Addressing India’s income inequality: 

Addressing India’s income inequality: 

Context:

Thomas Piketty and Lucas Cancel in their new paper “Indian Income Inequality 1922-2014: From British Raj to Billionaire Raj” has shown that income inequality in India at present is at its highest level since the creation of the Indian Income Tax Act in 1922

How is the recent data published different from previously published data?

• Indian inequality data has traditionally been derived from consumer surveys.
• The traditional data largely understated the problem of income inequality in India.
• However, the data in the Pikety’s recent paper have calculated inequality from tax data, national income accounts and sample surveys. This method gives a way better picture of inequality.

What major conclusions can be drawn from the paper?

• The increase in income inequality coincides with the sharp rise in Indian economic growth after 1980
• Income inequality is not merely the share of national income going to the top 1%.
• There are other major distributional issues. The middle 40% in India got 23% of the increase in national income since 1980. In contrary, during the same period, middle 40% in China got 43% of the increase in national income.
• The bottom half in both China and India experienced similar conditions.

Why did middle 40% in India have a different experience than China’s?

• The main reason is the failure of labour-intensive manufacturing in India compared to its massive success in China.  
• In India, the proportion of workers in agriculture has declined but the workers who have left farms have not got jobs in modern factories or offices.

What political economy lessons can be learnt from these trends?

• There is a need to focus sustainable attack on mass poverty by job creation in the modern sectors of the economy rather than redistribution through fiscal spending that is eventually destabilizing.
• Widening income inequality weakens public support for liberal economic reforms and economic populism takes over.