India’s challenge in confronting its stark inequality lies in governance reforms and greater accountability in government.
On Tuesday morning (12 September), I woke up to see two pieces about the new paper by Thomas Piketty and Lucas Chancel on inequality in India. Manas Chakravarty and James Crabtree had written the articles. Interestingly, I learnt from an email sent by Crabtree that his forthcoming book on India has also been titled ‘Billionaire Raj’. Unbeknownst to him, Piketty and Chancel have also chosen to name their piece ‘Indian income inequality, 1922-2014: From British Raj to Billionaire Raj?’. Chakravarty helpfully provided a link to the original paper.
Chakravarty contents himself with summarising the original paper. The paper looks at India’s income trends from 1922 to 2014. Yes, the data stops at 2014 before NDA (National Democratic Alliance) came to office. But, you would not guess that from reading Crabtree’s article. Somewhat unsurprisingly and yet disappointingly, the subtitle of his article is, ‘The massive inequality in the country gives the lie to Narendra Modi’s rhetoric—and poses several economic threats’. Maybe he did not write it but the Mint editors did.
I did not quite get it since the data ended in 2014. For all the rhetoric of poverty and ‘reforms with human face’, it is clear that inequality trends had worsened in India in the years between 2004 and 2014 – the era of UPA (United Progressive Alliance). Look at any of the charts in Appendix 13 (1 to 4), 14 and 15. Also, take a look at figure 6 on page 20, reproduced below. Figure 9 on page 23 is equally dramatic but not reproduced here.
You will get what I say. Inequality trends accelerated under UPA (1 and 2). That is par for the course in India. Policy discourse or rhetoric is one thing and policy effect is another. Reading Crabtree’s piece would not give you the impression that the problem became big in the UPA era. That said, UPA’s failure – it not only failed to stem but also actually witnessed an acceleration in inequality – holds lessons for the current NDA government, lessons which it has shown no sign of learning, however.
Crabtree’s concluding lines are not too far off the mark, however, even though the NDA government is not providing as much hope for crony capitalists as the previous government did:
Beyond this a far more radical agenda is needed, to improve basic social services at the bottom, while using competition policy and regulation to stamp out crony capitalism and entrenched corporate power at the top.For all of his talk of fairness, Modi is doing little of this. If he does not change course, the Billionaire Raj is only going to grow stronger.‘The dangers of India’s Billionaire Raj’, Mint
Piketty and Chancel write:
Under Prime Minister Jawaharlal Nehru (in power from 1947 to 1964), India was a statist, centrally directed and regulated economy. Transport, agriculture and construction sectors were owned and administered by the Central Government, commodity prices were regulated and the country had important trade barriers. Nehru’s followers, including Indira Gandhi’s (1966-77 and 1980- 1984) prolonged these policies and implemented a highly progressive tax system. In the early 1970s, the top marginal income tax rate reached record high levels (up to 97.5 per cent).
It is difficult to call a top marginal tax rate of 97.5 per cent progressive, except if one believed in an usurious state.
Once India’s so-called liberalisation started, it did boost average incomes:
Real per adult national income growth, which has more sense from the point of view of individual incomes than commonly used GDP, significantly increased after the reforms. It was 0.7 per cent in the 1970s, 2.5 per cent in the 1980s, 2.0 per cent in the 1990s and 4.4 per cent since 2000 (Figure 1). However, little is known on the distributional characteristics of post-2000 growth.
When national incomes accelerate, top earners see their incomes rise faster (see figure 11 on page 245). But, India is an outlier:
Unequal growth dynamics over the period are not specific to India. Income growth rises the higher up the income distribution one proceeds in China, in the USA and in France as well. India’s dynamics are, however, striking: it is the country with the highest gap between the growth of the top 1 per cent and growth of the full population. It is also interesting to note that bottom 50 per cent of earners grew three times more slowly in China than in India, the middle 40 per cent six times more slowly than their Chinese counterparts, but that the incomes of those at the very top of the Indian have grown at a faster pace than in China.
Looking at figures 12 and 16, it is clear that India did a far better job of distributing its poverty between 1951 and 1980 than it did distributing its prosperity between 1980 and 2014 (pages 26 and 29 respectively). At 49 per cent, the middle 40 per cent had a much better share of total income growth in the period between 1951 and 1980 than it had in the period between 1980 and 2014 (23 per cent).
At one level, this should not be surprising. The annual Credit Suisse Wealth report (forget which year – 2015 or 2016) had mentioned that India had extreme wealth inequality. Then, this news report in Business Standard in July this year mentioned that the ratio of executive compensation to median worker pay was 1,200 times, dwarfing the 276 times in America!
What the present NDA government is doing is somewhat similar to the equality that India had achieved before 1980. Everyone was relatively poor. No one was extremely rich, or at least very very few were. This government has so far managed to steer clear of crony capitalism, as far as we know, and at least not in a big way. On paper, it is going after big defaulters on public sector bank loans. Even as it hurts (assuming it is true) the big guys, the sad truth is that it may be hurting the small guys more.
The current NDA government has not been able to boost incomes in the lower income strata. If anything, its well-intentioned (or so we believe, or they would like us to believe) policy measures such as the note ban exercise of 8 November 2016 and its implementation of a nation-wide goods and services tax seem to be hurting the rural poor and small businesses more than it is hurting the richer and larger businesses and urban dwellers. In that sense, paradoxically, this government too might be contributing to worsening inequality. It is trying to make up for it with harsh rhetoric directed at the rich and big corporations and tax investigations. In other words, India might be having the worst of both worlds.
The world over, the growth-distribution trade-off challenge is a real one. One needs to grow the pie to divide it among many. But, growth would see inequality rise as those who are at the centre or the core benefit from opportunities that growth throws up before those opportunities percolate to those in the periphery and the poor. The big redistributor is the government, with special schemes and subsidies for access to education and health for the poor and low-income classes.
This is where India may be failing big. In other words, more than economic policy reforms or more redistribution, India’s challenge in confronting its stark inequality lies in governance reforms and greater accountability in government – both at the ministerial and bureaucratic level. For example, read this interview by professor Devesh Kapur in The Hindu in July and weep.
Who will bell the cat?
It needs a politician who is prepared to be in office just for a term or even less, but is clear about what he or she needs to do and is determined to do it.
This article originally appeared on the writer’s blog, ‘The Gold Standard’.