Piketty is right, inequality has risen

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December 21, 2020 5:15 AM

Opening up of the economy in India has led to concentration of income at the top 10% level

Budget 2021-22, Union Budget 2021This year’s Budget, with its thrust on domestic manufacturing and ease of doing business, presents a balanced approach to FDI that further strengthens India’s attractiveness as an investment destination. A

Capitalism is known to operate on the principles of economic Darwinism and the assumption is that markets are the sole determinant of success. The market is accessible to all and hence it is fair play. But markets, while being open to all, have barriers to entry, which can be education, income thresholds, cartelisation, revolving doors among the elites, and so on. Hence, while free markets capitalism is supposed to be fair, it does not give the expected results and there tends to be concentration at the top.

This is what has been seen across the world and within India, too. Liberalisation, which came with reforms since 1991-92, ushered in a large influx of goods and services, never before witnessed. Sectors were opened up and the red tape was cut. The shibboleths of MRTP and FERA were dismantled, and the focus was on making doing business easier and the private sector was able to operate progressively with fewer fetters. As companies expanded, jobs got created, and when the business cycles played their course, were lost.

The impressionist view is that everyone was better off and the different measures of poverty that are officially declared drive home the point. In a very rudimentary way, if one looks at movements in MGNREGA wages, which has moved from around Rs 90 a day in 2006-07 to Rs 202 today, there has evidently been improvement. But in this period of accelerated growth has inequality been exacerbated?

Conventional socialist theories talk of how capitalism creates the illusion of the poor also becoming less poor while the rich become significantly richer under advanced capitalism. The existence of a middle class ensures that there is a constant image of progress in income. This is a safety valve which ensures there is social order. Therefore, it is useful to look at how inequality has progressed over the last 27-28 years. As globalisation is an extension of capitalism which integrates the world, a global comparison is compelling here.

The accompanying table has data from the World Inequality Database. While the way of reckoning such data will be at variance across countries as it is based on national income or tax statistics, the reader should look probably at trends and magnitudes rather than absolute numbers when comparing across nations. Points of comparison are 1990 or 1991 or 1992 as the base line, and the terminal point is the most recent data that could be 2018 or 2019 depending on the country. In the case of Brazil, the earliest year for which information is available is 2001. Four categories of income brackets are presented: top 1%, top 10%, middle 40% and bottom 50%.

One feature that prevails all through this table is the vindication of Thomas Piketty’s hypothesis that capitalism leads to rising inequality in distribution of income. Capitalists take the benefits from the government, which often is termed as crony capitalism, and then use the legitimate policy route to increase profits, most of which goes back to the owners. The top echelons reward themselves with higher pay packages and stocks in good times, and do not get untowardly affected in bad times, as the Lehman episode showed. The wage labourers get something to keep them enthused but their compensation is disproportionately lower than what goes to the elites. The table shows that in all countries the top 1% and 10% saw their shares increase, while those of the bottom witnessed a decline in share. The middle 40% share declined in all countries, which shows that while the middle class may have gained in terms of increasing income, the share in total income declined.

The pattern in Germany deserves comment. The unification of Germany took place at the turn of the decade, but as can be seen there has been a tendency for the changes in shares to be very limited in all the brackets, even while it followed the global pattern. This is significant because the merger was of unequal countries with different ideologies. The government has definitely managed the distribution matrix. Japan is the only country where the share of the top 1% has come down over this time period, while in the case of Switzerland the changes have been very moderate. By 2019, Switzerland had the bottom 50% holding around 24% of total income, which is the highest within this set of countries. The task was easier given the size of the population as well as prosperous nation to begin with, which does not hold for developing countries.

India stands out for some significant changes. The first is that the change in the share of top 1% has increased most dramatically during their period by 11.4% points, which is well above that of other countries. Clearly, this class benefited a lot in the post-1992 phase. Such prosperity has been attributed to the animal spirits coming out, while critics have argued that this was due to ‘policy capture’. Second, the top 10% increased its share by 21% points to 56.1%, which is one of the highest in this set of countries. Brazil is higher at 57.3% in 2019, but had witnessed an increase of 3% points during this period. Third, the share of middle 40% declined the most by 13.8% points. The next highest fall was for the US by 3.8% points. The bottom 50% witnessed decline in share from 21.9% to 14.7%, i.e. 7.2%, which puts it only below China that has witnessed a fall of 7.8% points. The last two points show that the middle class and the bottom half of the population may have witnessed increase in income but was at a much slower rate than that of the elites.

One conclusion that can be drawn is that reforms and opening up of the economy in India has led to concentration of income at the top 10% level, even while incomes may have gone up for all. The question is really for the government as to how policies should be pursued against this background. There are constant calls for more reforms that benefit the corporates, which, in turn, will bring growth but also increase the inequality gap. The lobby groups always argue against fiscal spending that is non-asset-creating and this talk has become the mantra now. The government, too, is defensive about spending more on the poor and uses it as the last option when nearing elections. Quite clearly, there is a need to narrow this gap between the rich and the not so rich. The middle class has also lost its share in pie (which holds across all countries).

Some serious thinking is needed to address the issue of inequality and the approach must not be to just create jobs, but to move people to a higher platform where earnings increase significantly. This is needed because to keep the consumption cycle running, more people have to enter the spending system, or else high growth will not be sustainable.

The author is Chief economist, CARE Ratings

Views are personal

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