Mumbai: Macroeconomic indicators pegged India’s economic growth over the last couple of years as having beaten general expectations (see here, here, here, here and here). In January 2024, the National Statistical Office declared that India’s real GDP growth for 2023-24 would be 7.3%, more than any of the world’s major economies, higher than the International Monetary Fund’s December 2023 projection of 6.3%.

With China still struggling post-pandemic and the Euro zone only narrowly escaping economic contraction in the last three months of 2023, the exultations on India’s GDP numbers—which rose significantly on account of a post-Covid base effect and then continued to be pegged  at 6%-7%—have persisted.  

Now, about a month before India’s general election in April-May 2024, a new paper by economists of the World Inequality Lab raises critical questions about the growth  numbers—how is this growth distributed across the population, who has gained and who has lost, whether their gains and losses were rooted in particular policy trajectories pursued by the government.  

Stark inequalities in India are visible everyday—a £120 million Ambani wedding in Jamnagar co-exists with data on Indian children who had not consumed any food over a 24-hour period, termed ‘zero-food’ children. The findings of the World Inequality Lab paper, titled Income and Wealth Inequality in India, 1922-2023: The Rise of the Billionaire Raj, puts anecdotal evidence into perspective. 

The paper is co-authored by Nitin Kumar Bharti of New York University-Abu Dhabi;  Lucas Chancel of Sciences Po Paris and Harvard Kennedy School; Thomas Piketty of the École des Hautes Études en Sciences Sociales (School of Advanced Studies in the Social Sciences) and Paris School of Economics; and Anmol Somanchi of the Paris School of Economics. The authors combined national income accounts, tax data, billionaire rankings and surveys on income, consumption and wealth to create data series back till 1922.

It said inequality in India, on a decline in the post-independence years until 1980, began to rise sharply in the early 2000s, and is now higher than it was in the colonial era. Since 2014-15, wealth concentration has been further accentuated among the very rich, leading to the top 1% of the population accounting for 22.6% of income and 40.1% of wealth—a concentration of billionaires that is among the sharpest in the world. 

The paper said a ‘super tax’ of only 2% on the net wealth of only 167 of India’s wealthiest families in 2022-23 would yield 0.5% of national income in revenues and create the fiscal space needed to facilitate investments in health, education and nutrition that can enable average Indians, and not just the elites, to “meaningfully benefit” from  globalisation.

Put simply, the paper reiterates that GDP growth numbers are not an adequate indicator of human welfare.  

In an interview, lead author of the paper, Nitin Kumar Bharti of New York University, Abu Dhabi and the World Inequality Lab, told Article 14 that persistent inequality has led to India missing out on consumption-led growth, and that Indian society, historically unequal, has witnessed this structural inequality also reflected in monetary terms.  

Almost immediately upon its release, a flurry of newspaper articles disputed the paper’s findings (here, here and here) with, notably, economists Surjit Bhalla and Karan Bhasin writing that its methodology was flawed and that there were discrepancies in Piketty's estimates of income and wealth distribution in India.

Excerpts from the interview:

Your paper comes amid a persistent buzz about this being India’s decade and India’s century. Does rising inequality in India not impact growth at all? How is such growing income and wealth inequality an important facet of how we must understand contemporary India?  

Inequality does indeed have an impact, a negative impact, on the growth rate. Instead of the form of extreme inequality that we have where money is concentrated in very few hands, if it was to be distributed—not equally, for I think equality can be another extreme—to give money into the hands of  maybe the bottom 50% whose purchasing power would thus increase, that will lead to a high multiplier effect. There will be much more consumption. Consumption-led growth is something India has  missed. Our GDP growth levels are probably lower than they would have been if we had consumption-driven growth. But this is something that needs careful study and research to pinpoint exactly. 

On how wealth inequality is a facet of India, I would say Indian society has historically been very unequal. What happened post-1991 is that economic liberalisation transformed many things into an economic form. And on some level, all that deep structural inequality that our society already had is now also reflected in monetary terms, in some sense. 

The way I understood your paper is that  the rise in inequality has been more pronounced between 2014-15 and 2021-22, but the trend in fact began around 2004-05, when the UPA government was in power. In that sense, the policies of the left and the right have had a somewhat similar impact on how inequality grows in India?  

Post-liberalisation, there has been an increasing trend in inequality, and it’s certainly true that this has been the case regardless of which political party was in power. 

To give you an example, our education system has kept a lot of the population illiterate, and few have managed to escape that. In 2011, for example, 30% of the population was still illiterate. 

For a very long time, irrespective of the political party in power, India did not focus on mass level primary education. The focus was more on tertiary education, leading to a situation where few got  super well-educated,  able to compete with human capital in the US or elsewhere in the West. The large part of the population meanwhile, remained very poorly educated. 

Post 1990s, we started emphasising on education, but the quality still remained poor and had the same effect on human capital. And because post-1991, social inequalities were also transformed into money, you see rising inequality in the early 2000s also. 

Coming to the recent phenomena, what we are observing in number terms is that the share of the top 10%, which has been consistently increasing, has seen a concentration even within this segment. If I have to differentiate, this is the factor that sets recent years apart. Now you have the top 1 % people’s share in wealth at 40%, and 22% in income.  

What is the role of education inequality in wage inequality, and isn’t it true that income inequality also leads to further inequalities in educational attainment? Does this sort of become a self-perpetuating cycle of income inequality caused by education inequality and causing further income inequality? 

Educational inequality, wage inequality and then educational inequality—these are certainly interlinked. 

Another paper I’m working on compares the long-term evolution of the modern education systems in China and India and it emerges that education inequality explains a much larger share of wage inequality in India as compared to China. Survey data exists from the 1980s to now, and one can see that China, because their education system is also sort of transforming now, is witnessing a greater impact from education inequality. However, it remains way below the levels of education inequality impacting income inequality in India where one quarter of all wage inequality is rooted in education inequality. 

On how wage inequality in turn starts impacting education inequality, if you have very high wage inequality—I am now going to use wage and income inequality interchangeably because a major part of income inequality comes from wage inequality—and a situation where good schools are mostly private schools with high tuition then good quality education is inaccessible to a large population. This further leads to decreasing intergenerational mobility based on education rank, and thus income inequality starts impacting education inequality. 

To break this cycle, the public education system has to be robust, provide equal opportunity to everyone, a subject that governments have shied away from. It’s true that government spending on education has increased over the years but it's not enough. We have a huge backlog from historically not spending enough, and five or 10 years of spending is not going to change that. There needs to be a sustained effort for a very long time to break the cycle.

If the gains from growth are made by the top 10%, this must have come at the expense of the middle 40% and bottom 50% of the population. What is their lived experience of this data? In real terms, what is it that the middle classes and poor in India have actually lost?

Let us be clear on one thing, which is also the usual response of the government— that averages are increasing. We are not denying that. Even for the middle 40% or the bottom 50%, income / wealth levels compared to before have increased. But the extra growth, as the pie increases, benefits a small segment alone. Most of the increased buying is done by the top, while the middle 40% or bottom 50% has a smaller and smaller share.  

On wealth, land and buildings account for almost 90% of assets. Of course, surveys tend to under-report financial wealth, but we also know that financial wealth is super-concentrated in maybe the top 5% of the population. 

So, for 95% of the population where of course our middle 40% and bottom 50% lie, land and building make up 90% of their total wealth, and financial assets only 10% or so. And we see that from 1991, the asset prices of the rich have grown much faster. 

What could be the reason for land prices growing faster for the top 10% of the population compared to the middle 40% and bottom 50%? Why are their asset prices moving up at a faster rate?

My answer is that probably, amenities such as roads and sanitation and other things that increase land valuations and in rural areas things such as public irrigation canals or private wells/ borewells lead to a differential increase in land prices. This is about the quality of public amenities, and who gets them. 

On the faster income gains at the top, look at salaries in cities such as Bangalore, for example. Salaries for some individuals at the top management level have escalated so much. We have quoted from Khera and Yadav 2020 which looks into the pay ratio of the top management and the median employees in 50 Nifty (NIFTY50) companies. They find this ratio to be 250—that is huge. They compare it to other parts of the world and find that it is an extremely wide gap in India.  

On the greater financialisation of wealth, can you tell us why this contributes to an uneven playing field?  

The financialisation of wealth in India is actually lower than in other countries, although there are complications with regard to whether our surveys are properly capturing financial wealth. Overall, large percentages of Indian households’ wealth still remains in land and buildings—perhaps due to lower awareness, or that there is not enough extra wealth to take the risks that the stock market requires. Risk taking behaviour is a function of your wealth, and the more wealth you have, the more likely you are to take risks because you can absorb any losses.  

From the inequality perspective, financialisation of wealth is not per se wrong—it is the extreme financialisation that bothers us. Additionally, it leads to improper capture of wealth data. The second thing is it becomes easier to move wealth around for the top top rich individuals who can move their assets across the world to escape taxation.  

Your paper says we have a regressive tax regime in which the very rich pay a lower proportion of their incomes as taxes. So is the answer to inequality in an improved taxation regime? 

That is one of the answers. But I think there are a lot of other things we could do. 

We need to bring human capital formation more into focus. We don’t need more resources to do so, we can reshuffle our priorities to change our focus.

My perception on this changed when thinking about China and India, and on looking at what they were able to do in terms of educating their entire population, when they were not rich. 

China is rich today, but before 1980 they were like India on per capita income. They were then educating their bottom 50% of the population while we were educating the top 5%. This is the difference. 

We do need to restructure our taxation system, the current system is progressive in terms of income but regressive when you look at income and wealth both. At the top you have super, super rich people who fall within the same tax bracket and pay the same income tax as those with significantly lower income and wealth. 

Very large disparities in wealth and income are not uncommon. Internationally, countries do not have thousands of tax brackets. But different countries have other forms of taxes such as estate tax, wealth tax, forms of taxes that keep inequality in check. In India we do not have those taxes, and that makes it tricky.

There is criticism about some aspects of your paper, including a footnote on the results being tentative, based on inferences you draw on distribution of income and wealth as per your estimates. How do you respond to the charge that the paper is based on questionable assumptions? 

We would like to thank them for going through our paper, and acknowledging the data issues prevalent in India—no survey capturing income information, surveys becoming non-representative. 

On the two important points dealing with our paper, my comments are that  footnote number 36 is NOT about the inequality estimates, but about something else. In that footnote we are talking about the ratio of average wealth and income at  percentile level. There does not exist any data source which captures income and wealth together, hence we compute the distributions—income and wealth—separately, and then compute the ratio. To get a precise ratio, one requires a data source that  captures both, which unfortunately is not present in any data source in India. Hence, in our data section of the paper, we call for the inclusion of some wealth information in tax tabulations to do this exercise precisely. 

Also, they are incorrect when they say that for 1999, the top 1% share increased to "21%". I don't know where 21% is coming from. In our table (B1; page 70 and 71) the top 1% share in 1999 is 14.7%, same as before (as in Chancel and Piketty 2021).  

Such mistakes can happen while reading a long paper with anyone. Hence, we request a re-read. The above two things are the crux of their critique (also, almost half of the article). The debate related to US inequality was also responded to earlier. Rest is simply their opinions.

(Kavitha Iyer is a senior editor with Article 14 and the author of ‘Landscapes of Loss’, a book on India’s farm crisis.) 

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