For instance, consider a person A, whose income is 1,000 but 1,000 is not sufficient to sustain. He borrows another 1,000 and consumes 2,000 in that month. Consider second person B, who earns 10,000 but consumes only 5,000 and saves 5,000.
We go and survey both A and B. A reports consumption of 2,000 and B reports consumption of 5,000. We calculate inequality as the distance between 2,000 and 5,000. Without going into indexes, let's say inequality is 3,000.
This measure of 3,000 as inequality is misleading because A's income was only 1,000 and B's was 10,000. The actual inequality is 9,000. The difference between consumption measures and income measures arises because the lower percentiles consume more than their income and higher percentiles save a significant part of their income. Consumption measures thus give lower estimates.
The question then is - how are the people at bottom percentiles consuming double their income? Debt! Borrowing. It takes us back to an earlier post on demonetisation on why it is incorrect to argue "poor don't have cash savings, hence they won't suffer". Poor don't use cash savings like us, as an instrument to protect against uncertainties. They smoothen their consumption using credit. So, their transaction intensity, the amount of money transacted in proportion to their wealth, is high. As seen here, they are essentially surviving on credit. They have negative wealth. When cash is sucked out, it impacts the instrument of the credit thereby hurting the poor adversely.