Home / Opinion / The wrong priority for India

As has been widely reported, including in this newspaper, economist Thomas Piketty was recently touring India. In a series of public engagements, he exhorted the Indian government to raise its tax-to-GDP (gross domestic product) ratio, to spend the extra money on public health and education, and thereby to reduce wealth and income inequality. As most readers will be aware, Piketty sees himself as something of a crusader on a quest to slay the dragon of inequality; he appears to believe that one of the caves in which this dragon may be lurking is in India.

As it happens, much of the commentary, whether in favour or against the mercurial Frenchman, has fixed on essentially technical questions, such as: how narrowly or broadly one should define taxes, should one look at only taxes levied by the Union or also the states, does a consumption based Gini coefficient understate true income inequality, should one focus on income or wealth inequality, and so forth.

Important and indeed vital as these technical questions are—and some of them are the subject of research by this and other authors—they altogether elide deeper political economy questions. The most fundamental such question, in my judgement, is this: Is prioritizing the reduction of inequality (however measured) a sensible policy goal for India at present?

Many commentary pieces on the topic have assumed, without argument, that Piketty’s policy prescription, deriving from his analysis of advanced economies, can more or less be transplanted intact to India and other developing and emerging economies. This unstated assumption needs to be questioned and, I would argue, frontally challenged.

It is certainly plausible to argue that, in an advanced economy such as the US, in which the level of per capita income is already high, it is a pressing public policy imperative today to use the panoply of fiscal tools, both on the taxation and on the spending side, to attenuate the high level of income and wealth inequality. A functionally related objective is to reverse, if one can, the stagnation of proletarian and middle-class incomes, by investing in a failing public infrastructure, public health, public education, and so forth. Not just Piketty, but a range of economists, such as Nobel laureates Paul Krugman and Joseph Stiglitz, to name just two of the most prominent, have advocated variations of such a prescription. While I personally would not be especially enthusiastic, one could make a tenable case that the US needs a dose of “tax and spend" at this juncture.

But, in my judgement, it would be disastrous for India, which is still a lower-middle-income economy even a quarter century after economic reforms were unleashed, to embrace such an approach. Indeed, such advice, in the Indian context, whether coming from Piketty or any other celebrity economist who pays an obligatory visit to India in the winter, is, I am afraid to say, little more than generic “drive by" punditry. Such advice is easily doled out and cheaply embraced by some of our would-be progressives: cheaply, because they perhaps suspect that the chances of the advice being followed are slim to non-existent.

It should be glaringly obvious to everyone by now—but, alas, is not—that India’s top economic policy priority must be to achieve a high sustainable rate of GDP growth. And this is not because anyone fetishizes GDP, but because economic theory and evidence from many places and times teach us that high and sustained economic growth is the only viable path to reducing poverty and combating other social ills. Further, in the Indian context, such sustained growth can only be achieved by pressing ahead with economic reforms and, crucially, maintaining fiscal discipline.

The latter, in turn, is aided and abetted by our new inflation-targeting monetary policy regime, which, in effect, puts a lid on the irresistible political urge to indulge in fiscal profligacy. There are plausible, if debatable, Keynesian arguments for relaxing fiscal discipline if the problem one is facing is, principally, a business cycle downturn—but there is no credible case for doing so if the real issues are structural, as they self evidently are in India’s case.

It could be argued that Piketty’s goal of reducing inequality could be achieved with an unchanged fiscal deficit target, if only the efficiency of the tax system were improved, and the mix of government spending were shifted towards more productive purposes. While true, this is a non sequitur, since making our fiscal system work better is without doubt a good idea, and not chiefly because of any putative impact on inequality.

The broader point is that a fixation on inequality—which relates to relative, not absolute, income and wealth—is sheer folly in an economy in which the problem is poverty, a matter of absolute deprivation. The usual economist’s criterion for a policy worth pursuing is “Pareto improvement"—that is, making at least some people better off, while harming no one. This is entirely consistent with rising incomes, falling poverty and rising inequality.

Piketty is an impassioned and articulate advocate for fighting inequality. But it is manifestly the wrong priority for India at this time.

Every fortnight, In the Margins explores the intersection of economics, politics and public policy to help cast light on current affairs.

Comments are welcome at views@livemint.com. To read Vivek Dehejia’s previous columns, go to www.livemint.com/vivekdehejia

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