Piketty in India

May 29 2014, 04:23 IST
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SummaryA capitalism-led crisis in India seems unlikely

Thomas Piketty has kicked up a storm with his rather well-researched view on the pitfalls of capitalism as is practised in the West. While he does not quite predict doomsday like Karl Marx did over a century ago, he shows that inequalities have widened in western society and that this could be the downfall for the system as low growth and high capital accumulation would have no room for consumption. He prescribes progressive taxation as a solution. Where would India stand in this context?

India may be described as a semi-capitalist economy where private wealth has been allowed to grow freely, while the government remains important with combined central and state government expenditure accounting for a third of GDP. With economic reforms coming in, a thrust was provided to the private sector with substantial liberalisation for both domestic and foreign investment and easing of trade restrictions. While critics have called it crony capitalism, others have argued that the rich have benefited more than the poor. What is the true picture, if such a story can be discerned?

Piketty’s tenets can be examined in the Indian context. Inequality exists in terms of both wealth and income with a strong relation between the two. Forbes lists the top 100 wealthiest Indians, who are from industry, being valued at $300 billion. Given that our GDP is a little less than $2 trillion, this ratio comes to around 15%, which is high. Piketty’s argument is that most of this wealth is of the nature of ‘rent’ as it has been inherited and not earned.

In terms of income, the picture is ambivalent. The Ginni coefficient for consumption in India over the last 30 years shows a mixed picture. Based on data provided by the Planning Commission, the coefficient remained virtually unchanged in rural regions but increased in urban areas. It was at 0.28 in 1973-74 and 2009-10 in rural India indicating that economic stratification is less prominent and that the government’s social and economic programmes including MGNREGA have been equalising forces.

In urban India, there has been an increase from 0.30 to 0.37 indicating widening inequality. Intuitively, one can see that large-scale migration to urban areas and skewed incomes in this segment has furthered inequalities here. In corporate India, the inequalities are stark and Piketty would argue that corporate managements have tended to legitimately pay themselves higher remuneration that includes compensation through remuneration and stock options which is

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