When Piketty came to India

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.

- SHUBHAM SHARMA AND SUMIT DAHIYA

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.

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.