Why inequality in India is at its highest level in 92 years
By Soutik Biswas: Did India’s economic
reforms lead to a sharp rise in inequality?
New research by
French economists Lucas Chancel and Thomas Piketty, author of Capital, the 2013
bestselling book on capitalism and increasing inequality, clearly points to
this conclusion. They studied household
consumption surveys, federal accounts and income tax data from 1922 - when the
tax was introduced in India - to 2014. The data shows that
the share of national income accruing to the top 1% of wage earners is now at
its highest level since Indians began paying income tax.
The economists say the
top 1% of the earners captured less than 21% of the total income in the late
1930s, before dropping to 6% in the early 1980s and rising to 22% today. India,
in fact, comes out as a country with one of the highest increase in top 1%
income share concentration over the past 30 years," they say.
To be sure, India’s
economy has undergone a radical transformation over the last three decades.
Up to the 1970s, India
was a tightly regulated, straitlaced economy with socialist planning. Growth
crawled (3.5% per year), development was weak and poverty endemic. Some easing of
regulation, decline in tax rates and modest reforms led to growth picking up in
the 1980s, trundling at around 5% a year. This was followed by some substantial
reforms in the early 1990s after which the economy grew briskly, nudging close
to double digits in the mid-2000s.
Growth has slowed
substantially since then, but India still remains one of the fastest-growing
economies in the world. The ongoing slowdown - growth was 5.7% in the
April-June quarter, the slowest pace in three years - largely
triggered by feeble demand, a controversial cash
ban, declining private investment and weak credit growth, is a cause for
concern. And the need for
fast-paced growth, according to Nobel Prize winning economist Amartya Sen, is
"far from over since India, after two decades of rapid growth, is still
one of the poorest countries in the world".
From their latest work
on income inequality, Lucas Chancel and Thomas Piketty contend that there has
been a "sharp increase in wealth concentration from 1991 to 2012,
particularly after 2002". Also, they conclude, India has only been really
shining for the top 10% of the population - roughly 80 million people in 2014 -
rather than the middle 40%. The economists plan to
release the first World Inequality Report, produced by a network of more than
100 researchers in December, where they will compare India’s inequality with
other countries and suggest ways to tackle it.
Striking transition: They agree that
unequal growth over a period of time is not specific to India, but market
economies are not bound to be unequal. India’s case is striking in the fact
that it is the country with the highest gap between the growth of the top 1%
and that of the full population. Incomes of those at the very top have actually
grown at a faster pace than in China. The economists contend
that the growth strategy pursued by successive governments has led to a sharp
increase in inequality. China also liberalised and opened up after 1978, and
experienced a sharp income growth as well as a sharp rise in inequality. This
rise was however stabilised in the 2000s and is currently at a lower level than
India. In Russia, the move
from a communist to a market economy was "swift and brutal" and today
has a similar level of inequality to India.
"This shows that
there are different strategies to transit from a highly regulated economy to a
liberalised one. In the arrays of possible pathways, India pursued a very
unequal way but could probably have chosen another path," Dr Chancel told
me. While inequality is
rising in most parts of the world, certain countries are resisting this trend.
For example, he says, the rise in inequality is much lesser in western Europe
than in the Anglo-Saxon world or in emerging markets.
"This largely
owes to social security mechanisms that are relatively more favourable to
workers than capital as compared to other parts of the world, to relatively
more efficient tax systems and government investment in public goods such as
education, housing, health or transport."
Clearly, the new
research should help promote a vigorous debate on what more can be done to
promote more inclusive growth in India and the need for more transparent income
and wealth data.
