Less inequality can push growth, poverty alleviation in India: Piketty

The income share of India’s top 10 per cent population should be 30-40 per cent, not the 55-60 per cent seen at present, says French economist THOMAS PIKETTY, known for his groundbreaking research on economic inequality, wealth distribution, and the dynamics of capitalism. A professor at the Paris School of Economics, where he also co-founded the World Inequality Lab (WIL) and the World Inequality Database (WID), Piketty has sparked global debates with his research, becoming a central figure in contemporary discussions on economic equity and public policy. In an interview with Ruchika Chitravanshi and Asit Ranjan Mishra in New Delhi during his India visit, Piketty advocated a wealth tax on Indian billionaires to finance social infrastructure. Edited excerpts:

 

Earlier this year, the WIL said India's income inequality was now worse than during the British rule. So, does that mean the poor in India are now worse off than they were during the colonial era?

 

No, it does not mean that. Average income and average wealth in India have increased a lot since the colonial period. All I am saying is, we could do a lot better with less inequality. I think the level of inequality India has today is excessive. This kind of inequality is not necessary for pushing growth. India can have more growth and faster poverty reduction with less inequality.

 

A comparison with the colonial period, which is very striking indeed, shows extreme levels of inequality. But what is even more important to me is the comparison with other countries that have gone through economic development and growth — China for instance, and those in Europe, North America, Latin America, and Africa. Our conclusion at the WIL is that India right now is almost at the very top of the world in inequality. Apart from South Africa, there are very few countries where the share of the bottom 50 per cent of the population in total income is so small, and the share of the top 10 per cent is so large. At present, 55-60 per cent of total income in India is going to the top 10 per cent, while the bottom 50 per cent are getting something like 15 per cent. This kind of gap is rare. It is not like that in China.

 

The government’s argument — that we need this kind of income scale and inequality to incentivise wealthy entrepreneurs to develop, accumulate wealth and deliver growth — is just not convincing. I am not saying we want complete equality. It is okay to say we need some incentives and some reasonable income scale and wealth scale to develop. But those are just too much here.

 

What would be an acceptable level of inequality for India?

 

The experience shows that the share of top 10 per cent of the population in Europe is 25-30 per cent. Even in the US, which is a lot more unequal, it is 40-45 per cent. In China, it is 40 per cent. So, the right number for India would be 30-40 per cent, not the 55-60 per cent at present. The gap is enormous. I am not saying we should have an enormous transfer of income right away. I am just saying there is scope to redistribute and reduce inequality.

 

What is the reason behind this inequality? Is it policy-driven?

 

It is largely policy-driven. Some would say you have a historical legacy, caste system. But, to be honest, I don't much believe it. When you compare countries, you should not have a deterministic view that some countries have always been unequal, and they will always be unequal. It does not work like that. Things can change quite quickly with political will and mobilisation, and institutional change.

 

India has invented a very innovative way to tackle inequality. For instance, the reservation system for scheduled castes and scheduled tribes, and reservation for women in elections, are very interesting. The rest of the world has a lot to learn from the Indian experience with reservations — it is not perfect, but there is a lot to learn. However, this focus on reservation has sometimes served as an excuse for not putting financial resources into public services. I think we could have done both; India should do both. In practice, India has acted on the legal system reservation, which is important but not enough. Access to university, public-sector jobs and elected positions is not going to solve the problem of a vast majority of the population. In the end, what you need is to have good schools, good hospitals, and good infrastructure. India is improving. It is growing and making investment. But it could do a lot more by taking more money from the top of the distribution and investing more in these services.

 

What are the key reforms the government should undertake to reduce inequality?

 

I would recommend having a very ambitious plan for tax justice in India, asking the richest Indians, who have benefitted the most in the past 10-20 years, to just give back a part of their new wealth accumulation to pay for investment in India's public services, such as education and health. You are not going to close the productivity gap by making dismissing a worker easier. If you want to close the productivity gap, it will have to come from such an ambitious plan.

 

Those with annual income above Rs 15 lakh are taxed at 30 per cent in India. What would be the ideal income-tax slab for the rich in India?

 

The real problem is that the very rich do not report a lot of income. So, if you take top billionaires, some have become very rich in India lately by using the infrastructure of India, education system of India, sometimes connections to the government, and public procurement market. The income they report on their income-tax returns is maybe 0.01 per cent of their wealth. If you take the people with several dozen billions of dollars in wealth, let the tax administration tell us the average income of the top 100 Indians, or the top 20 Indians, and compare with the 100 wealthiest or 20 wealthiest. You will see that the income they report is 0.01 per cent of their wealth. So, you can tax income at 90 per cent if you want. But that is not the issue. Whether the tax rate should be 30 or 40 per cent, or 90 per cent, is not the issue for these very top billionaires. The issue is to tax the wealth itself. What we show in our work is that even a 2 per cent (wealth) tax on the very top billionaires will raise a lot of money. (32nd US President Franklin D) Roosevelt had a 90 per cent top income-tax rate, which worked quite well in the US. But before talking about this, we can do a lot by putting a very small tax rate on very high-wealth people.

 

India is now aspiring to be a developed country by 2047, though we are ranked 141st among countries by per-capita income. Is it the right goal to chase or should we focus on improving our per-capita income?

 

This is an ambitious but reasonable strategy, if India makes it a real priority and puts the resources to go in this direction. Let me again put a simple number on the table. Total tax revenue in India is around 13-14 per cent of its gross domestic product (GDP) today. You cannot pay for education, police, justice, and infrastructure with so little money. If you do that, you do not pay people well. I am not saying you should be like Sweden by next year, with tax revenue accounting for 50 per cent of GDP. But India should go in this direction substantially. Now, does this mean having 25 per cent or 35 per cent of GDP in tax revenue? Who knows? At the end, it is more than just numbers. This is also how you organise the education systems and the essential infrastructure. So, you have to involve people. This can happen only very gradually, but you have to take it in that direction.

 

One of the key criticisms of your research has been that you use income-tax data. For a country like India, with a vast informal economy and only 100 million people paying taxes, do you think that is the right way to measure inequality?

 

Let me make it clear that we combine all the data sources that are available. We obviously use household survey, consumption survey, employment survey, and labour survey — that is the only way to reach the living conditions of the really poor and also of a large part of the Indian middle class. We also use national accounts data. We try to reconcile it with consumption survey data, though it is difficult to reconcile sometimes. We use data on wealth. We also use data on income tax, because at the end of the day, our experience with other countries — we are covering more than 200 countries in the world, in the world inequality database — is that even in countries where the tax administration is not working perfectly, the kind of information you have for top income groups in income-tax data is always better than what you get in a survey. That is because the rich simply do not show up in self-reported surveys. It is always better to have the income-tax data, which we correct using the missing income gap with the national accounts. We would love to have more data. I am telling the Government of India that the income-tax tabulations you publish today are less rich in terms of detailed information than what we had 40 or 50 years ago. So, please give us more data, and we will try to do a better job. In any case, we will combine all these sources. Now, no matter the imperfection of the data sources for India, I think it will be stupid to deny that India is a very unequal country, even if we have uncertainty. We are ready to discuss everything. But the conclusion that India is an equal country by international standards makes no sense.

 

But the government would argue that your data may be missing out on a lot of welfare programmes like the free food scheme and the rural job guarantee scheme, which help in ameliorating poverty?

 

We are trying to take those into account. We are trying to look at data before transfer and after transfer. But in any case, again, even taking this into account, India currently looks very, very unequal by international standards.

 

You are vising just before the Budget will be presented (in February). Have you made any recommendations? What kind of interactions did you have with government officials?

 

I think they do not take criticism in a very constructive manner. Look, I think they are trying to do their best, and I am just saying it is possible to do a lot better. You have to accept constructive criticism, especially from someone like me who is a big fan of India, the largest democracy in the world, and is just here to learn, to help and to discuss.

 

What do you think will be the impact of artificial intelligence (AI) on inequality?

 

It all depends on the public regulation for AI.

 

Are you happy to be called the modern-day Karl Marx?

 

Well, I'm not so sure how I see him. I don't know if I prefer (John Maynard) Keynes or Marx. There are some good things about Marx, and some less good things too.