Thomas Piketty, the French economist and author of the famous book Capital in the Twenty First Century, was recently in India. He delivered a lecture on the state of inequality globally as well as in India. The main highlight of his lecture was: income inequality in India is very high when compared to the developed world (Global North and Japan) and low when compared to countries like South Africa and Brazil.

In comparison to China, India does not do well either. As in terms of income shares, the top 10 per cent hold 42 per cent of the income share in India whereas the corresponding number for China is 31 per cent. In a jointly written paper with Nancy Qian, Piketty showed that between 1986 and 2003 the income share of the top 1 per cent increased by more than 120 per cent in China whereas 50 per cent in India. Why then has income inequality increased in India vis-à-vis China in the long run? First, the income tax in China has become a ‘mass tax’ while income tax in India has remained an ‘elite tax’. Secondly, corporations in China are held on a tighter leash by the political class. In India, the obverse is true. Since 1991 Indian corporations have got tax cuts and bonanzas in the shape of ownership of public utilities and natural resources.

Advertisement

Up till the UPA 2 regime corporate taxes accounted for two-thirds of total direct taxes. Currently, corporate taxes account for less than half. As against the statutory tax rate of 34.6 per cent in 2017-18, the effective tax rate for all companies was 29.5 per cent. In 2018-19, it declined marginally to 27.8 per cent. But even in these two pre-2019 years, the lowest effective tax rate was for the richest companies, at 26.3 per cent in 2017-18 and 25.9 per cent in 2018-19. All this has not resulted in the desired uptick in investments. From a high of 27 per cent of GDP in 2007-08 it dropped to 19.6 per cent in 2020-21. Economists have different explanations for this.

Some say that private investment did not peak because of the lack of money in the hands of the consumers. Some say that Indian businesses do not have confidence in the way the economy is being managed. Their main complaints pertain to a lack of further reforms, and a lack of digitization of land records among others. The Indian political class has never desired to have legislation to force private capital into investing in the economy. Between 2003 and 2012, Indian corporates borrowed frantically from public banks at cheap interest rates envisaging a China-like developmental story for India.

Even during this period, the private sector’s gross capital formation as a share of GDP remained below that of the public sector in the pre-reform era. Prasenjit Bose et.al., have calculated that from 1980 to 1990 the public sector accounted for 11.1 per cent of gross capital formation whereas in 2012-13 the private sector accounted for 9.2 per cent. The growth period was marked by a heavy accumulation of Non-Performing Assets. The debt restructuring programme was initiated followed by the ‘Indradhanush Programme’ in 2015 to revamp the cash-starved public sector banks.

Through this programme, the government aimed to inject Rs 70,000 crore into the public sector banks and those banks that required support. Simply put, the purloining of money by corporations had to be paid for by public money. Even the second Narasimham Committee report that argued against government ownership of banks was opposed to such capital infusion operations for its fiscal costs to the government.

According to Piketty (as argued in his book Brief History of Equality), the Indian state has failed to adopt social policies that are ambitious and have universalist goals. He writes, ‘‘If the balance sheet on Indian quotas (affirmative action for backward and marginalized communities) is on the whole positive this experiment also illustrates the limits of such a policy. This kind of system is not sufficient for eliminating inequality; it must be accompanied by social policies that are more ambitious and have universalist goals.

By construction, the places in universities, elected assemblies and public offices can concern only a small minority of the socially disadvantaged classes. In the Indian context, quotas were often used by the elites as an excuse for not paying the taxes necessary to finance investments in infrastructure, education, and health care that would have been necessary to really reduce social inequalities in India and increase equality for all the disadvantaged classes (and not only a minority within them). In the absence of a sufficiently wellfinanced welfare state, inequalities did in fact begin to increase quickly again after 1980, despite their decrease over the first decades following independence.’’ Piketty’s jottings are reflected in the National Family and Health Survey (NFHS) 5 survey report.

Among India’s present demographic dividend (15-49 years) only 41 per cent of women and 50.2 per cent of men have 10 years plus of schooling. 57 per cent women and 25 per cent men are anaemic. Only 11.3 per cent of children aged 6-23 months received a minimally adequate diet. According to the Annual Status of Education Report, a quarter of those between the ages of 14 and 18 struggle to read Grade-2 textbooks and only 35 per cent could divide. India’s transition to neo-liberalism was marked by inertia in sociopolitical mobilization demanding economic welfare.

Barring the implementation of the Mandal Report which was an inclusivist and not an egalitarian step, there was nothing that would force the political class to adopt universalist pro-poor policies. In Europe, between 1914 and 1980, a great redistribution took place on the back of three events. First, the rise of the welfare state which was in large measure the result of class struggles in the second half of the nineteenth century accelerated by the 1929 Great Depression and the wanton destruction of the two World Wars; secondly, the rise of progressive tax on income and inheritance; thirdly, the liquidation of private foreign assets in the colonies and subsequently the public debt. The last condition is not relevant for India but the first two are.

A massive non-unionized informal economy and relative prosperity of the formal sector have made labour unity difficult to achieve. Piketty also proposed a 2 per cent wealth tax on assets above Rs 100 million and a 33 per cent inheritance tax on property valued that much. Shamika Ravi, representing the Government of India on the dais, contradicted this by asking in what way taxing the rich would increase labour productivity? All economists agree that the productivity of Chinese labour was the result of investment in health and education during the Maoist era. Even if we skirt the Chinese case, the great turnaround of Japan after the country had lost almost everything during the Second World War was possible because of compulsory and free primary education, which had been enforced in Japan since 1876.

Any action on Piketty’s moderate proposal seems difficult if not impossible. Both the Congress and the Bharatiya Janata Party have historically had good numbers of businessmen in the Lok Sabha. In the 14th and 15th Lok Sabha, Congress had 19.28 and 21.60 per cent businessmen MPs. In the 16th Lok Sabha (2014) 26.33 per cent of BJP’s MPs were businessmen. In the 17th Lok Sabha, 23 per cent of all MPs were businessmen.

(The writers are, respectively, a PhD Candidate, Dept of Political Science, University of Connecticut, USA, and an Assistant Professor, Government Girls College, Gurugram, Haryana.)