34 GovernanceNow | April 1-15, 2014

W
hy do we vote? We dont beneft from cast-
ing our votes; we dont beneft from not
casting our votes either, said Dinesh Nay-
ak, summing up the status of voter empow-
erment after more than six decades of de-
mocracy in India. Sitting on a plastic chair outside his hut
in Achhala village, he was talking about the plight of his
community, Nayaks or Naykas.
This village is close to Chhota Udepur, some 90 km from
Vadodara and a veritable headquarters of tribals in Gujarat.
The Rathwa community among adivasis are economically
somewhat better of even if life is difcult for many of them.
Rathwas have land and are not doing badly in agriculture,
cultivating maize. When the highway to Madhya Pradesh
passes through towns, one can notice signboards of doctors
with the Rathwa surname. A few Rathwas have made po-
litical careers from the reserved constituency (one was a
minister of state for railways in UPA I). But the Naykas are
a minority, indeed the marginalised among those who are
not far from the margins. Socially, they are one scale below
the Rathwas, many of whom till recently would not drink
water in a Nayka home.
Loktak Lake, near Moirang in Manipur, is
the largest freshwater lake in India.
Less equal
than others
Economic models have been vociferously debated this poll season, but there is little
discussion on the dening challenge of our time: economic inequality. It is increasing
fast, and Indias own 1% problem is bound to raise its head soon
Ashish Mehta
35 www.GovernanceNow.com
people politics policy performance
On Equality
Lallubhai Rathwa, who has studied
the Nayka community while working
from the Adivasi Academy of Tejgagh,
said the Naykas do not have land of
their own, and earn their living as
farm labourers, mostly in other parts
of Gujarat. This forced migration for
the better part of the year means they
cannot access quality health care and
their children cannot regularly attend
the local school for long.
What a welfare state can do for them
is to give them land, and that is very
much on the cards. Under the Forest
Rights Act (FRA), they can claim land
their forefathers used to till, but most
do not have proofs. Dinesh Nayak re-
called that the state government prom-
ised to distribute its unused land to the
poor and even distributed token certif-
icates of land rights at a garib kalyan
mela, or the poor welfare fair, in 2009,
but no one had got any land till the
2012 assembly elections, thanks to the
bureaucratic hurdles.
What the community has got from
our welfare state is job assurance un-
der MGNREGS (which they dont need),
money to construct houses under In-
dira or Sardar Awas Yojna (which has
certainly helped), a school and a health
centre (which they cannot use except
for a couple of months a year). What
the community has so far got from the
great white hope of our times, liberali-
sation and economic reforms, is better
and better wages that, however, are
not enough to keep up with the infa-
tion and certainly not enough to accu-
mulate capital.
The Dening Challenge of Our Time
When we debate growth versus devel-
opment, when we talk about the neo
middle class, when we list out benefts
of liberalisation, it would probably
help to keep in mind Dinesh Nayaks
friends, like the handicapped Luliyo
and a youngster too afraid to give his
name to a reporter.
They have certainly benefted from
economic reforms many of them
sport mobile phones and take joy rides
on motorcycles. They have jobs, even
if in the informal sector, and their in-
come has grown to an extent from
1991 to today. What they do not have
is capital: no land, no investment, no
higher-level skills. In other words,
a 44-year-old Nayak has seen his in-
come rising from 1991 to 2014 even if
it is not comparable to the rise enjoyed
by a 44-year-old Delhi-based journal-
ist. But the frst has no means to reap
benefts of an India emerging as one of
the fastest growing economies, where-
as the second has, and it shows not so
much in the income but in the capital
or wealth accumulated by the latter.
Also, unlike the former, the latter has
inherited some capital (a house, some
stocks).
If we compare the marginalised citi-
zen not with the middle-class taxpayer
but with a specimen of the top 1 per-
cent moneymakers in the country,
the contrast would be way too stark
again, not just in terms of income, but
also in terms of capital (especially the
inherited one), and the ability to reap
benefts of a global economy.
With this much background, here
is what we need to seriously come to
terms with: this contrast, this inequal-
ity is increasing. This is what US presi-
dent Barack Obama has called the de-
fning challenge of our time.
Dinesh Nayak of the tribal community of Naykas: will they ever be economically equal to the rest?
Whenever one speaks about the
distribution of wealth, politics is never very
far behind, and it is difcult for anyone to escape
contemporary class prejudices and interests.

Thomas Piketty
GN PHOTOS
36 GovernanceNow | April 1-15, 2014
Plenty of rationale for taxing richer people more
Do Pikettys diagnosis of
increasing inequality and
the prescription of fght-
ing it with more taxes
apply to India? We turned
to leading development
economist Reetika Khera.
She responded in an email
interview:
On using taxation to
reduce income inequality
There is immense unrealised potential
for revenue collection in India. Raising
tax rates as Piketty suggests, especially
raising the top marginal tax rate (from
the current 30% to, say, even 35%), is
a measure I would support (more on
that below).
More importantly, the tax base in
India continues to be very narrow.
According to the fnance ministers
budget speech, only about 3% of the
population pays taxes. Compare this
with a country such as the US which
is supposed to have a pro-rich taxa-
tion policy. There it is reported that
just over 50% pay income taxes, but
even that is considered low. Even
China has done much better than us:
in about 20 years, the proportion pay-
ing income tax increased from 0.1% to
20% in 2008!
Another reason for the
low tax base in India is tax
exemptions. For instance,
agricultural incomes re-
main tax-free even for the
20% farmers who are not
small or marginal. What
stops the state govern-
ments from levying a fat
10% on medium or large
farmers? According to the
budget documents, revenue foregone
due to various exemptions was more
than `5 lakh crore in 2013-14. That is
about 80% of our total revenue collec-
tion! Further, these exemptions tend
to be regressive: e.g., the diamond and
gold industry is among the highest
benefciaries of exemptions/rebates in
custom duties over `65,000 crores.
Coming back to the top marginal tax
rate, the rhetoric of the aam aadmi in
India is such that people who are at the
top of the income distribution in India
perceive themselves to be the middle
class, and feel sorry for themselves.
According to the ILO, the middle class
(though difcult to defne) includes
those whose incomes are between $4-
13 per day. Combined with the fact that
many subsidies (e.g., fuel) are enjoyed
by the better-of in India, there is plen-
ty of rationale for taxing richer people
more.
The top marginal tax rate in Den-
mark was at 60% in 2013. The US with
its pro-rich taxation policy set its top
rate at 40%. In India, it is only 30%.
Certainly we can do better. In order
to keep top marginal tax rates low,
many argue that the improvement in
income tax collections are due to the
reduction in marginal tax rates. Cer-
tainly that contributed, but the other
factor which contributed at least as
much, viz., tax deduction at source
(TDS), is never highlighted. The rich
(or aam aadmi) have too much
voice in the business media, in poli-
tics, and elsewhere too in the Indian
system.
On the nexus between economic and
social inequalities
The problems of economic and social
inequality are deeply connected in
India. It is not easy for us to fully ap-
preciate how social inequalities can af-
fect economic outcomes. Consider, for
instance, something as innocent as
rural habitation patterns, where Dalit
bastis are physically separate from
those of other communities. Often, be-
cause sanctions are sought and given
by non-Dalits, the most basic ameni-
ties such as hand-pumps, roads and
Growing inequality is a shocking sur-
prise, because growth is supposed to
take care of it. That has been the as-
sumption following from the work
of the American economist Simon
Kuznets, which is the standard text-
book view expressed in our policymak-
ing circles as the trickle-down theory:
if the economy grows, everybody ben-
efts even if some beneft less than
others. A rising tide, in the words of
John F Kennedy, will lift all boats. In-
stead, what is happening is what many
vaguely, simplistically put as this: the
rich have become richer and the poor
poorer.
More than growth, more than job
creation, economic inequality is the
biggest challenge before Indian econ-
omy in the 21st century. This conclu-
sion comes not from radicals but from
pro-market institutions like the Inter-
national Monetary Fund, Organisation
for Economic Cooperationa and Devel-
opment and Asian Development Bank.
In their majestic work last year, Un-
certain Glory: India and Its Contradic-
tions, Jean Dreze and Amartya Sen
were talking precisely about people
like the Naykas when they wrote:
Since Indias recent record of fast
economic growth is often celebrated,
with good reason, it is extremely im-
portant to point to the fact that the so-
cietal reach of economic progress in In-
dia has been remarkably limited.
While inequality is common around
the world, India has a unique cocktail
of lethal divisions and disparities of
caste, class and gender apart from the
economic ones with each adding to
the other.
The economist duo also underlined
the trend of growing economic inequal-
ity. Even if inequality had remained
static, poor people would have gained
much more from Indias rapid growth,
but the gap has increased, pushing the
poor down.
The ADB has specifc fgures too. A
February 2014 working paper calcu-
lates that the inequality (measured in
something called Gini coefcient: 0
means perfect equality, and 1 perfect
inequality) increased from 0.33 to 0.37
between the early 1990s and the late
2000s. The bottom-line: Had inequal-
ity not increased, the poverty head-
count rate at the $1.25-a-day poverty
line would have been 29.5% instead of
the actual 32.7% in 2010 in India.
If the Congress is voted out of power,
this would be a critical factor.
37 www.GovernanceNow.com
The Occupy movement
IN the west, the gap between the rich
and the poor has been a matter of hot
and excited debate for a while. First,
it was the Occupy movement of 2011
which drew attention to the 1 per-
cent (this slogan came from an essay
by Joseph Stiglitz, who noted that the
top one percent Americans had come
to control 40 percent of the countrys
wealth). And second, because a French
economist and his colleagues have put
together astounding data going back to
the 18th century and covering 20 coun-
tries, coming to the same conclusion in
a best-selling book.
Thomas Pikettys Capital in the
Twenty-First Century (translated from
French and published this month by
Belknap Press of Harvard University
Press) is attracting rave reviews. Paul
Krugman calls it a truly superb book.
Its a work that melds grand histori-
cal sweepwhen was the last time
you heard an economist invoke Jane
Austen and Balzac?with painstaking
data analysis This is a book that will
change both the way we think about
society and the way we do economics.
The Financial Times fnds it is an ex-
traordinarily important book. The ti-
tle and the ambition of the book have
invited comparisons with Marxs mag-
num opus, though the author modestly
points out diferences.
Pikettys central fnding is that the
level of inequality not just in incomes
but in overall capital, including wealth
(land, shares, etc) between the top
and bottom tiers of society in the west
was very high, but the shocks of the
two world wars and the states socialist
interventions later reduced the difer-
ence to an extent. However, since the
1990s inequality is increasing around
the world. He also briefy touches upon
the Indian case, based on income tax
data from 1922 to the early 2000s. His
prognosis: inequality in overall capital
is increasing. This is leading the world
back to the pre-1915 days, when the
rich were rich for generations and the
poor had no chance of making it big, no
matter what we are, in other words,
returning to patrimonial capitalism of
the kind portrayed in nineteenth cen-
tury novels.
In the case of India, it is possible to es-
timate (using tax return data) that the
increase in the upper centiles share of
national income explains between one-
quarter and one-third of the black
hole of growth between 1990 and
2000.
Piketty has explored the Indian scene
in detail in a discussion paper, written
with Abhijeet Banerjee (of Poor Eco-
nomics fame) and published by the
Centre for Economic Policy Research in
2004. Here are the specifc fndings of
Top Indian Incomes, 1922-2000:
Our data shows that the shares of the
top 0.01%, the top 0.1% and the top 1%
in total income shrank substantially
from the 1950s until the early-to-mid
1980s but then went back up again, so
that today these shares are only slight-
ly below what they were in the 1920s-
1930s. We argue that this U-shaped
pattern is broadly consistent with the
evolution of economic policy in India:
electricity come to non-Dalit bastis
frst. How does this afect econom-
ic outcomes? Take the example of
public transport, which would stop
where the road stops. Combined
with the fact that in some areas,
Dalits are still not allowed to enter
non-Dalit settlements, their access
to public transport may be entirely
cut of. Further, in some areas, they
may not even be allowed in the pri-
vate shared tempos. Thus, some-
thing as simple as commuting (say,
to a city for work) turns into a hur-
dle track for a Dalit person.
The same holds for discrimination
faced by women cultural norms
may inhibit (or prohibit even) wom-
ens economic opportunities. Re-
search by Thorat and Attewell in In-
dia suggests that call-back rates for
job interviews were systematically
lower for Muslim sounding names
compared with upper-caste Hindu
sounding names, even though the
CVs were exactly the same. Unfor-
tunately, there is great resistance in
India to accepting the existence of
such social inequalities, and their
repercussions on economic out-
comes and inequality. Inequality
economic or social appears to
have been completely internalised,
to the extent that they are not even
recognised as inequalities.
The rich-poor gap in India
Inequality in earnings has doubled in
India over the last two decades, making
it the worst performer on this count of all
emerging economies. The top 10 percent
of Indias wage earners now make 12 times
more than the bottom 10 percent, up from
a ratio of six in the early 1990s.
OECD report
people politics policy performance
On Equality
38 GovernanceNow | April 1-15, 2014
s
In particular, we do nd evidence of a substantial decline in
the share of the elite during the years of socialist planning
and a comparable recovery in the post-liberalization era.
However the rebound seems to start signicantly before the
ofcial move towards liberalization.
s
Our results suggest that the gradual liberalization of the
Indian economy did make it possible for the rich (the top 1%)
to substantially increase their share of total income. However,
while in the 1980s the gains were shared by everyone in
the top percentile, in the 1990s it was only those in the top
0.1% who big gains. The 1990s was also the period when the
economy was opened. This suggests the possibility that the
ultra-rich were able to corner most of the income gains in the
1990s because they alone were in a position to sell what the
world markets wanted.
Abhijeet Banerjee and Thomas Piketty, from discussion paper Top
Indian Incomes, 1922-2000
Year Top 1%
average income
Top 1%
income share
Top 0.01%
average income
Top 0.01%
income share
1922 122909.9 12.72 1936560 2
1924 126488.7 11.46 2026708 1.84
1926 128806.7 12.89 1868081 1.87
1928 138579.7 13.62 2009664 1.98
1930 140360.9 14.53 2037199 2.11
1932 157712.4 16.14 2271200 2.32
1934 167082.2 16.9 2387050 2.41
1936 151630.9 15.58 2252387 2.31
1938 173215.3 17.82 2814694 2.9
1940 173426.5 16.15 3204867 2.98
1943 96004.29 10.32 1738684 1.87
1945 104408.2 11.41 1858192 2.03
1947 112743.7 11.23 2279373 2.27
1949 107421.5 12 1875089 2.1
1953 113292.2 11.92 1756642 1.85
1955 148676.9 14.41 2079083 2.01
1957 136401.6 13.34 1720548 1.68
1959 136596.5 12.36 1594948 1.44
1961 145568.6 12.15 1647440 1.38
1964 128134.6 9.65 1385308 1.04
1966 123420.3 9.99 1436632 1.16
1968 125338.6 9.95 1270021 1.01
1970 133250.3 10.02 1364580 1.03
1971 113206.1 8.47 1176400 0.88
1973 97335.63 7.02 885240.5 0.64
1974 82113.85 6.65 667965.7 0.54
1975 87072.96 7.24 750223.8 0.62
1976 99674.22 7.27 844032.3 0.62
1977 87730.4 6.18 730013.8 0.51
1978 87660.84 6.05 744088.4 0.51
1979 80880.71 5.61 659410.3 0.46
1980 72505.42 4.78 599435 0.4
1981 67188.12 4.39 465055.4 0.3
1982 68884.89 4.51 524714.4 0.34
1983 101455 6.46 748364.2 0.48
1984 100723.7 6.39 785803.5 0.5
1985 134205.5 8.24 1076154 0.66
1986 140409.1 8.64 1133425 0.7
1987 134502.3 8.12 1048166 0.63
1988 150884 8.52 1467390 0.83
1989 154480.6 8.19 1463549 0.78
1990 147359.7 7.42 1261498 0.64
1991 139481.2 7.12 1114667 0.57
1992 136488.3 6.96 1160748 0.59
1993 179917.2 8.53 2428050 1.15
1994 180766.9 8.09 2388467 1.07
1995 199685.5 8.67 4716301 2.05
1996 207252.8 8.72 3655103 1.54
1997 262105.7 10.7 4603855 1.88
1998 223561.1 8.95 3926823 1.57
1999 229679.3 8.95 4034289 1.57
An unequal music
Not even top 1%, its top 0.01% India that benefts
Source: Banerjee, Abhijit and Piketty, Thomas (2010). Top Indian Incomes 1922-2000; in Atkinson, A B and Piketty, T (eds) Top Incomes: A Global Perspective, OUP.
Data and graphs via: Alvaredo, Facundo, Anthony B. Atkinson, Thomas Piketty and Emmanuel Saez, The World Top Incomes Database, http://topincomes.g-mond.
parisschoolofeconomics.eu/, 23/04/2014
39 www.GovernanceNow.com
The period from the 1950s to the ear-
ly-to-mid-1980s was also the period of
socialist policies in India, while the
subsequent period, starting with the
rise of Rajiv Gandhi, saw a gradual
shift towards more pro-business poli-
cies. Although the initial share of this
group was small, the fact that the rich
were getting richer had a non-trivial
impact on the overall income distri-
bution. In particular, its impact is not
large enough to fully explain the gap
observed during the 1990s between
average consumption growth in sur-
vey-based NSS data and the National
accounts based NAS data, but is suf-
ciently large to explain a non-negligi-
ble part of it (between 20% and 40%).
Crony capitalism of the past decade
must have pushed this trend fur-
ther, and the next government will be
cheered heavily to pursue even more
pro-business policies. In short, inequal-
ity is going to only increase further.
The Costs and Benets of Inequality
Disparities between the rich and the
poor can be shrugged of as a fact of
life: the world has indeed never seen
an ideal society where everybody was
equal. Indeed, economists even speak
of benefts of inequality. For example,
it can motivate innovation, dynamism,
and entrepreneurship if it is within
limits and not galloping away, which is
the case now.
As for the harms of inequality if they
need to be listed out there are many.
Dreze and Sen say inequality leads to:
n
Hurdles poverty reduction eforts
n
Worsening health scenario for the
whole of society,
n
More crimes,
n
Less social solidarity and civic coop-
eration, and
n
Disproportionate political power to
a privileged minority, reinforcing
elitist biases in public policy.
As Piketty told the New York Times,
its very difcult to make a democratic
system work when you have such ex-
treme inequality in income and in
political infuence. (No wonder, the
Naykas have often contemplated boy-
cotting elections.)
And, of course, all of these eventually
impact economic growth itself. So, in-
equality needs to be addressed even
for the sake of higher growth in future.
Pikettys Prescriptions
Piketty has a range of policy prescrip-
tions, too, and at the time of writing
many in the US including the treasury
secretary were queuing up to hear
the same from him. Pikettys panacea
is: a progressive global tax on wealth
over 1 million euros. Not likely, but let
us at least note that it is not likely due
to political reasons. This proposal has
predictably attracted ferce criticism
from the pro-market press, but Piket-
ty sees taxation as the most powerful
weapon in this fght. In Indian terms,
this should mean high wealth and in-
heritance tax for the top 1 percent, or
even 0.01 percent level. (By the way,
the fedgling middle class need not
worry: he in fact recommends doing
away with property tax for the lower
half or even lower three-fourths of
property tax payers.)
The next on the to-do list is something
very much in demand for our own ver-
sions of Occupy agitators: force tax
havens to release the wealth hoarded
there. Its a question of political will.
He told the New York Times, If we can
send one million troops to Kuwait in a
few months to return the oil, presum-
ably we can do something about tax
havens using trade sanctions.
Efective redistribution of land, a ma-
jor asset, can help. Higher education
helps one go up the economic hierar-
chy. Access to capital can help the poor.
A range of specifc prescriptions can
be considered, once we come to terms
with the fact that the increasing gap
between the rich and the poor is not
some god-given law for which little can
be done: fnally it is a political choice,
and its the political policy that has
consciously or otherwise taken us to
where we are today.
Piketty puts it better: Whenever
one speaks about the distribution of
wealth, politics is never very far be-
hind, and it is difcult for anyone to
escape contemporary class prejudices
and interests. n
ashishm@governancenow.com
85 people = half the world!
Christine Lagarde
Director, IMF
Seven out of ten people
in the world today live in
countries where inequality
has increased over the past
three decades. [India is one of them.]
Some of the numbers are stunning
according to Oxfam, the richest 85
people in the world own the same
amount of wealth as the bottom half of
the worlds population.
With facts like these, it is not surprising
that inequality is increasingly on the
global communitys radar screen. It is
not surprising that everyone from the
Confederation of British Industry to
Pope Francis is speaking out about it
because it can tear the precious fabric
that holds our society together.
Let me be frank: in the past, economists
have underestimated the importance
of inequality. They have focused on
economic growth, on the size of the pie
rather than its distribution. Today, we are
more keenly aware of the damage done
by inequality. Put simply, a severely
skewed income distribution harms the
pace and sustainability of growth over
the longer term. It leads to an economy
of exclusion, and a wasteland of
discarded potential.
Excerpted from a February 2014 speech
people politics policy performance
On Equality