Debating inequalities in the backdrop of elections

ByMaitreesh Ghatak

It is rare that an academic paper shows up in an election manifesto of a political party. The paper titled Income and Wealth Inequality in India, 1922-2023: The Rise of the Billionaire Raj, by Thomas Piketty and his co-authors Nitin Kumar Bharti, Lucas Chancel, and Anmol Somanchi, finds mention in the Congress’s election manifesto. They show that not only in the context of India’s own record over a century, the country’s level of inequality is the highest at present, but also that India is now among the most unequal countries in the world. This upward trend in inequality has been evident since liberalisation — the number of billionaires in US dollar terms rose from one in 1991 to 52 in 2011, and to 162 in 2022.

Even though the manifesto does not talk directly about redistribution, saying only that growing inequality of wealth and income will be dealt with by suitable changes in policies, the campaign trail has been heated up with charges by the ruling party that massive wealth redistribution is being planned if the Congress comes to power.

Inequality is a topic that is prone to generating debates anytime, anywhere. In the current instance, coming in the middle of ongoing debates about the state of the country’s economy over one decade of rule by the current government as the country goes to vote has naturally amplified its intensity. Now, debates regarding inequality can generally be divided into three main categories.

First, is inequality fundamentally undesirable or at least tolerable to some extent? This is a question of ideology. The Left sees economic inequality as inherently undesirable. The Right, in contrast, argues that economic inequality is inevitable just like inequality in other dimensions, such as intelligence and ability, and should be accepted although both sides tend to agree that absolute poverty or deprivation is undesirable.

Second, should one look at inequality of outcomes or of opportunity? In the case of the former, if one who works harder or is more enterprising earns more it is difficult to argue that is undesirable, let alone the negative incentive consequences on work, enterprise, or innovation. Even so, the question remains, are those who are getting the opportunity the most qualified, the most skilled, the most talented, or does being born into privilege matter?

Third, even if it is accepted that inequality is undesirable and that the problem of inequality of opportunity is very important, what can be done about it? It is a question of policy. If radical social change is not on the list of possibilities, then redistribution through taxation, public investment in health and education, and legal and regulatory steps to curb abuses of power by the rich are some of the policy instruments at hand. This is where the debate gets quite heated.

The main reaction against the thrust of the findings of the paper by Piketty and his colleagues is that economic growth necessarily leads to an increase in inequality as the wealthier classes are better able to take advantage of the expansion of economic opportunities that growth creates. However, poverty also goes down so focusing on inequality is misleading at best, and counterproductive at worst.

Growth leads to an expansion of economic opportunities, which increases wages and incomes in the labour market and thereby the size of government coffers, which, in turn, raises the ability to spend on welfare policies. After all, inequality was lower before liberalisation, but per capita, national income and its rate of growth were lower, and poverty was much higher.

The validity of this argument depends on whether the benefits of the growth process are indeed spreading to all classes of people. Are the incomes of the poorer classes rising at a sufficient rate despite inequality? Are employment and wages increasing at a sufficient rate in the labour market? Is the tax system progressive and public investment in areas where the poor benefit the most from is increasing? Let’s turn to evidence.

Research shows that the incomes of the top 1% and 10% income groups have grown at a higher-than-average rate of growth in the post-liberalisation era. Not only that, the growth rates of income of the bottom 50% and the middle 40% were both below the average growth rate. If the process of growth was inclusive, we should expect a higher rate of growth for those with lower incomes since by the laws of arithmetic, the lower the base, the easier it is to increase something by a certain percentage.

Given the incomes of the rich have been growing at a higher rate than the average, inequality — now at a historically high level — will continue to increase over time. Is this a problem that is inevitable in the era of globalisation and artificial intelligence (AI), and not exclusive to India? That happens not to be the case. For example, in China, the income growth rates of the top 1% and 10% groups have been broadly similar to that of India since the early 1980s, even though more recently, it has been higher for India. But, the income growth rates of the middle 40% and bottom 50% have been much higher in China than in India over the last 30 years.

Turning to the labour market, recent research shows that compared to the overall income growth of the country, the labour market fails to show signs of dynamism in terms of the quality of job creation and wage growth. Self-employed workers who do not employ any workers, casual workers, and workers engaged in unpaid family labour constitute three-fourths of the country’s total working population and their proportion has increased over the past decade. In terms of wages, the growth rate of the average real income of the working class is negligible compared to the overall income growth of the country. Thus, the picture emerging from the labour market, as to whether the poorer classes are benefiting substantially from the growth process, does not look positive.

If we look at the tax system, 17% of central government revenue comes from Goods and Services Tax (GST) and other indirect taxes, 15% from income tax, and 15% from corporation tax. However, about two-thirds of GST comes from the bottom 50% of the population, one-third from the middle 40%, and only 3-4% is collected from the rich. Wealth tax has been abolished since 2016. In a country like India, where more than 90% of the population is outside the income tax net, the process of tax collection is not easy, but still, the picture of the tax system that emerges cannot be called progressive in any way.

Finally, let’s look at the pattern of allocation of government expenditure on areas that would directly benefit the poor. Since 2014, the ratio of public spending on education as a proportion of national income has been consistently declining. The corresponding proportion for health increased slightly from 2017 to 2021 (the year of the epidemic). But since then, that too has been on a downward trend, and currently, stands slightly higher than the 2014 level. However, allocations to the public distribution system have increased since the epidemic, as have expenditures on public housing and drinking water. Although belated and limited in scale, this orientation of government policy is desirable. Still, the overall picture that is emerging is not promising.

Let’s not forget that the economy and politics are closely interrelated. There are other costs of inequality. The super-rich don’t just benefit because the tax system isn’t progressive enough. As the debate over electoral bonds suggests, they are politically active and, clearly, campaign contributions have economic leverage in terms of buying influence over government policy and decisions. So, the “don’t worry about inequality, growth will take care of everything” narrative does not look particularly convincing right now.

Maitreesh Ghatak is professor of economics, London School of Economics (LSE). The views expressed are personal