Fantastically rising inequality? Piketty has got it wrong

Inequality is measured by the Gini coefficient, ranging from zero for total equality to 1 for total inequality. Consumption surveys of the National Sample Survey Organisation show a modest Gini increase from 0.3 in 1983 to 0.36 in 2011-12. Businesses that were bound hand and foot during the licence-permit raj were unbound, and soared. So the increased inequality is unsurprising.

Many economists believe inequality has risen much faster. Thomas Piketty , guru of inequality, and Lucas Chanel have produced a new paper “Indian Income Equality , 19222014: from British Raj to Billionaire Raj?“ Using a complex mix of data on income tax, national accounts and household surveys, this concludes that the top 1% of income earners in 2014 earned 22% of national income, the highest share since 1922 when income tax was introduced.

Piketty and Chanel note that consumption as reported in NSSO surveys is barely 40% of consumption as shown in GDP data: the ratio has fallen steeply over recent decades.Of the many explanations, Piketty emphasises the thesis that the rich hide their consumption from surveyors for fear of tax consequences. The non-rich have no such compulsion.

Piketty says India has no income surveys over long periods. So he uses heroic but questionable assumptions to construct income estimates, admitting these are “fraught with methodological and conceptual difficulties.“ He uses income tax data for the richest 5%, and adjusted NSSO consumption data for others. This yields a picture of fantastically rising inequality .

I won\’t bore readers with Piketty\’s technical flaws. But consider this. Piketty says the rich lie to NSSO surveyors.So for them he switches to tax data. Ergo, he thinks that the rich tell the truth to the taxman, but lie to surveyors! Laugh aloud, please.

The poor lie to surveyors too. Exit polls for elections vary widely from one another and the actual outcome. Why? As one voter told pollsters, “Why should I tell you truthfully?
What will I get out of it?“ Economist Devesh Kapur once conducted a survey of Dalits, using a local facilitator. A Dalit being surveyed said he was in very bad shape. Then, by coincidence, it came to light there was a marriage proposal between the families of the Dalit and the facilitator. The Dalit immediately declared that he had been lying, and was actually very well off ! Clearly the non-rich will lie if it benefits them.

Once, most subsidies were universal. But in recent decades the central government has targeted those below the poverty line, who get much cheaper foodgrains, kerosene, the Antodaya scheme and Indira Awas Yojana (cheap houses). State governments have additional targeted schemes.So, villagers have strong incentives to understate income to maximise benefits. Piketty is wrong to think only the rich lie to surveyors, not the non-rich.

Indeed, the incentives of the rich to lie have fallen with lower tax rates in recent decades, even as the incentives of the poor have gone the other way . This dents, perhaps destroys, the assumptions and results of Piketty\’s fancy economic modelling.

He says the income share of the top 1% fell sharply to 6% under Nehru-Indira socialism from 1950 to the mid-1980s, and then rose stridently , especially in the era of economic liberalization after 1991. This implies that ordinary folk were treated better in the socialist era and much worse in the liberalisation era. Dead wrong. The poverty ratio did not fall at all between 1947 and 1977, while the population almost doubled. So, the absolute number of poor almost doubled. Piketty ignores this terrible outcome of “garibi hatao“ socialism.

By contrast, fast growth induced by economic liberalisation raised 138 million people above the poverty line between 2004 and 2011. Inegalitarian liberalisation was far better for the poor than egalitarian socialism. Liberalisation provided new opportunities, which mattered more than equality . All rural areas have much lower Ginis (hence more equality) than urban areas, yet all migration is from villages to towns. People vote with their feet for opportunity over equality . Bihar and Assam have the lowest Ginis, but this denotes terrible stagnation, not an egalitarian paradise. Biharis migrate in millions to unequal but richer states. The new opportunities of liberalisation have created 3,000 Dalit millionaires. This form of inequality merits cheers, not criticism.

Piketty fails to consider inequality of opportunity , India\’s worst curse. People with skills and global connectivity have soared. Those without have been left behind. India needs quality schools, health centres, broadband and other infrastructure in every village. It needs uncorrupt, skilled and accountable officials. That will finally improve equality of opportunity . Soaking the rich won\’t, as proved by the socialist era.

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