Recently, Tamil Nadu farmers from south India protested for their poor plight in the most desperate way at Jantar Mantar. To tell the government about their starving situations, these farmers shown themselves as eating their own excreta. There were other protests also some violent, some dropping their farm products on roads. On the other hand, there is Forbes list of billionaires 2017, in which number of Indians touched to 100 for the first time in last three decades. Only three countries, U.S., China, and Germany, have more.
Concern of Rising Inequality
Renowned French economist Thomas Piketty and his colleague Lucas Chancel published a paper “Indian Income Inequality, 1922-2014: From British Raj to Billionaire Raj?” in July 2017. Recently the paper had got the attention of newspaper “Livemint”. It highlighted the findings of the paper and raised a question on the rising inequality in India. This is not the first working which had raised questions on inequality problem in India. Many Indian economists had raised their concern through their work over and over again. Noble laureate Dr. Amartya Sen is probably the first one to raise the question on relatively lower improvement in social indicators despite having economic growth. Economic Survey 2017 had also raised concern over rising inequality among Indian states on the basis of Income and Consumption. This can be taken as an acknowledgment from the government side also.
The problem is right there and is growing serious with time.
Thomas Piketty Findings
The paper has analyzed household survey, national accounts, and tax data from 1922 to 2014 for Income inequality. According to the paper, top 1% income earners had 22% share of the total income, this was less than 21% in 1930 & was at 6% level in the early 1980s.
During the period 1951-1980, the share of the bottom 50% was 28% in total growth and income grew faster than average for the group, while top 1% decreased. Whereas in the period 1980-2014, the situation has reversed. The paper finds that average annual income growth for bottom half of the population grew at 1.94% in the 1980-2014 period compared to 2.2% in the period 1951-1980. The findings are more drastic for top 10% who grew at 4.96% in the later period compared to 1.2% in the earlier period. The figures change to 6.7% from 0.2% for top 1% of the income group. The paper doesn’t deny from the gains after liberalization. It finds that average annual real per adult growth for the entire population in the 1951-1980 period was 1.7%, well below the 3.25% growth notched up in the 1980-2014 period.
Therefore, though the poor had gained from the fruits of liberalization in terms of increase in income; but the growth in income has slowed down in post-liberalization period. The paper findings conclude that after the liberalization the inequality has risen in India.
The paper can be accessed here.
Critics of the Piketty’s Methodology
According to the Livemint, the assumptions taken by Thomas Piketty’s in the paper can be put to test. Piketty had used a combination of Survey and Tax data to estimates India’s income distribution. Piketty rules out—by assumption—any under-estimation (or under-reporting) of incomes by the bottom 90% of the population, an assumption that does not seem to draw support either from theory or common sense. While it may be fair to assume that the rich have a greater incentive to under report incomes and may be under sampled in household surveys, it is extraordinary to assume that only the rich have any incentive to under report consumption and incomes in household surveys.
The second problem in the assumption is that it does not take into account changes in tax administration that may have led taxman to measure and assess top-income groups better than before. This seems to have led to an exaggeration of the income estimates of top earners for the most recent years.
It might be possible that the Piketty’s findings are on higher side. But this doesn’t mean that there is no rise in inequality. There are various other reports which had highlighted the rising inequality in India. IMF report states that the official stated Gini coefficient (Indicator for Inequality) is under reported because of under reported consumption in consumer data survey. Even with official figures, India performs poor with respect to other countries in terms of Inequality. Credit Suisse, PRICE, and Indian Human development survey all find an increase in inequality in India after liberalization.
Another paper by Indian economist Ishan Anand & Anjana Thampi showed in 2016 that the concentration of wealth has increased sharply in Indian since the early 1990s.
Liberalization or Wrong domestic policies
The question here arises that Is liberalization responsible for this rise in inequality or is it the domestic policies?
According to the economic theory, at first, trade increase inequality in short run with an increase in overall Income in an economy. But in long run, when factors of production adjust to change in production because of trade, gains from trade spread to lower-income groups. All the above reports had confirmed for the overall gain from trade in India since liberalization.
Also, there other emerging economies, like China, Brazil & Russia which had gained from liberalization and has lower Inequality than India. Therefore, for rising inequality, liberalization cannot be blamed squarely.
This hints towards the role of domestic policies in rising inequality. Performance of India in terms of social indicators, specifically education and skill generation has been abysmally low. Government expenditure on educational & skill generation programs has been very low leading to lower labor productivity when compared with other emerging economies. Because of this poor performance, many economists terms India’s economic growth as mechanical growth i.e. growth without any significant improvement in lives of masses.
Stuck with agriculture
Movement of labor from agriculture to industries has not taken place in India, because, India had more capital-intensive industries which require high skill set which is not available. To provide employment to large unskilled labor, India needs labor-intensive industries. Second is the move to services without having full-fledged industrial growth. Both these factors lead to stuckness of large labor force within agriculture which is now labor surplus and offers lower wages and overall lower return. Since, the demand elasticity of agricultural products is low, even with higher production, income generation remain low. This is the reason for continuous protest from farmers for their lower incomes despite the huge amount of subsidies from the government. Though the efficiencies of these subsidies are low, still these are expenditures for the government.
Two things are clear – first, there is a rise in inequality and second domestic policies are far from being right. Further research is required before getting to new policies, but new policies are desperately required at this point.
The rising inequality will start dragging the overall growth. This is a fact and many countries had witnessed this in past. The continuous rise in inequality will threaten the social balance of the country and if not controlled, will lead to falling in faith over government and establishment. And that is the last thing anybody will wish for, both the government and the poor.