April 7, 2024The Acornop-edPublic Policy

India cannot afford Piketty’s prescriptions

India should not be distracted from pursuing a sustainable high-growth path

Welcome to Nitin Pai’s cyberspace. You are in the structured section of my domain where I have my blog posts, newspaper columns, updates on my teaching and research, and other things you had always been warned about. This Op-Ed essay was published in the Times of India, by invitation.

To a man with the hammer, everything looks like a nail. Thomas Piketty, economist and writer of big fat books, believes that economic inequality is a problem and higher taxes on the rich are the solution. To this end he has enlisted social scientists from around the world to cast inequality as a global problem. It’s a little like European communists a century ago, who zeroed in on class struggle as the big problem and went around the world looking for it.

Now, inequality might be a serious social problem in rich Western countries. I do not know enough of those societies to comment. It is definitely a popular cause with the Western Left, although recent research is showing that the extent of inequality might have been overstated even in the United States. What I do know is that inequality not a problem that policymakers in India should worry too much about. Our foremost economic challenge is to create sustainable growth and opportunities for hundreds of millions of people for the foreseeable future.

It is important to underscore the importance of economic growth, free markets and globalisation because for several years, Piketty and colleagues have been advertising how contemporary India is more unequal than the British Raj and the post-Independence socialist era. Their new report is titled Income and Wealth Inequality in India, 1922-2023: The Rise of the Billionaire Raj”. The implication, of course, is that India must abandon its growth path and return to the warm embrace of socialism.

The period after 1991 — which Piketty condemns for rising inequality — is a historic one for India. Estimates vary but over 400 million Indians pulled themselves out of poverty in the past two decades. This is an achievement on a scale matched only by China. Compare this to the first three decades of independent India when the number of people living in poverty increased. There was lower inequality because people were equally poor. And compare this with the British Raj during which population plunged into poverty and famine. Tens of millions of Indians died because of colonial policy. Again there was an equality in poverty. It is laughable to suggest that Indians today are worse off than during the colonial and socialist periods. But really it is in bad taste.

Piketty and colleagues do not explain how they created the income chart and how they arrived at the conclusion. Anyone measuring income and wealth in India is skating on thin ice. Whether you use data from the Income Tax department or from surveys you are staring at unfathomable errors. Not all farmers are poor but they are outside the income tax net. Wealth invested in real estate and gold is hard to calculate. What we have are broad estimates and we should be careful how we use them.

Furthermore, there are strong incentives to under-report income and wealth, because passing off as poor entitles you to a variety of subsidies and incentives. I once was in a public meeting where well-to-do families were haranguing the local politician for not providing them with BPL cards. Even so, around 9 years ago, 75% of families in Karnataka were found to have BPL cards!

This does not mean inequality has not risen in the post-reform period. I am sure it has. A software engineer in Bengaluru, plugged into the global economy, has enjoyed massive increases in productivity and income compared to a rural farm worker in Uttar Pradesh. Over three decades the divergence in wealth can be significant. People who have been fortunate, or worked hard to avail opportunities in the global economy have done better than others. Public investment in education, skills, healthcare and infrastructure have lagged, but even if they had not, people in globalised economic sectors would have done better their counterparts in farming.

The policy challenge for India is how to increase productivity — and thus incomes — in agriculture, low-skilled manufacturing and urban services. More than redistribution, the answer is in skilling, transportation infrastructure and market development. I will not be surprised if national highways, trains, airports and a national common market (through GST) have done a lot more to raise incomes and reduce inequality than any redistribution scheme has.

Inequality is not a problem. The question is in its effects. There is empirical evidence to show high inequality can result in high growth in some cases, and the opposite in others. A lot depends on context. We should worry if rich are getting richer at the cost of the poor. This does not appear to be the case in India. There is data to show this. But one look at our streets will reveal more than the data would: for there are no mass protests. What we have instead are people hurrying about their jobs or looking for opportunities. Indeed, people are voting with their feet and moving from low inequality regions to high inequality cities. That’s because they care more about growth and opportunity than how much of the national income the top 1% earn.

Piketty, much like his Leftist predecessors argues that redistributing wealth is a way to buy off the poor. This approach has failed before. The negative effects of inequality are better tackled by increasing competition in the market, enabling people to capture opportunities and strengthening social capital. We should be happy that India is creating new billionaires. The role of public policy ought to be to ensure that market power is not concentrated and that big money does not mix with politics in corrupt ways. This calls for competition law, sectoral reforms and transparency, not fiscal policy. Bolstering human capacity and improving overall governance is a better route to upward economic mobility. India is doing some of this, but there is a long way to go.

To read about more things like this, you can check out my published raw notes and my massive archives.

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