India Shining? Rich got richer, the poor stayed that way

The late Prof. C K Prahalad, known for his work on studying business opportunities at the “Bottom of the Pyramid”, once said: “I am always accused of having thought about the pyramid. But I was very clear since day one. Our job is to understand the pyramid so it becomes the diamond -- so most people live normal, middle class lives.”  The pyramid to diamond transformation happens when people at the bottom reduce as they begin to move up and add large numbers to the middle class while some from the middle move to the top. This is a description sold by many a consulting firm to build on the idea that India’s growth is taking people up the economic ladder and transforming the nation.

An interesting dimension of this much discussed (and generally accepted) hypothesis now comes from the French economists Lucas Chancel and Thomas Piketty, who this month released a paper titled “Indian Income inequality, 1922-2014:  From British Raj to Billionaire Raj?” Piketty is the celebrated economist who shot to global fame with his book “Capital in the Twenty-First Century” which works with a massive collection of historical data for several countries to develop a grand theory of capital and inequality. The book triggered a new round of global debate on inequality. Lucas Chancel is co-director of the World Inequality Lab and of the World Wealth and Income Database at the Paris School of Economics. The two have tracked the dynamics of Indian income inequality over a vast period – from 1922 to 2014 – and their findings are nothing short of alarming.

Put simply, the paper concludes that the share of national income accruing to the top one per cent income earners is now at its highest level since the creation of the Income Tax of 1922 under the British Raj.  In the India of the late 1930s, which is around the time in history when All India Radio was first established, the top one per cent of earners captured less than 21 per cent of total income. This dropped to six per cent in the late 1980s and has risen to 22 per cent today.

Considering the period from 1951 to 1980, the bottom 50 per cent captured 28 per cent of total growth. Their incomes grew faster than average.  Against this, the top 0.1 per cent incomes decreased. The picture has completely reversed since. The 1980-2014 period saw the top 0.1 per cent of earners capture a higher share of total growth than the bottom 50 per cent (12 per cent vs. 11 per cent), while the top one per cent received a higher share of total growth than the middle 40 per cent (29 per cent vs. 23 per cent).

As the Chancel-Piketty paper says, “It is also interesting to note that bottom 50 per cent of earners grew three times more slowly in China than in India, the middle 40 per cent six times more slowly than their Chinese counterparts, but that the incomes of those at the very top of the Indian population have grown at a faster pace than in China.”

The paper and its findings would falsify the broad narrative that has taken root over the years and sells the story of the rising Indian middle class as the powerhouse of domestic consumption. In effect, the middle class that is being led on to spend more and mark its arrival is the class that has got far less out of the India economic story than those sitting higher on the economic pyramid.

It is true that the public debate in India over liberalisation policies has largely focussed on the macroeconomic impact and on the impact on poverty with substantial reduction in poverty rates. The debate on inequality has been less discussed and in many fora is completely absent.  So the paper marks a substantial contribution from leading authors on the distributional characteristics of economic growth.

The fact that India stands out as a country with one of the highest increases in the top one per cent income share concentration over the past 30 years should lead to some rethinking on how the growth story  is going.

The analysis sits at odds when seen in conjunction with India as “bright spot in the global landscape,” as Paul Cashin of the IMF said earlier this year.  It shows that rapid growth has not transformed to address problems of inequality, particularly the labour market and employment conditions in the country. Employment grew merely by 0.5 per cent per annum from 2004-05 to 2011-12 – the period that saw the highest growth of GDP by 8.5% per annum. At the same time, 92 per cent of workers are still engaged in informal employment. Close to 276 million workers live below the poverty line of USD two per day, and their bargaining positions have declined despite economic growth. Further, both rural–urban disparities as well as inequality within urban areas in per capita expenditure are growing.  Recent data also indicates a growing concentration of per capita incomes at the top during the post-reform period.

As the distribution of incomes and expenditures has become more unequal, poor people have not gained sufficiently from rapid economic growth. In addition to labour market inequalities, gender inequalities have also contributed to the income inequality trend. The redistributive role of fiscal policy could be reinforced by greater reliance on wealth and property taxes, removing opportunities for tax avoidance and evasion, better targeting of social benefits while also minimising efficiency costs, in terms of incentives to work and save. Improving the quality of education, eliminating financial barriers to higher education, and providing support for apprenticeship programmes are all key to boosting skill levels in both tradable and non-tradable sectors.

The problems that Chancel and Piketty point to cannot be addressed by counting our fancy hospitals, air-conditioned schools or luxury housing. That is not growth but an impediment to the real growth that India needs if the nation is to stand tall in the global order. At the very least, the research must open up new avenues to debate these issues and to move away from the cliché of “India shining”.

(Rattnanai is Editor, SPJIMR.  Pattnaik is Professor, SPJIMR)