The issue of income inequality has been hogging the limelight since the 2008 financial crash, when the world came perilously close to a depression. French economist Thomas Piketty’s book Capital in the 21st Century was what brought this issue into the public realm, though inequality was a problem that always remained on the radar of academic economists.
Recently, Piketty and Lucas Chancel came out with a new paper titled ‘Indian Income Inequality, 1922-2014 — From British Raj to Billionaire Raj?’, which has been getting a lot of media attention. Though the findings of the paper are startling, they are not entirely unsurprising.
Repeating history?
The major findings of this study are that income inequality in India today is as bad as it was in the 1930s. The authors start with the year 1922, as that was the year the British started imposing income tax on Indians, and data on income tax began to get compiled.
The top one per cent earners accounted for 21 per cent of the total national income. This share came down to 6 per cent in the early 1980s, but has gone up to 22 per cent today.
In comparison, Chancel and Piketty say, the bottom 50 per cent, in the 1950-80 period, captured 28 per cent of the total national income, but this trend was reversed in the 1980-2014 period.
India stopped publishing tax data since 2000, which, the authors argue, has been a major impediment to research in this area. They have called for the revival of tax statistics and greater transparency in income and wealth statistics to aid better research and have a more informed debate in this crucial area.
Income growth
When it comes to income growth, the authors say there has been a substantial growth in average income over the decades, from less than 2 per cent in the 1960s and 1970s to 2.5 per cent in the 1980s, 2 per cent in the 1990s and 4.4 per cent since the 2000s — a decade when reforms took off.
But crucially, since the 1980s, for people in the bottom 50 per cent, incomes grew at a substantially lower rate than the average.
In the paper, the authors present a few interesting line graphs — the annual real national income shows a rapid growth in roughly the 1995-2005 decade. Interestingly, the income for all sections has grown rapidly in this period albeit at varying pace.
For the people in the bottom 50 per cent, incomes grew rapidly in the 1995-2005 decade and have plateaued since, unlike the other groups which have seen a dip in this period.
Income inequality
In a media interaction more than 10 years ago, economist Kaushik Basu (before he became the chief economic advisor to the government) had said that there was no doubt that poverty rates have fallen in the decades since reforms were implemented, but income inequality had risen. Chancel and Piketty’s graphs seem to endorse this view.
For the top 10 and one per cent, income growth has been gradual since the 1950s, but for this group too, the 1995-2005 decade has been the defining one.
Sources used
Chancel and Piketty combine tax data with NSSO household income, which measure only consumption and not income, and do caution the readers about the methodological and conceptual difficulties in this exercise.
They also use the Forbes rich list to buttress their argument on the rapid rise of income of the rich in India. Sample this: the wealth of the richest Indians formed only 2 per cent of the national income in the 1990s, which peaked to 27.5 per cent in 2008-09 and has since levelled off at 10 per cent in 2015.
Making a country-wide comparison, Chancel and Piketty show that in the 1980-2014 period, for the top one per cent, India shows the highest income gap compared with China, France and the US. For the bottom 50 per cent, the paths of India and China are similar.
So when we place all this information in the larger historical context, what inferences can we draw from them?
Historical fact check
Ironically, it was in the 1950-80 period, that income inequality was at its lowest and the bottom 50 per cent and middle 40 per cent accounted for substantial chunks of the total national income.
This was the period associated with ‘Nehruvian Socialism’ where the public sector was at the vanguard of the ‘command economy’. This was also the era that marked the ‘licence-permit raj’ where there were severe restrictions on imports and a plethora of controls over domestic industry.
But this was also a period marked with sluggish growth or the ‘Hindu rate of growth’ (3.5 per cent annual growth). This was also a period where the government had imposed a progressive income tax regime, with marginal income tax rate peaking at 97.5 per cent in the 1970s and then settling at 50 per cent in the 1980s.
In contrast, since the 1980s when the government started taking some halting steps towards liberalising the economy and since 1991, when a more ambitious reforms programme was launched, income inequality increased.
Chancel and Piketty argue that in the much tom-tommed ‘India Shining’ slogan of the erstwhile NDA regime, it was the top 10 per cent which was shining. Ironically, for the middle 40 per cent, it was the 1950-80 decades that were shining, where this section accounted for 49 per cent of the national income.
Inclusive growth
Of course, the authors admit that their paper is an attempt to expand the debate on this issue and caution against coming to any definitive conclusions.
It must be tempting for critics of the reforms process to draw on these conclusions and argue that reforms have been a failure on the poverty and inequality front. But to put things in perspective, even though income inequality was at its lowest in 1950-80 period, there is little doubt that the national pie then was much smaller and has since increased substantially and income for all sections have risen.
The question now is how to distribute this pie more equally and what can be done to make greater growth more inclusive.
The current danger
But in the decade since 2000, India was growing at a healthy 8+ per cent rate, despite growing inequality. The danger now is that growth has since fallen and the real challenge for the Modi government will be to revive growth and tackle inequality simultaneously.
Though Chancel and Piketty refrain from making any specific policy suggestions, there is little doubt that this insightful paper will lead to a more informed debate on this crucial issue.