Is Piketty right, and what do we do? PDF Print E-mail
Friday, 15 September 2017 04:23
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Apart from his model being iffy, inequality is function of growth – more jobs will help, but not clear by how much

Even a casual observer can tell you inequality levels have gone up in India over the past few decades, so when a new paper by Thomas Piketty and Lucas Chancel present a series of data to show this, it is hardly surprising. Between 1951 and 1980, the duo say, per capita incomes for the bottom half of the population grew by 2.2% per annum but when overall income growth for the country almost doubled—from 1.7% to 3.3%—in 1980-2014, the bottom half’s incomes grew by a lower 1.9%. For the middle 40%, income growth rose, but not by much—from 1.9% to a bit over 2%. For the top 1%, in contrast, income growth rose from 0.2% to 6.7%. It is when you look at that over a longer period of time that the differences really hit you (see table). So, the bottom 50% saw income growth rise marginally from 87% to 89% over the two periods while the top 1% saw income growth rise from 5% to a whopping 750%.

How accurate is the Piketty data, is the obvious question since the higher growth period is also the one that saw a massive fall in Indian poverty levels, and certainly the consumerism of the last few decades can’t be reconciled with the Piketty/Chancel view that ‘shining India’ was restricted to just the top 10% of the population.

Before examining how good Piketty’s data is, even this suggests rising inequality appears to go hand in hand with higher growth. The country that has the most equal growth, France, is also the one with the slowest growth. China has more inequality than the US, but its growth is also much faster—India’s inequality is higher than that of China but less than that of the US. It may be true, as James Crabtree says in his piece on Piketty, that nations with great inequality tend to grow more slowly, but that’s probably true after a certain level of income. It is difficult to name any country that has risen from the kind of abject poverty that China and India have without rising levels of inequality.

Though several vital flaws were pointed out in Piketty’s Capital in the Twenty First Century, not too much work has been done as yet by economists/statisticians on the Piketty/Chancel paper. Even so, several assumptions look worrying. Since India does not collect data on incomes but only on expenditure, Piketty/Chancel blithely marry consumption data from the National Sample Survey (NSS) and the income tax since, in their words, “our preferred strategy is to assume that surveys are reliable from the bottom of the distribution up to a certain percentile and that tax data is reliable after another”! Even if you assume the tax data does represent those in the upper strata, there is enough reason to believe the NSS is mostly junk, even for those in the lower segments. Between 1983 and 2011, as the duo acknowledge, while GDP data show household consumption expenditure grew by over 300%, the NSS indicates it grew just 200%—so incomes at the bottom are vastly understated. Other data in the paper, that feed into the same narrative of the rich exclusively cornering all the benefits of growth, look equally odd—a Forbes’ India Rich list shows the wealth of the richest Indians at less than 2% of GDP in the 1990s, rising to a peak of 27% in FY09 and then collapsing to 10% in 2015; there is nothing, however, to explain why it collapsed since asset prices have risen steadily in this period.

But let’s forget all of this and assume Piketty is right. What is the policy prescription this suggests that is different from what various governments have been attempting to follow? Better education and health are obvious ways to increase the lot of the poor, but funding that requires a quantum leap in tax collections—that’s exactly what every government since 1991 has been attempting to do. The same holds for improving infrastructure and easing various doing-business rules which will help create both more jobs as well as entrepreneurs. But since the knowledge economy will create even more inequalities—just see Apple/Google’s meteoric rise to know this—a policy most favour is to rapidly increase taxes on the rich. When money moves so quickly to low-tax jurisdictions, though attractive, this is perhaps the most destructive policy to follow; indeed, it will take India back to the ‘glorious’ days of Indira Gandhi—high on rhetoric and poor on delivery.

Last Updated ( Monday, 18 September 2017 04:06 )

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