Thomas Piketty's work 'Capital in the Twenty-First Century' has topped best-seller charts and created unprecedented buzz in the west. It has great relevance for India too. In this election season, there were vociferous debates on economic models, but little discussion on what Obama called the defining challenge of our time: economic inequality
Ashish Mehta | May 15, 2014
Why do we vote? We don’t benefit from casting our votes; we don’t benefit from not casting our votes either,” said Dinesh Nayak, summing up the status of voter empowerment after more than six decades of democracy in India. Sitting on a plastic chair outside his hut in Achhala village, he was talking about the plight of his community, Nayaks or Naykas.
This village is close to Chhota Udepur, some 90 km from Vadodara and a veritable headquarters of tribals in Gujarat. The Rathwa community among adivasis are economically somewhat better off even if life is difficult for many of them. Rathwas have land and are not doing badly in agriculture, cultivating maize. When the highway to Madhya Pradesh passes through towns, one can notice signboards of doctors with the Rathwa surname. A few Rathwas have made political careers from the reserved constituency (one was a minister of state for railways in UPA I). But the Naykas are a minority, indeed the marginalised among those who are not far from the margins. Socially, they are one scale below the Rathwas, many of whom till recently would not drink water in a Nayka home.
Lallubhai Rathwa, who has studied the Nayka community while working from the Adivasi Academy of Tejgagh, said the Naykas do not have land of their own, and earn their living as farm labourers, mostly in other parts of Gujarat. This forced migration for the better part of the year means they cannot access quality health care and their children cannot regularly attend the local school for long.
What a welfare state can do for them is to give them land, and that is very much on the cards. Under the Forest Rights Act (FRA), they can claim land their forefathers used to till, but most do not have proofs. Dinesh Nayak recalled that the state government promised to distribute its unused land to the poor and even distributed token certificates of land rights at a ‘garib kalyan mela’, or the poor welfare fair, in 2009, but no one had got any land till the 2012 assembly elections, thanks to the bureaucratic hurdles.
What the community has got from our welfare state is job assurance under MGNREGS (which they don’t need), money to construct houses under Indira or Sardar Awas Yojna (which has certainly helped), a school and a health centre (which they cannot use except for a couple of months a year). What the community has so far got from the great white hope of our times, liberalisation and economic reforms, is better and better wages that, however, are not enough to keep up with the inflation and certainly not enough to accumulate capital.
The Defining Challenge of Our Time
When we debate growth versus development, when we talk about the ‘neo middle class’, when we list out benefits of liberalisation, it would probably help to keep in mind Dinesh Nayak’s friends, like the handicapped Luliyo and a youngster too afraid to give his name to a reporter.
They have certainly benefited from economic reforms – many of them sport mobile phones and take joy rides on motorcycles. They have jobs, even if in the informal sector, and their income has grown to an extent from 1991 to today. What they do not have is capital: no land, no investment, no higher-level skills. In other words, a 44-year-old Nayak has seen his income rising from 1991 to 2014 even if it is not comparable to the rise enjoyed by a 44-year-old Delhi-based journalist. But the first has no means to reap benefits of an India emerging as one of the fastest growing economies, whereas the second has, and it shows not so much in the income but in the capital or wealth accumulated by the latter.
Also, unlike the former, the latter has inherited some capital (a house, some stocks).
If we compare the marginalised citizen not with the middle-class taxpayer but with a specimen of the top 1 percent moneymakers in the country, the contrast would be way too stark – again, not just in terms of income, but also in terms of capital (especially the inherited one), and the ability to reap benefits of a global economy.
With this much background, here is what we need to seriously come to terms with: this contrast, this inequality is increasing. This is what US president Barack Obama has called “the defining challenge of our time”.
Growing inequality is a shocking surprise, because growth is supposed to take care of precisely this inequality. That has been the assumption following from the work of the American economist Simon Kuznets, which is the standard textbook view expressed in our policymaking circles as the trickle-down theory: if economy grows, everybody benefits – even if some benefit less than others. A rising tide, in the words of John F Kennedy, will lift all boats. Instead, what is happening is what many vaguely, simplistically put as this: the rich have become richer and the poor poorer.
More than growth, more than job creation, economic inequality is the biggest challenge before Indian economy in the 21st century. This conclusion comes not from left-wingers but from pro-market institutions ranging from the International Monetary Fund (IMF) to the Asian Development Bank (ADB) (see box).
In their majestic work last year, ‘Uncertain Glory: India and Its Contradictions’, Jean Dreze and Amartya Sen were talking precisely about people like the Nayka when they wrote:
“Since India’s recent record of fast economic growth is often celebrated, with good reason, it is extremely important to point to the fact that the societal reach of economic progress in India has been remarkably limited.” While inequality is common around the world, India has a “unique cocktail of lethal divisions and disparities” of caste, class and gender apart from the economic ones – with each adding to the other.
The economist duo also underlined the trend of growing economic inequality. Even if inequality had remained static, “poor people would have gained much more from India’s rapid growth”, but the gap has increased, pushing the poor down.
The ADB has specific figures too. A February 2014 working paper calculates that the inequality (measured in something called Gini coefficient: 0 means perfect equality, and 1 perfect inequality) increased from 0.33 to 0.37 between the early 1990s and the late 2000s. The bottom-line: “Had inequality not increased, the poverty headcount rate at the $1.25-a-day poverty line would have been 29.5% instead of the actual 32.7% in 2010 in India.”
If the Congress is voted out of power, this would be the critical factor.
The ‘Occupy’ movement
IN the west, the gap between the rich and the poor has been a matter of hot and excited debate for a while. First, it was the Occupy movement of 2011 which drew attention to the ‘1 percent’ (the slogan of ‘1 percent’ came from an essay by Joseph Stiglitz, who noted that the top one percent Americans had come to control 40 percent of the country’s wealth). And second, because a French economist and his colleagues have put together astounding data going back to the 18th century and covering 20 countries, coming to the same conclusion in a book that has made it to the bestseller charts.
Thomas Piketty’s ‘Capital in the Twenty-First Century’ (translated from French and published this month by Belknap Press of Harvard University Press) is attracting rave reviews. Paul Krugman calls it a “truly superb book”. “It’s a work that melds grand historical sweep—when was the last time you heard an economist invoke Jane Austen and Balzac?—with painstaking data analysis… This is a book that will change both the way we think about society and the way we do economics.” The Financial Times finds it is “an extraordinarily important book”. The title and the ambition of the book have invited comparisons with Marx’s magnum opus, though the author modestly points out differences.
Piketty’s central finding is that the level of inequality – not just in incomes but in overall capital, including wealth (land, shares, etc) – between the top and bottom tiers of society in the west was very high, but the shocks of the two world wars and the state’s socialist interventions later reduced the difference to an extent. However, since the 1990s inequality is increasing – around the world. He also briefly touches upon the Indian case, based on income tax data from 1922 to the early 2000s. His prognosis: inequality in overall capital is increasing. This is leading the world back to the pre-1915 days, when the rich were rich for generations and the poor had no chance of making it big, no matter what – we are, in other words, returning to ‘patrimonial capitalism’ of the kind portrayed in nineteenth century novels.
In the case of India, it is possible to estimate (using tax return data) that the increase in the upper centile’s share of national income explains between
one-quarter and one-third of the “black hole” of growth between 1990 and 2000.
Piketty has explored the Indian scene in detail in a discussion paper, written with Abhijeet Banerjee (of ‘Poor Economics’ fame) and published by the Centre for Economic Policy Research in 2004. Here are the specific findings of ‘Top Indian Incomes, 1922-2000’:
“Our data shows that the shares of the top 0.01%, the top 0.1% and the top 1% in total income shrank substantially from the 1950s until the early-to-mid 1980s but then went back up again, so that today these shares are only slightly below what they were in the 1920s-1930s. We argue that this U-shaped pattern is broadly consistent with the evolution of economic policy in India: The period from the 1950s to the early-to-mid 1980s was also the period of ‘socialist’ policies in India, while the subsequent period, starting with the rise of Rajiv Gandhi, saw a gradual shift towards more pro-business policies. Although the initial share of this group was small, the fact that the rich were getting richer had a non-trivial impact on the overall income distribution. In particular, its impact is not large enough to fully explain the gap observed during the 1990s between average consumption growth in survey-based NSS data and the National accounts based NAS data, but is sufficiently large to explain a non-negligible part of it (between 20% and 40%).”
Crony capitalism of the past decade must have pushed this trend further, and the next government will be cheered heavily to pursue even more pro-business policies. In short, inequality is going to only increase further.
The Costs and Benefits of Inequality
Disparities between the rich and the poor can be shrugged off as a fact of life: the world has indeed never seen an ideal society where everybody was equal. Indeed, economists even speak of benefits of inequality. For example, it can motivate innovation, dynamism, and entrepreneurship – if it is within limits and not galloping away, which is the case now.
As for the harms of inequality – if they need to be listed out – there are many. Dreze and Sen say inequality leads to:
As Piketty told the New York Times, “it’s very difficult to make a democratic system work when you have such extreme inequality” in income and in political influence. (No wonder, the Naykas have often contemplated boycotting elections.)
And, of course, all of these eventually impacts economic growth itself. So, inequality needs to be addressed even for the sake of higher growth in future.
Piketty has a range of policy prescriptions too, and at the time of writing many in the US – including the treasury secretary – were queuing up to hear the same from him. Piketty’s panacea is: a progressive global tax on wealth over 1 million euros. Not likely, but let us at least note that it is not likely due to political reasons. This proposal has predictably attracted fierce criticism from the pro-market press, but Piketty sees taxation as the most powerful weapon in this fight. In Indian terms, this should mean high wealth and inheritance tax for the top 1 percent, or even 0.01 percent level. (By the way, the fledgling middle class need not worry: he in fact recommends doing away with property tax for the lower half or even lower three-fourths of property tax payers.)
The next on the to-do list is something very much in demand for our own versions of ‘Occupy’ agitators: force tax havens to release the wealth hoarded there. It’s a question of political will. He told the New York Times, “If we can send one million troops to Kuwait in a few months to return the oil, presumably we can do something about tax havens” – using trade sanctions.
Effective redistribution of land, a major asset, can help. Higher education helps one go up the economic hierarchy. Access to capital can help the poor.
A range of specific prescriptions can be considered, once we come to terms with the fact that the increasing gap between the rich and the poor is not some god-given law for which little can be done: it is finally a political choice, and it’s the political policy that has consciously or otherwise taken us to where we are today.
Piketty puts it better: “Whenever one speaks about the distribution of wealth, politics is never very far behind, and it is difficult for anyone to escape contemporary class prejudices and interests.”
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