India’s Elite Must Stop Pretending it’s Doing Enough for Income Redistribution

Thomas Piketty, the author of Capital in the Twenty-First Century, delivered some blunt messages to India’s elite during his recent visit to the country. Significantly, the messages come at a time when the Indian economy is stagnating and rural income growth is probably negative in real terms. He warned that India’s ruling elite must stop pretending it is doing enough to ensure equitable redistribution of income and wealth. According to Piketty, they need to make far more sacrifices to ensure that economic growth is socially and democratically sustainable. Economic rationality must not conflict with democratic rationality, he stresses.

Self-confessedly, Piketty is not some radical Marxist who believes in the overthrow of an unjust system. He discloses at the outset that he is not anti-markets or anti-globalisation. But he is a passionate advocate of the use of tax policy and other fiscal instruments to reduce the historically accumulating income and wealth gap.  India can clearly learn from the experience of the Western elites in this regard, he says.

Based on income and wealth distribution data for over 200 years, the French economist has empirically established that the more perfect the markets, the more inequality in income and wealth creation. The conclusion being that inequality is organically embedded in the market economy. This, he says, reflects in the long term trend where rate of return on capital exceeds rate of economic growth by as much as 3% to 5%.

One briefly caught up with Piketty in New Delhi recently after he spoke at the Jawahar Lal Nehru University. While lamenting the lack of transparency in India’s income tax data dissemination, Piketty kept emphasising how little India spends on public health. “India’s public health expenditure is just about 1% of GDP. India can at least go up to the level of China which spends 3% of GDP on public health,” he said.

Unfortunately, instead of acknowledging this stark reality, Bibek Debroy, Member, Niti Aayog, chose to contest Piketty by suggesting there is a great deal of private expenditure on health in India which must not be ignored. But Debroy seemed to miss the point that private expenditure occurs in other developing countries too. The larger question is whether private spending can be a substitute for public expenditure in health?  It is evident that India cannot have sustainable growth without spending enough on health.

What is most worrisome is that the current demand depression the world faces, especially the United States, could have something to do with the exacerbation of the inequalities in income and wealth distribution after the 1980s. Piketty’s data shows that the sharp rise in managerial incomes, supported by stock ownership, especially in the IT and financial sector, has resulted in a big skew in income distribution in the US. Over two thirds of the income growth since the 1980s in the US was captured by the top 10 % of its population. If this trend is read with Joseph Stiglitz’s finding that real median incomes in the US have stagnated to the levels seen before 2000, the picture of inequality and the growing skew in wealth accumulation becomes complete.

Piketty’s data shows that the peak levels of inequality in income and wealth seen in the US in recent decades was last seen in the inter-war years (1918-1838) and during the Great Depression in the 20^th century. The disruption created by the wars and the economic depression led to considerable destruction of the wealth and incomes of the top 10 %.

Subsequently, the relatively more inclusive economic policies under the New Deal led to a few decades (1945 to 1970) of more equitable income and wealth distribution.  During this period the share of the income of the top 10 % had come down sharply because of a higher economic growth combined with better redistribution of incomes.

But worryingly, the skew in income and wealth distribution in the US is back to what it was before the Second World War. And the world today, both in terms of the financial as well as the real economy, is far more globalised than it was before the War, in the early 20^th century. No one can ignore what is happening in the $18 trillion US economy. If the US cannot generate a broad-based demand partly due to skewed income and wealth distribution, it is a matter of worry.

It is in this context that Piketty has advised that India’s policy makers must avoid the mistakes made by the West. If India is better placed to register higher growth over the next decade, it should also ensure that the gains of growth are distributed in a way that sustains broad-based demand in the economy, which is the only way to make growth socially and democratically viable.

One big indicator of income and wealth inequality in the US is that the share of wages in economic value added is going down even as the share of profits of companies is going up. This again reflects a growing gap between the income of wage earners and the owners of capital. Piketty argues that the sudden increase in the remuneration of CEOs and managers is not necessarily caused by much higher productivity.

Strangely, even in India, which is at a totally different stage of economic development compared with the United States, a similar trend seems to be occurring. The share of wages in economic value added is going down sharply. I asked Piketty why this should be happening in India where the structure of the economy is very different from that of the US. His reply was that it could be because wage earners are not able to bargain adequately, adding that “it could have something to do with the historically weakening trade union movement”. Going by the totally undemocratic conditions the trade union movement has had to face in the modern auto industry, as exemplified in the Maruti plant in Gurgaon, one cannot but agree with Piketty

Indeed, Piketty has multiple messages for India. The question is – are we ready to listen?