New Delhi-based newspaper Mint on September 12 carried an article titled “The dangers of India’s billionaire Raj” that clearly brought out the growing income inequality in India mainly due to poor public policy, along with corruption and cronyism. The article was authored by James Crabtree, a senior research fellow of the Lee Kuan Yew School of Public Policy, Singapore. This widening gap of disparity between the rich and poor was the subject of a paper published last week by celebrated French economist Thomas Piketty and Lucas Chancel.
Possibly, this went down badly with the policymakers and the present government must have reacted to this news in a knee jerk fashion. As a result they were back in the news the very next day in the same newspaper with an article by Tadit Kundu headlined “Is Thomas Piketty right about inequality in India?” This article questioned Piketty’s estimates based on the historical data on tax collections and other published information and claimed that Piketty’s estimations were exaggerated.
While the matter of whether inequality of wealth is detrimental to a country’s economic prospects is a matter of debate, the talk of disparity seems to have rattled the government. This is especially true of a country like India which has a highly stratified population. But it seems that the Mint is really trying to do damage control. The speed at which these two contradictory articles were printed is amusing.
On the heels of this came yet another news on September 14 on offshore wealth held by Indians in tax havens increasing 90% between 2007 and 2015 to $62.9 billion (about Rs 4 lakh crore), which was about 3.1% of India's GDP in 2015.
A shrinking tip of the pyramid that holds majority of the country’s assets and a bloating bottom of the pyramid will definitely create an imbalance and lead to a variety of socio-economic issues especially when job creation is not keeping pace with the demographic dividend that we so proudly flaunt.
Thomas Piketty in his seminal work titled “Capital In the Twenty-First Century” explains one more concept that invariably creates an imbalance in income distribution leading to more inequality in wealth creation. He uses a simple formula of r>g where “r” stands for return on capital and “g” for growth in GDP of any country. GDP growth in most countries other than China and India is an average of 3%, while the return on capital in most cases in an average of 25%. This is especially true for most of the high networth individuals as well as PEs and other institutional investors. While the masses (middle and bottom of the pyramid) constitute the set that are affected by growth in GDP, the rich get a much handsomer return on their capital. This leads to a widening income disparity.
In India, the HNIs probably constitute less than 1% of the population and due to their better leveraging capability, garner an average of at least 20% return per annum whereas the bulk of the people get less than 8% return per annum. This disparity gets magnified and eventually creates a situation where 1% of the population has over 50% of the country’s wealth.
Many people think it is socialism that creates a rich and poor divide, but actually it is undiluted capitalism that does so.