog, Inequality is measured by the Gini coefficient 
based on consumption (from NSS database 2011) and growth by per capita Net State Domestic Product (NSDP) 
2017-18 in Rupees at constant prices, MoSPI. (Note: Health Index is a composite score incorporating 23 indicators 
covering key aspects of health sector performance., measured on a scale of 0-100, higher score indicating better 
performance). Advanced Economies: The index of health and social problems is a composite index including 
components like distrust, mental illness, life expectancy, and obesity etc (Data for each component is collected 
from a distinct source, http://www.equalitytrust.org.uk/why/evidence/methods for details on the construction of the 
Index, and references for all components listed above), Inequality is measured by Average of the 20:20 (the ratio of 
top 20 per cent to bottom 20 per cent) income inequality published in the United Nations Development Program. 
Human development reports for years 2003, 2004, 2005, 2006, Oxford University Press: New York.
Page 5


CHAPTER
04
Poverty is the parent of revolution and crime.
—Aristotle
The Economic Survey 2019-20 argued that ethical wealth creation – by combining the 
invisible hand of markets with the hand of trust – provides the way forward for India to 
develop economically. An often-repeated concern expressed with this economic model 
pertains to inequality. Some commentary, especially in advanced economies post the 
Global Financial Crisis, argues that inequality is no accident but an essential feature 
of capitalism. Such commentaries, thus, highlight a potential conflict between economic 
growth and inequality. Could the fact that both the absolute levels of poverty and the 
rates of economic growth are low in advanced economies generate this conflict? If so, 
could it be that a developing economy such as India can avoid this conflict – at least in 
the near future – because of the potential for high economic growth, on the one hand, and 
the significant scope for lifting millions out of poverty, on the other hand? This question 
becomes pertinent especially because of the inevitable focus on inequality following the 
COVID-19 pandemic. 
In this chapter, the Survey examines if inequality and growth conflict or converge in the 
Indian context. By examining the correlation of inequality and per-capita income with a 
range of socio-economic indicators, including health, education, life expectancy, infant 
mortality, birth and death rates, fertility rates, crime, drug usage and mental health, the 
Survey highlights that both economic growth – as reflected in the income per capita at 
the state level –and inequality have similar relationships with socio-economic indicators. 
Thus, unlike in advanced economies, in India economic growth and inequality converge 
in terms of their effects on socio-economic indicators. Furthermore, this chapter finds 
that economic growth has a far greater impact on poverty alleviation than inequality. 
Therefore, given India’s stage of development, India must continue to focus on economic 
growth to lift the poor out of poverty by expanding the overall pie. Note that this policy 
focus does not imply that redistributive objectives are unimportant, but that redistribution 
is only feasible in a developing economy if the size of the economic pie grows.
Inequality and Growth: Conflict 
or Convergence?
122 Economic Survey 2020-21   V olume 1
INTRODUCTION
4.1 The Economic Survey 2019-20 argued that ethical wealth creation – by combining 
the invisible hand of markets with the hand of trust – provides the way forward for India to 
develop economically. An often repeated concern expressed with this economic model pertains 
to inequality. In the advanced economies, Wilkinson and Pickett (2009), Atkinson (2014) and 
Piketty (2020) show that higher inequality leads to adverse socio-economic outcomes but 
income per capita, a measure that reflects the impact of economic growth, has little impact. 
Some commentary, especially in advanced economies post the Global Financial Crisis, argues 
that inequality is no accident but an essential feature of capitalism. Such commentaries, thus, 
highlight a potential conflict between economic growth and inequality
1
. The significant reduction 
in poverty that high economic growth has delivered in India and China presents the most striking 
challenge to this notion of conflict between economic growth and inequality. Could the fact 
that both the absolute levels of poverty and the rates of economic growth are low in advanced 
economies generate this conflict? If so, could it be that a developing economy such as India can 
avoid this conflict because of the potential for high levels of economic growth, on the one hand, 
and the significant scope for poverty reduction, on the other hand, ? This question becomes 
pertinent especially because of the inevitable focus on inequality following the COVID-19 
pandemic.
4.2 The question remained important for India even before the pandemic. Choices in economic 
policy always present inherent trade-offs. Resolving these trade-offs in a manner that suits the 
specific economic context of the day is, therefore, critical to lay out clear policy objectives. 
The advanced economies may choose to focus on alleviating inequality given their stage of 
development, their potential rate of economic growth and the absolute levels of poverty that 
they face. Thus, they may resolve the trade-off between growth and inequality by leaning 
towards alleviating inequality. However, despite facing the same trade-off, the policy objective 
of focusing on inequality may not apply in the Indian context given the differences in the stage 
of development, India’s higher potential rate of economic growth and the higher absolute levels 
of poverty. Given these motivations, in this chapter, the Survey examines if inequality and 
growth conflict or converge in the Indian context in an effort to identify the correct policy 
objective for India.
4.3 By examining the correlation of inequality and per-capita income, which reflects the 
impact of economic growth, with a range of socio-economic indicators, the Survey highlights 
that both economic growth and inequality have similar relationships with socio-economic 
indicators. Thus, unlike in advanced economies, in India economic growth and inequality 
converge in terms of their effects on socio-economic indicators. Furthermore, this chapter finds 
that economic growth has a far greater impact on poverty alleviation than inequality. Therefore, 
given India’s stage of development, India must continue to focus on economic growth to lift the 
poor out of poverty by expanding the overall pie. Note that this policy focus does not imply that 
1
See Wilkinson and Pickett, 2009; Picketty, 2013 among others for the research on inequality, mostly focused on 
advanced economies.
123 Inequality and Growth: Conflict or Convergence?
redistributive objectives are unimportant, but that redistribution is only feasible in a developing 
economy if the size of the economic pie grows. In sum, for a developing country such as India, 
where the growth potential is high and the scope for poverty reduction is also significant, the 
focus must continue on growing the size of the economic pie rapidly at least for the foreseeable 
future.
GROWTH, INEQUALITY, AND SOCIO-ECONOMIC OUTCOMES: 
INDIA VERSUS THE ADV ANCED ECONOMIES
4.4 In the advanced economies, Wilkinson and Pickett (2009), Atkinson (2014) and Piketty 
(2020) show that higher inequality leads to adverse socio-economic outcomes but income per 
capita, a measure of economic growth, has little impact. This section examines whether these 
findings apply to India. For this purpose, Figures 1-7 display simultaneously the correlation of 
socio-economic outcomes with inequality and income per capita across advanced economies 
and across Indian states. In each figure, the top panel displays these correlations for the Indian 
states while the bottom panel displays the same for the advanced economies; the chart on 
the left displays the correlation with inequality while the chart on the right displays the same 
with income per capita. These figures demonstrate clearly across a range of socio-economic 
outcomes the stark contrast between India and the advanced economies in the correlation of 
socio-economic outcomes with inequality and income per capita. Across the Indian states, it is 
observed that both inequality and income per capita correlate similarly with socio-economic 
outcomes. In these figures, inequality across Indian states is measured as the Gini coefficient of 
consumption. As it is demonstrated in the Appendix to the chapter, the results remain robust to 
using other measures of inequality. 
4.5 Figure 1 shows clearly that the index of health outcomes correlates positively with 
both inequality and income per capita across the Indian states. However, across the advanced 
economies, inequality correlates negatively with the index of health and social outcomes while 
income per capita correlates positively. Thus, while the conflict between growth and inequality 
is clearly seen across the advanced economies, inequality and growth converge in their effects 
on health among Indian states. Figures 2-5 show the same result using the index of education, 
life expectancy, infant mortality and crime respectively. It is clearly evident from Figure 6 that 
neither inequality nor income per capita among Indian states correlate strongly with drug usage; 
however, inequality correlates strongly with drug usage in the advanced economies. On mental 
health, Figure 7 shows that the effects of inequality and income per capita remain similar across 
the Indian states and the advanced economies. 
124 Economic Survey 2020-21   V olume 1
Figure 1: Correlation of inequality and growth (as reflected in income per capita) 
with health outcomes: India versus Advanced Economies
States in India
20
30
40
50
60
70
80
0. 20 0. 25 0. 30 0. 35 0. 40
Gini
Health Index
Wor s e
B et t er
Low Hi g h
30
40
50
60
70
80
25 55 85 115 145 175
NSDP Per Capita (?, '000)
Health Index
B et t er
Wor s e
Advanced Economies
GBR
AUS
AUT
BE L
CAN DNK
FIN
FRA DE U
GRC
IRL
IT A
JPN
NL D
NZ L
NOR
PRT
E SP
SW E
CHE
U SA
- 1 .5
- 1 .0
- 0 .5
0 .0
0 .5
1 .0
1 .5
2 .0
2 .5
3 .0 4 .0 5 .0 6 .0 7 .0 8 .0 9 .0
Income Inequality
Index of health & social problems
Low Hi g h
B et t er
Wor s e
GBR
AUS
AUT
BE L
CAN
DNK
FIN
FRA
DE U
GRC
IRL
IT A
JPN
NL D
NZ L
NOR
PRT
E SP
SW E
CHE
U SA
- 1 .5
- 1 .0
- 0 .5
0 .0
0 .5
1 .0
1 .5
2 .0
2 .5
20 40 60 80 100
National Income Per Capita ($, '000)
Index of health & social problems
B et t er
Wor s e
 Source: States in India: Health Index (2017-18) is from NITI Aayog, Inequality is measured by the Gini coefficient 
based on consumption (from NSS database 2011) and growth by per capita Net State Domestic Product (NSDP) 
2017-18 in Rupees at constant prices, MoSPI. (Note: Health Index is a composite score incorporating 23 indicators 
covering key aspects of health sector performance., measured on a scale of 0-100, higher score indicating better 
performance). Advanced Economies: The index of health and social problems is a composite index including 
components like distrust, mental illness, life expectancy, and obesity etc (Data for each component is collected 
from a distinct source, http://www.equalitytrust.org.uk/why/evidence/methods for details on the construction of the 
Index, and references for all components listed above), Inequality is measured by Average of the 20:20 (the ratio of 
top 20 per cent to bottom 20 per cent) income inequality published in the United Nations Development Program. 
Human development reports for years 2003, 2004, 2005, 2006, Oxford University Press: New York.
125 Inequality and Growth: Conflict or Convergence?
Figure 2: Correlation of inequality and growth (as reflected in income per capita) 
with education outcomes: India versus Advanced Economies
States in India
30
40
50
60
70
80
90
0. 20 0. 25 0. 30 0. 35 0. 40
Gini
Education Index
B et t er
Wor s e
Low
Hi g h
30
40
50
60
70
80
90
25 55 85 115 145 175
NSDP Per Capita (?, '000)
Education Index
B et t er
Wor s e
Advanced Economies
AUS
AUT
BE L
CAN
DNK
FIN
FRA
DE U
GRC
IRL
IT A
JPN
NL D
NZ L
NOR
PRT
E SP
SW E
CHE
U SA
ISR
440
460
480
500
520
540
560
3 .0 4 .0 5 .0 6 .0 7 .0 8 .0 9 .0
Income I ne qua l i t y
Maths and literacy scores
Low Hi g h
Wor s e
B et t er
AUS
AUT
BE L
CAN
DNK
FIN
FRA
DE U
GRC
IRL
IT A
JPN
NL D
NZ L
NOR
PRT
E SP
SW E CHE
U SA
ISR
440
460
480
500
520
540
560
20 40 60 80 100
National Income Per Capita ($, '000)
Maths and literacy scores
Wor s e
B et t er
Source: States in India: Education Index (2016-17) from NITI Aayog, (Note: SEQI (School education Quality 
Index) is based on a set of indicators that measure the overall effectiveness, quality and efficiency of the Indian 
school education system, measured on a scale of 0-100, higher score indicating better performance). Advanced 
Economies: Maths and literacy scores (2003) from OECD, Education at a glance 2003, in OECD Indicators. 2004, 
OECD: Paris. 
Note: These are the combined maths and reading literacy scores of 15 year olds