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Inequality and income mobility: the case of targeted and universal interventions in India

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Abstract

Income interventions with pro-poor targeting is a common fiscal policy around the world. However their distributional effects on consumption and savings are not well understood. Motivated by the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), we use longitudinal data on income and consumption of Indian households to estimate distributional effects of such interventions in a model with endogenous consumption and savings distribution, where households face uninsured income risks. In the model, a standard scheme of interventions that consistently targets low-income cohorts, has small distributional impacts on targeted and non-targeted cohorts alike. In contrast, a fiscally-equivalent scheme that changes the expected income profile of the targeted households in the same initial cohort irrespective of their future incomes, generates larger effects by changing income mobility for both the targeted and non-targeted cohorts. This mobility-based channel generates consumption responses even though the magnitude of the shock is lesser for the initially targeted cohort, as it more than offsets the effect from permanent income shock. Quantitatively, such an intervention in the order of 0.6 percent of output, approximating the Indian scenario, increases consumption share of the targeted cohort by nearly 2.5 percent, five times as large as the effect of standard interventions. The distributional effects are similar to those arising from a counterfactual policy of universal basic income.

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Data Availability

The data we use are provided by the Consumer Pyramids Households Survey developed by the Center for Monitoring the Indian Economy (CMIE). It is commercially available. One may visit https://consumerpyramidsdx.cmie.com/kommon/bin/sr.php?kall=wkb  this link to check how to access the data.

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Acknowledgements

We are grateful to seminar and conference participants at Ashoka University, IIM Ahmedabad, ISI Delhi Growth conference and 19th Macroeconomics and Finance Conference at IGIDR, Sambit Bhattacharya, Jeevant Rampal, Tridip Ray and Gautham Udupa for their helpful comments and feedback. We thank the editor and reviewers for helpful comments and suggestions. All remaining errors are ours. This research was partially supported by institute R &P grant, IIM Ahmedabad. ASC acknowledges research support from the UTI AMC chair in macroeconomics and University of Sussex Business School for hosting when this research was conducted (partially).

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Authors and Affiliations

  1. Economics area, Indian Institute of Management, Ahmedabad, Gujarat, India. Visiting professor at the Economics department, University of Sussex Business School, Brighton, UK

    Anindya S. Chakrabarti

  2. Economics area, Indian Institute of Management, Ahmedabad, Gujarat and O.P., Jindal Global University, Sonepat, Haryana, India

    Abinash Mishra

  3. Economics area, Indian Institute of Management, Ahmedabad, Gujarat, India

    Mohsen Mohaghegh

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  1. Anindya S. Chakrabarti
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Chakrabarti, A.S., Mishra, A. & Mohaghegh, M. Inequality and income mobility: the case of targeted and universal interventions in India. J Econ Inequal (2024). https://doi.org/10.1007/s10888-023-09614-5

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