inequality, piketty and india

8/12/2019 Inequality, Piketty and India

http://slidepdf.com/reader/full/inequality-piketty-and-india 1/634 GovernanceNow | April 1-15, 2014

Why do we vote? We don’t benet from cast -ing our votes; we don’t benet from notcasting our votes either,” said Dinesh Nay-

ak, summing up the status of voter empow-

erment after more than six decades of de-

mocracy in India. Sitting on a plastic chair outside his hutin Achhala village, he was talking about the plight of hiscommunity, Nayaks or Naykas.

This village is close to Chhota Udepur, some 90 km fromVadodara and a veritable headquarters of tribals in Gujarat.The Rathwa community among adivasis are economically

somewhat better o even if life is dicult for many of them.Rathwas have land and are not doing badly in agriculture,cultivating maize. When the highway to Madhya Pradeshpasses through towns, one can notice signboards of doctorswith the Rathwa surname. A few Rathwas have made po -

litical careers from the reserved constituency (one was aminister of state for railways in UPA I). But the Naykas area minority, indeed the marginalised among those who arenot far from the margins. Socially, they are one scale belowthe Rathwas, many of whom till recently would not drinkwater in a Nayka home.

Loktak Lake, near Moirang in Manipur, isthe largest freshwater lake in India.

Less equal

than othersEconomic models have been vociferously debated this poll season, but there is littlediscussion on the defining challenge of our time: economic inequality. It is increasing

fast, and India’s own 1% problem is bound to raise its head soon

Ashish Mehta


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35www.GovernanceNow.com

people politics policy performance

On Equality

Lallubhai Rathwa, who has studiedthe Nayka community while workingfrom the Adivasi Academy of Tejgagh,said the Naykas do not have land of

their own, and earn their living asfarm labourers, mostly in other partsof Gujarat. This forced migration forthe better part of the year means theycannot access quality health care andtheir children cannot regularly attendthe local school for long.

What a welfare state can do for themis to give them land, and that is verymuch on the cards. Under the ForestRights Act (FRA), they can claim landtheir forefathers used to till, but mostdo not have proofs. Dinesh Nayak re-

called that the state government prom-

ised to distribute its unused land to thepoor and even distributed token certif -icates of land rights at a ‘garib kalyanmela’, or the poor welfare fair, in 2009,but no one had got any land till the2012 assembly elections, thanks to thebureaucratic hurdles.

What the community has got fromour welfare state is job assurance un-

der MGNREGS (which they don’t need),money to construct houses under In-

dira or Sardar Awas Yojna (which hascertainly helped), a school and a healthcentre (which they cannot use exceptfor a couple of months a year). Whatthe community has so far got from thegreat white hope of our times, liberali-sation and economic reforms, is betterand better wages that, however, arenot enough to keep up with the ina-

tion and certainly not enough to accu-

mulate capital.

The Defining Challenge of Our TimeWhen we debate growth versus devel-opment, when we talk about the ‘neo

middle class’, when we list out benetsof liberalisation, it would probablyhelp to keep in mind Dinesh Nayak’s

friends, like the handicapped Luliyoand a youngster too afraid to give hisname to a reporter.

They have certainly beneted fromeconomic reforms – many of themsport mobile phones and take joy rideson motorcycles. They have jobs, evenif in the informal sector, and their in-

come has grown to an extent from1991 to today. What they do not haveis capital: no land, no investment, nohigher-level skills. In other words,a 44-year-old Nayak has seen his in-

come rising from 1991 to 2014 even ifit is not comparable to the rise enjoyedby a 44-year-old Delhi-based journal-ist. But the rst has no means to reap

benets of an India emerging as one ofthe fastest growing economies, where-

as the second has, and it shows not so

much in the income but in the capitalor wealth accumulated by the latter.

Also, unlike the former, the latter hasinherited some capital (a house, somestocks).

If we compare the marginalised citi-zen not with the middle-class taxpayerbut with a specimen of the top 1 per-

cent moneymakers in the country,the contrast would be way too stark –again, not just in terms of income, butalso in terms of capital (especially theinherited one), and the ability to reapbenets of a global economy.

With this much background, hereis what we need to seriously come toterms with: this contrast, this inequal-

ity is increasing. This is what US presi-

dent Barack Obama has called “the de-

ning challenge of our time”.

Dinesh Nayak of the tribal community of Naykas: will they ever be economically equal to the rest?

Whenever one speaks about thedistribution of wealth, politics is never very

far behind, and it is difficult for anyone to escapecontemporary class prejudices and interests. Thomas Piketty

GN PHOTOS



36 GovernanceNow | April 1-15, 2014

“Plenty of rationale for taxing richer people more” Do Piketty’s diagnosis ofincreasing inequality andthe prescription of ght-ing it with more taxes

apply to India? We turnedto leading developmenteconomist Reetika Khera. She responded in an emailinterview:

On using taxation toreduce income inequalityThere is immense unrealised potentialfor revenue collection in India. Raisingtax rates as Piketty suggests, especiallyraising the top marginal tax rate (fromthe current 30% to, say, even 35%), is

a measure I would support (more onthat below).More importantly, the tax base in

India continues to be very narrow.According to the nance minister’sbudget speech, only about 3% of thepopulation pays taxes. Compare thiswith a country such as the US whichis supposed to have a pro-rich taxa-

tion policy. There it is reported that just over 50% pay income taxes, buteven that is considered “low”. EvenChina has done much better than us:in about 20 years, the proportion pay-

ing income tax increased from 0.1% to20% in 2008!

Another reason for thelow tax base in India is taxexemptions. For instance,agricultural incomes re-

main tax-free even for the20% farmers who are notsmall or marginal. Whatstops the state govern-

ments from levying a at10% on medium or largefarmers? According to the

budget documents, revenue foregonedue to various exemptions was morethan `5 lakh crore in 2013-14. That isabout 80% of our total revenue collec-

tion! Further, these exemptions tendto be regressive: e.g., the diamond and

gold industry is among the highestbeneciaries of exemptions/rebates incustom duties – over `65,000 crores.

Coming back to the top marginal taxrate, the rhetoric of the “aam aadmi” inIndia is such that people who are at thetop of the income distribution in India

perceive themselves to be the middleclass, and feel sorry for themselves.According to the ILO, the middle class(though dicult to dene) includesthose whose incomes are between $4-13 per day. Combined with the fact thatmany subsidies (e.g., fuel) are enjoyedby the better-o in India, there is plen

-

ty of rationale for taxing richer people

more.The top marginal tax rate in Den-

mark was at 60% in 2013. The US withits pro-rich taxation policy set its top

rate at 40%. In India, it is only 30%.Certainly we can do better. In orderto keep top marginal tax rates low,many argue that the improvement inincome tax collections are due to thereduction in marginal tax rates. Cer-

tainly that contributed, but the otherfactor which contributed at least asmuch, viz., tax deduction at source(TDS), is never highlighted. The rich(or “aam aadmi”) have too muchvoice – in the business media, in poli-tics, and elsewhere too – in the Indian

system.

On the nexus between economic andsocial inequalitiesThe problems of economic and socialinequality are deeply connected inIndia. It is not easy for us to fully ap-

preciate how social inequalities can af -fect economic outcomes. Consider, forinstance, something as “innocent” asrural habitation patterns, where Dalitbastis are physically separate fromthose of other communities. Often, be-

cause sanctions are sought and givenby non-Dalits, the most basic ameni

-

ties such as hand-pumps, roads and

Growing inequality is a shocking sur-prise, because growth is supposed totake care of it. That has been the as-

sumption following from the workof the American economist SimonKuznets, which is the standard text-book view expressed in our policymak-

ing circles as the trickle-down theory:

if the economy grows, everybody ben-

ets – even if some benet less thanothers. A rising tide, in the words of

John F Kennedy, will lift all boats. In-

stead, what is happening is what manyvaguely, simplistically put as this: therich have become richer and the poorpoorer.

More than growth, more than jobcreation, economic inequality is thebiggest challenge before Indian econ-

omy in the 21st century. This conclu-

sion comes not from radicals but from

pro-market institutions like the Inter-

national Monetary Fund, Organisationfor Economic Cooperationa and Devel-opment and Asian Development Bank.

In their majestic work last year, ‘Un-

certain Glory: India and Its Contradic-

tions’, Jean Dreze and Amartya Senwere talking precisely about people

like the Naykas when they wrote:“Since India’s recent record of fast

economic growth is often celebrated,with good reason, it is extremely im-

portant to point to the fact that the so -

cietal reach of economic progress in In-

dia has been remarkably limited.”While inequality is common around

the world, India has a “unique cocktailof lethal divisions and disparities” ofcaste, class and gender apart from theeconomic ones – with each adding tothe other.

The economist duo also underlinedthe trend of growing economic inequal-ity. Even if inequality had remainedstatic, “poor people would have gainedmuch more from India’s rapid growth”,but the gap has increased, pushing thepoor down.

The ADB has specic gures too. A

February 2014 working paper calcu-

lates that the inequality (measured insomething called Gini coecient: 0means perfect equality, and 1 perfectinequality) increased from 0.33 to 0.37between the early 1990s and the late2000s. The bottom-line: “Had inequal-ity not increased, the poverty head-

count rate at the $1.25-a-day povertyline would have been 29.5% instead ofthe actual 32.7% in 2010 in India.”

If the Congress is voted out of power,this would be a critical factor.




The ‘Occupy’ movementIN the west, the gap between the richand the poor has been a matter of hotand excited debate for a while. First,it was the Occupy movement of 2011which drew attention to the ‘1 per-

cent’ (this slogan came from an essayby Joseph Stiglitz, who noted that the

top one percent Americans had cometo control 40 percent of the country’swealth). And second, because a Frencheconomist and his colleagues have puttogether astounding data going back tothe 18th century and covering 20 coun-

tries, coming to the same conclusion ina best-selling book.

Thomas Piketty’s ‘Capital in theTwenty-First Century’ (translated fromFrench and published this month byBelknap Press of Harvard UniversityPress) is attracting rave reviews. Paul

Krugman calls it a “truly superb book”.“It’s a work that melds grand histori-cal sweep—when was the last timeyou heard an economist invoke JaneAusten and Balzac?—with painstakingdata analysis… This is a book that willchange both the way we think aboutsociety and the way we do economics.”The Financial Times nds it is “an ex-

traordinarily important book”. The ti-tle and the ambition of the book haveinvited comparisons with Marx’s mag

-

num opus, though the author modestlypoints out dierences.

Piketty’s central nding is that thelevel of inequality – not just in incomesbut in overall capital, including wealth(land, shares, etc) – between the topand bottom tiers of society in the westwas very high, but the shocks of thetwo world wars and the state’s socialistinterventions later reduced the dier-

ence to an extent. However, since the

1990s inequality is increasing – aroundthe world. He also briey touches uponthe Indian case, based on income taxdata from 1922 to the early 2000s. Hisprognosis: inequality in overall capitalis increasing. This is leading the worldback to the pre-1915 days, when therich were rich for generations and thepoor had no chance of making it big, nomatter what – we are, in other words,returning to ‘patrimonial capitalism’ ofthe kind portrayed in nineteenth cen

-

tury novels.In the case of India, it is possible to es-

timate (using tax return data) that theincrease in the upper centile’s share ofnational income explains between one-quarter and one-third of the “blackhole” of growth between 1990 and2000.

Piketty has explored the Indian scenein detail in a discussion paper, writtenwith Abhijeet Banerjee (of ‘Poor Eco-

nomics’ fame) and published by the

Centre for Economic Policy Research in2004. Here are the specic ndings of‘Top Indian Incomes, 1922-2000’:

“Our data shows that the shares of thetop 0.01%, the top 0.1% and the top 1%in total income shrank substantiallyfrom the 1950s until the early-to-mid1980s but then went back up again, sothat today these shares are only slight-ly below what they were in the 1920s-1930s. We argue that this U-shapedpattern is broadly consistent with theevolution of economic policy in India:

electricity come to non-Dalit bastisrst. How does this aect econom-

ic outcomes? Take the example ofpublic transport, which would stopwhere the road stops. Combinedwith the fact that in some areas,

Dalits are still not allowed to enternon-Dalit settlements, their accessto public transport may be entirelycut o. Further, in some areas, theymay not even be allowed in the pri-vate shared tempos. Thus, some-

thing as simple as commuting (say,to a city for work) turns into a hur-

dle track for a Dalit person.The same holds for discrimination

faced by women – cultural normsmay inhibit (or prohibit even) wom-

en’s economic opportunities. Re-

search by Thorat and Attewell in In-

dia suggests that call-back rates for job interviews were systematicallylower for Muslim sounding namescompared with upper-caste Hindusounding names, even though theCVs were exactly the same. Unfor-

tunately, there is great resistance inIndia to accepting the existence ofsuch social inequalities, and theirrepercussions on economic out-comes and inequality. Inequality

– economic or social – appears tohave been completely internalised,to the extent that they are not evenrecognised as inequalities.

The rich-poor gap in India

“Inequality in earnings has doubled in

India over the last two decades, making

it the worst performer on this count of all

emerging economies. The top 10 percent

of India’s wage earners now make 12 times

more than the bottom 10 percent, up from

a ratio of six in the early 1990s.”

–OECD report


On Equality



38 GovernanceNow | April 1-15, 2014

s In particular, we do find evidence of a substantial decline inthe share of the elite during the years of socialist planningand a comparable recovery in the post-liberalization era.However the rebound seems to start significantly before the

official move towards liberalization.

s Our results suggest that the gradual liberalization of theIndian economy did make it possible for the rich (the top 1%)to substantially increase their share of total income. However,while in the 1980s the gains were shared by everyone inthe top percentile, in the 1990s it was only those in the top0.1% who big gains. The 1990s was also the period when theeconomy was opened. This suggests the possibility that theultra-rich were able to corner most of the income gains in the1990s because they alone were in a position to sell what theworld markets wanted.

—Abhijeet Banerjee and Thomas Piketty, from discussion paper ‘Top

Indian Incomes, 1922-2000’

Year Top 1%average income

Top 1%income share

Top 0.01% average income

Top 0.01%income share

1922 122909.9 12.72 1936560 2

1924 126488.7 11.46 2026708 1.84

1926 128806.7 12.89 1868081 1.87

1928 138579.7 13.62 2009664 1.98

1930 140360.9 14.53 2037199 2.11

1932 157712.4 16.14 2271200 2.32

1934 167082.2 16.9 2387050 2.41

1936 151630.9 15.58 2252387 2.31

1938 173215.3 17.82 2814694 2.9

1940 173426.5 16.15 3204867 2.98

1943 96004.29 10.32 1738684 1.87

1945 104408.2 11.41 1858192 2.03

1947 112743.7 11.23 2279373 2.27

1949 107421.5 12 1875089 2.1

1953 113292.2 11.92 1756642 1.85

1955 148676.9 14.41 2079083 2.01

1957 136401.6 13.34 1720548 1.68

1959 136596.5 12.36 1594948 1.44

1961 145568.6 12.15 1647440 1.38

1964 128134.6 9.65 1385308 1.04

1966 123420.3 9.99 1436632 1.16

1968 125338.6 9.95 1270021 1.01

1970 133250.3 10.02 1364580 1.03

1971 113206.1 8.47 1176400 0.88

1973 97335.63 7.02 885240.5 0.64

1974 82113.85 6.65 667965.7 0.54

1975 87072.96 7.24 750223.8 0.62

1976 99674.22 7.27 844032.3 0.62

1977 87730.4 6.18 730013.8 0.51

1978 87660.84 6.05 744088.4 0.51

1979 80880.71 5.61 659410.3 0.46

1980 72505.42 4.78 599435 0.4

1981 67188.12 4.39 465055.4 0.3

1982 68884.89 4.51 524714.4 0.34

1983 101455 6.46 748364.2 0.48

1984 100723.7 6.39 785803.5 0.5

1985 134205.5 8.24 1076154 0.66

1986 140409.1 8.64 1133425 0.7

1987 134502.3 8.12 1048166 0.63

1988 150884 8.52 1467390 0.83

1989 154480.6 8.19 1463549 0.78

1990 147359.7 7.42 1261498 0.64

1991 139481.2 7.12 1114667 0.57

1992 136488.3 6.96 1160748 0.59

1993 179917.2 8.53 2428050 1.15

1994 180766.9 8.09 2388467 1.07

1995 199685.5 8.67 4716301 2.05

1996 207252.8 8.72 3655103 1.54

1997 262105.7 10.7 4603855 1.88

1998 223561.1 8.95 3926823 1.57

1999 229679.3 8.95 4034289 1.57

An unequal musicNot even top 1%, it’s top 0.01% India that benets

Source: Banerjee, Abhijit and Piketty, Thomas (2010). Top Indian Incomes 1922-2000; in Atkinson, A B and Piketty, T (eds) Top Incomes: A Global Perspective, OUP.Data and graphs via: Alvaredo, Facundo, Anthony B. Atkinson, Thomas Piketty and Emmanuel Saez, The World Top Incomes Database, http://topincomes.g-mond.

parisschoolofeconomics.eu/, 23/04/2014




The period from the 1950s to the ear-

ly-to-mid-1980s was also the period of‘socialist’ policies in India, while thesubsequent period, starting with therise of Rajiv Gandhi, saw a gradual

shift towards more pro-business poli-cies. Although the initial share of this

group was small, the fact that the richwere getting richer had a non-trivialimpact on the overall income distri-bution. In particular, its impact is notlarge enough to fully explain the gapobserved during the 1990s betweenaverage consumption growth in sur-

vey-based NSS data and the Nationalaccounts based NAS data, but is su-

ciently large to explain a non-negligi-ble part of it (between 20% and 40%).”

Crony capitalism of the past decademust have pushed this trend fur-

ther, and the next government will becheered heavily to pursue even morepro-business policies. In short, inequal-ity is going to only increase further.

The Costs and Benefits of InequalityDisparities between the rich and thepoor can be shrugged o as a fact oflife: the world has indeed never seenan ideal society where everybody wasequal. Indeed, economists even speakof benets of inequality. For example,it can motivate innovation, dynamism,and entrepreneurship – if it is withinlimits and not galloping away, which isthe case now.

As for the harms of inequality – if theyneed to be listed out – there are many.Dreze and Sen say inequality leads to:

n Hurdles poverty reduction eortsn Worsening health scenario for the

whole of society,n More crimes,n Less social solidarity and civic coop-

eration, andn Disproportionate political power to

a privileged minority, reinforcingelitist biases in public policy.

As Piketty told the New York Times,“it’s very dicult to make a democraticsystem work when you have such ex-

treme inequality” in income and inpolitical inuence. (No wonder, theNaykas have often contemplated boy-

cotting elections.)And, of course, all of these eventually

impact economic growth itself. So, in-

equality needs to be addressed evenfor the sake of higher growth in future.

Piketty’s Prescriptions

Piketty has a range of policy prescrip-tions, too, and at the time of writing

many in the US – including the treasurysecretary – were queuing up to hearthe same from him. Piketty’s panaceais: a progressive global tax on wealthover 1 million euros. Not likely, but letus at least note that it is not likely dueto political reasons. This proposal haspredictably attracted erce criticismfrom the pro-market press, but Piket-ty sees taxation as the most powerfulweapon in this ght. In Indian terms,

this should mean high wealth and in-

heritance tax for the top 1 percent, oreven 0.01 percent level. (By the way,the edgling middle class need notworry: he in fact recommends doingaway with property tax for the lowerhalf or even lower three-fourths ofproperty tax payers.)

The next on the to-do list is somethingvery much in demand for our own ver-

sions of ‘Occupy’ agitators: force taxhavens to release the wealth hoardedthere. It’s a question of political will.He told the New York Times, “If we cansend one million troops to Kuwait in afew months to return the oil, presum-

ably we can do something about taxhavens” – using trade sanctions.

Eective redistribution of land, a ma-

jor asset, can help. Higher educationhelps one go up the economic hierar-

chy. Access to capital can help the poor.A range of specic prescriptions can

be considered, once we come to termswith the fact that the increasing gapbetween the rich and the poor is notsome god-given law for which little can

be done: nally it is a political choice,and it’s the political policy that hasconsciously or otherwise taken us towhere we are today.

Piketty puts it better: “Wheneverone speaks about the distribution ofwealth, politics is never very far be-

hind, and it is dicult for anyone toescape contemporary class prejudicesand interests.” n

[email protected]

85 people = half the world!

Christine Lagarde

Director, IMF

Seven out of ten people

in the world today live in

countries where inequality

has increased over the past

three decades. [India is one of them.]

Some of the numbers are stunning—according to Oxfam, the richest 85

people in the world own the same

amount of wealth as the bottom half of

the world’s population.

With facts like these, it is not surprising

that inequality is increasingly on the

global community’s radar screen. It is

not surprising that everyone from the

Confederation of British Industry to

Pope Francis is speaking out about it—

because it can tear the precious fabric

that holds our society together.

Let me be frank: in the past, economists

have underestimated the importanceof inequality. They have focused on

economic growth, on the size of the pie

rather than its distribution. Today, we are

more keenly aware of the damage done

by inequality. Put simply, a severely

skewed income distribution harms the

pace and sustainability of growth over

the longer term. It leads to an economy

of exclusion, and a wasteland of

discarded potential.

Excerpted from a February 2014 speech


On Equality

inequality, piketty and india

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