Is India More Unequal Than It Was Under British Raj? Not Really

There has been a lot of chatter online about inequality in the Indian context. About a year ago, Thomas Piketty published a paper showing that inequality in India today has eclipsed the magnitude of inequality during the British Raj. Piketty is often associated with leftist thought, and I find the comparison to be insensitive. Further, Oxfam recently published a report claiming that the richest 1% in India controlled 40% of total wealth.

Oxfam likes to wave about the following claims:

• The top 10% of the Indian population holds 77% of total national wealth.

Piketty and his co-authors claim the following:

• The top 1% of Indians hold about 25% of total income and 40% of all wealth.

Rebutting these claims, Gautam Chikermane from the Observer Research Foundation, published an editorial stating that according to the Gini Index, India is the world’s fourth most equal country. Only Slovakia, Slovenia and Belarus have lesser inequality than India.

How can all of these claims be valid at the same time? To understand that, I want to take some time to clear up some misconceptions about wealth and inequality in this post. Once the methodology behind these statistics is understood, the credibility of these claims becomes clearer.

Income Inequality among statistical categories

Whether it be India or any other Western country, income statistics of the form “X% of people have Y% of wealth/income” are common. X is usually a number less than 10, and Y tends to be a number greater than 50.

The mistake here is to compare abstract categories and map them onto people. For example, until people turn 21 years old and get their first job, their share of income in the economy is usually 0%. The retirement age in India also tends to be somewhere around 60.

The population pyramid posted above shows that about 30% of the population is earning nothing. Generally, in such a case, there will never be income equality. Many studies do correct for such errors.

However, there is another nuance here.

As people grow older and gain more experience, they will naturally command higher salaries. The implication is that a youthful employee starting out their career at the age of 21 might earn multiples of that amount by the age of 55. This would be the case in any healthy economy and is desirable.

This might not happen in two scenarios:

Both these cases are undesirable, but inequality measures like the Gini coefficient and Piketty’s measurements would show inequality declining.

A subtle point here is that any economy should make the trade-off of having a high floor of income even if it means that the income ceiling rises disproportionately. Does it really matter that billionaires’ incomes are rising if wages and incomes are also rising proportionately?

The same mistake is made by the Indus Valley Report published by Blume. India 3 comprises 1 billion people. It is likely that about 300 million people in India 3 are either below the age of 21 or above the age of 60.

This is not to brush away concerns about wage growth and job creation. There are issues with rural wage stagnation, but the methodology to study this must be properly vetted. Such reports only serve as launchpads for homilies by the usual suspects.

In the US, a 2007 study by the Department of Treasury tracked individuals’ income mobility through their income tax returns over a decade from 1995 to 2005. Among other findings, what caught the eye was:

• Roughly half of the income taxpayers who started out in the bottom 20 percent in 1996 moved up to a higher income group by 2005.

To study inequality thoroughly, there needs to be a similar study across time rather than a snapshot of the current state of affairs. If economic mobility across income quintiles is high, then inequality becomes less salient. Unfortunately, I was not able to find any similar studies or data for India.

Wealth Inequality among the population

Wealth is even more nebulous than income. There is a common perception that billionaires hoard wealth like a dragon. However, taking a look at the components of their wealth shows that it is heavily concentrated in the companies they own or have founded.

Organisations like Oxfam will allege that their stake in companies gives them monopoly power. For example, one of their claims is that Amazon “accounts for 80% or more of online purchases in Germany, France, UK and Spain.” That is not monopoly power, though. If the cost of online purchases exceeds those from brick-and-mortar businesses, consumers will gravitate towards those businesses. So, by definition, that does not make it a monopoly.

Oxfam’s methodology to compute wealth consists of subtracting debt from assets. At first glance, that appears to be reasonable. On digging deeper, it results in absurdities such as there being more poor people in the US than in China. Similar absurdities result when this methodology is applied to other countries like India.

Usually, when individuals start out in life, they accumulate a significant amount of debt. Education loans, car loans, housing loans, among others, are often greater than assets for probably the first decade and a half of one’s career.

That is desirable in a healthy economy. It shows that enough people have confidence in the economy to invest significant years in building up human capital. Once they grow older and pay off their debts, assets start to accumulate. That is the pattern followed across all healthy economies in the modern world.

An economy where this pattern is absent will have lower levels of wealth inequality, but will likely be a less desirable place to live. A good example is that the US is more unequal than Pakistan when measured by the Gini coefficient. However, few people seem eager to live in Pakistan simply because everyone is equally poor.

Just as with income, the same mistake is repeated here. The concentration of wealth is often a bigger problem than it is made out to be. What we are interested in is the probability of someone navigating to the higher wealth quintiles than the one they were born into.

A quick glance at billionaires in India and elsewhere in the world suggests that this is possible. Many billionaires at present were not born into wealthy families. Certainly, their families were well-off and could afford to invest in their human capital. But with that push, they were able to propel themselves into the billionaire class.

Finally, let us look at Oxfam’s methodologies to compute wealth inequality.

It estimates wealth distribution across each country’s population. Owing to a lack of wealth distribution data, most wealth models estimate wealth distribution patterns using income distribution data. Wealth-X’s proprietary database of millions of records on the world’s wealthiest individuals enables it to construct wealth distribution patterns using real, rather than assumed, wealth distributions, making the model more reliable. It then uses the resulting Lorenz curves to distribute the net wealth of a country across its population. The database is also used to construct investable asset distribution patterns across each country’s population. The model uses residency as the determinant of an individual’s location. (Note: emphasis added by author)

First. Income distribution data itself is flawed. Using it to estimate the distribution of wealth data is analogous to building castles on sand.

Second. The Lorenz curve has significant limitations. One of the major ones is that it is often a temporal snapshot, that is, a snapshot at one moment in time. A college student will be temporarily poor until he earns his degree, and he may become wealthy in a couple of decades. However, the snapshot of the category he is placed in will show no difference. It will appear as if inequality is constant.

Third. Another problem with using the Lorenz curve is that ultra-wealthy individuals can distort the curve. This is similar to an extremely tall person pulling up the average height in a basketball team. It may not reflect what the typical person experiences as inequality.

Fourth. As mentioned earlier, measuring wealth is nebulous. Valuing assets like private businesses, real estate and collectibles involves significant uncertainty. High-net-worth individuals often have multiple tax residencies and their wealth is frequently distributed across such jurisdictions.

Fifth. Oxfam’s claim that they use “real, rather than assumed” wealth distribution is problematic. Wealth by nature is highly secretive. Do they have independent verification mechanisms? This appears highly doubtful.

The Gini Index

The World Bank prefers using the Gini Index to measure inequality. The coefficient ranges from 0 to 1, where 0 corresponds to perfect equality with everyone sharing the same income, and 1 corresponds to perfect inequality where one person receives all the income.

Recently released data show that India is the fourth most equal country, only after Slovakia, Slovenia and Belarus. As mentioned earlier, inequality is not the whole story. In the graph above, the lower the coefficient, the better.

Pakistan has the lowest Gini coefficient among all the economies chosen for the graph. And yet, it is doubtful that anyone reading this is rushing to pack their bags to move to Pakistan.

The source for the data is the World Inequality Database which had been created by Thomas Piketty and his co-authors back in 2013.

While the top 1 percent in India have seen their incomes rise, the top 10 percent have also experienced increases. When we remember that these are categories and not actual individuals, the picture becomes more optimistic. It implies that as long as economic growth continues, someone starting out today will see wage growth and, therefore, accumulate more wealth before retiring from the workforce.

Executives earn 950 times the worker’s wage

Oxfam has claimed that in India, top executives are paid what their lowest-paid workers would take hundreds of years to earn. There are different ways of making the same claim. On X (formerly Twitter), Jairam Ramesh claimed that the median earning of the top 10 percent is 13 times higher than that of the bottom 10 percent.

There are a number of issues with this logic, some of which have already been discussed.

The 13x gap between the top and bottom 10 percent reflects the premium the market places on skills and productivity. A skilled software engineer can often accelerate the execution of a project by a factor of ten. Would such an engineer not command a premium salary?

Similarly, senior managers in a company have multiple resources under their command which they utilise to deliver value for the business. Those managers who add the most value typically receive compensation in line with their contributions.

The gap also reflects natural life-cycle patterns. Sowell puts it pithily: “Who should be surprised that 60-year-olds have higher incomes and more wealth than 30-year-olds?”

A related point is that these statistics are only a snapshot in time. Following the trends of income brackets creates the illusion of tracking individuals.

If such individuals were commonplace, the supply would push down wages. That the wages remain high reflects the willingness of stockholders (often retail investors) to approve such compensation.

Finally, greed is not the reason for high salaries. A CEO’s salary depends on what stockholders and board members are willing to approve. Even if the individual were the greediest person on earth, it would not affect their pay in the slightest.

On a related note, who is not eager to earn a higher salary? It is rare to meet someone who believes they are being greedy for negotiating a better wage, especially when many people still go hungry each night.

In Marxist thought, there is often an emphasis on equality of outcomes rather than equality of opportunity. In reality, disparities are more common than equalities. A society must ensure that such disparities are not the result of discrimination. Once that condition is met, outcomes are beyond the control of any institution.

A useful example is that of birth-order effects. In the United States, firstborns in families were more often finalists in National Merit Scholarships than their younger siblings. A family typically provides equal opportunities, yet equal outcomes are not guaranteed.

This should be sufficient to show that the conversation on inequality is far more nuanced than what headlines often suggest. There will be a sequel to this piece which will examine flaws in Piketty’s methodologies in his paper on the 'Billionaire Raj'.

Note: The piece first appeared on author's blog.