Photo: Reuters
Photo: Reuters

Thomas Piketty | India has a very strong legacy of extreme inequality

Piketty talks about what India can do to breach the inequality gap

French economist Thomas Piketty’s views on inequality, wealth and taxation are well known. After all, he devoted 700 pages to them in his celebrated tome Capital in the Twenty-First Century, that took the world by storm, sparking off debate and controversy on the issue of global inequality. Piketty, a professor at the Paris School of Economics and centennial professor at the London School of Economics’ new International Inequalities Institute, also has very definite views on what India can do to breach the inequality gap. He shared it in an interview on the sidelines of the Jaipur Literature Festival. Edited excerpts:

Your book traces the evolution of inequality since the beginning of the industrial revolution. In your opinion, how can India tackle the problem of inequality?

India is a relatively high inequality country with a very strong legacy of extreme inequality for centuries between groups. India has the potential to do very well, I think. In comparison to China, India has strong democratic institutions; it must try to address inequality through reservation policy in a public, democratic manner. Now India needs to cope with its inequality in an even more effective manner in the future if it wants to keep converging with the richest country. What I’m a bit concerned about is the lack of transparency about certain features of inequality like the income tax data.

You’ve spoken about this in a number of forums. Why do you think transparency is so important, especially for a country like India?

If you look at democratic countries, it’s pretty rare not to publish this data. It is true that there are some countries like China that do not publish income tax statistics. But then it comes together with a very opaque political system. If you look at democracies, most countries actually do publish this data. And what’s unique about India is that it used to publish this data until 2000. There was this All India Income Tax Statistics Report and this has been interrupted. For the past 15 years during this period of very high growth in India, nobody knows how income tax operates, how have top income groups in India done as compared to GDP growth. When we look at the consumption of average Indians or bottom 50% Indians, we don’t see the kind of GDP growth rates that we have in GDP statistics. The possibility, of course, is that a lot of the growth has gone to top income groups. Is this true? Has the income tax system been able to make this group contribute to the tax burden in proportion to the increase in their income, nobody knows.

And you know when nobody knows there is a suspicion that if we don’t show this data, it must be because we are not too proud of how the income tax system is working. I hear a lot of rich people or business people in this country say we have to trust the market forces, but I think we also need to build trust in the government, together with trust in market forces and competition. If you want to build trust in state capacity and government, then you need more transparency. So I think this kind of data has a very negative impact on the level of trust in government in general. So if we want to build better state capacity then transparency is very important.

Let me give you another example. It is not only income tax data but there is a lack of transparency in other forms of inequality data. For instance, you have the socio-economic census of caste that was conducted in 2011. This was five years ago but we still don’t have access to this data. I think this is not good because the purpose of this survey was to clarify the complex relationship between caste, income, and wealth. And we know there is lot of tension in this country regarding reservation policy. Nobody really knows how do different groups of OBCs (other backward caste) compare to SCs (scheduled castes) and how they compare to other castes in terms of income and wealth. And again if you don’t release the data, there is a suspicion that some groups are benefiting from the system more than they should. If you want to build trust into this system, I think it is really important to release that.

It’s a bit paradoxical that India passed the Right To Information Act 10 years ago but in fact in many ways it has become less informative than what it used to be. So while it is a much more transparent and democratic country compared with China, there is a risk that we get accustomed to a culture of opacity, not publishing the data and in the long run it would be very negative for India.

You recommend a global wealth tax in your book Capital in the Twenty-First Century, and have been a votary of taxing the elite class to prevent inequality. How do you think this can help in India?

The question is really what you do with the tax revenue and I think, if you use the extra tax revenue to invest in the health system, in the education of the bottom 50% or bottom 70% of the country, then, yes, increased tax of the rich in India would be actually good for growth. It would reduce inequality and at the same time increase growth. Because we know India, for its level of per capita GDP, is really not doing very well in terms of health indicators like life expectancy, which is 10 years lower than even Vietnam. So it is possible to do better at this level of development. We don’t need to wait 20 years before improving the health system in India. And improving the system requires improving the deliveries, improving the efficiencies and also investing in more resources. If you look at your total budget of the health system in India, it is 1% of GDP. In China, it is 3% of GDP. So there is no way you can do the same with three times less money.

What would be your five tips to the Indian government to help reduce inequality and improve the economy.

First, invest in the health system, improve basic health services available to the common man. Next is education that needs more investment. I think basically the bottom half of this country doesn’t receive the kind of health services and education they should.

In order to finance them, we need tax reform. I think again the income tax system should be made more transparent and probably effective income tax rate paid by the richest Indians should be increased. The tax collection capacity should be improved, so that would be number three.

I would club both inheritance tax and property tax together, as it does not exist in this country and wealth tax is not sufficient.

Number five, is what I mentioned earlier. We need to continue with the process that was started with the 2011 census and the long-term objective should be to gradually move away from a caste-based reservation system to a system of reservation that is more based on parental income, parental wealth. That would take a long time but I think it’s important to start moving in this direction.

Capital in the Twenty-First Century has attracted plenty of criticism. How do you react to that?

This was part of the objective to stimulate conversation and controversy, so I am very satisfied with the outcome. The book has been more successful than what I could possibly expect. More than 2.2 million copies have been sold, and not only in English but also in Chinese, Japanese, Brazilian, German, French, Italian, Spanish and now it is available even in Hindi which makes me very, very happy. This shows that there is a strong demand of some form of democratization of knowledge. I have no problem with the controversy. My objective is not to make everybody agree. There is a lot of historical evidence in my book and that is not simple. People can take the book and draw their own conclusions for the future.

Close