Critiquing Thomas Piketty’s Views on India’s Economy 

Source: The post Critiquing Thomas Piketty’s Views on India’s Economy has been created, based on the article “Dis/Agree: Piketty is wrong, India is not that unequal” published in “Indian Express” on 27th December 2024 

UPSC Syllabus Topic: GS Paper3- Economy-Indian Economy and issues relating to planning, mobilisation, of resources, growth, development and employment. 

Context: The article critiques Thomas Piketty’s claims about income inequality and tax collection in India. It argues that his data and conclusions are flawed, highlights India’s tax-to-GDP ratio as higher than reported, and questions the need for higher wealth taxes. 

What Are Piketty’s Claims About Income Inequality in India? 

1. Thomas Piketty suggests that India has one of the highest levels of income inequality in the world, second only to South Africa. 
2. He believes that the income Gini coefficient in India might be around 0.6, based on his estimates. 
3. However, this figure is contested by other experts who point out that India’s consumption Gini is about 0.34, suggesting that an income Gini around 0.4 is more plausible than 0.6.
4. Piketty proposes taxing the rich at higher rates to increase tax revenues. 
5. He believes that using these funds to provide services for the poor could help reduce inequality and spur economic growth in India.

For detailed information on Challenges of implementing a wealth tax read this article here 

What are the issues with Piketty’s Views on India? 

1. Income Inequality Claim: Piketty claims India’s income inequality (Gini ~0.6) is second highest globally, but India lacks an official income survey. Plausible income Gini is closer to 0.4 (consumption Gini: 0.34).
2. Tax-to-GDP Ratio: Piketty asserts India’s tax-to-GDP ratio is 13%. Recent IMF data (2019-20) shows it is 16.7%, higher than China (16%) and Vietnam (13.3%).
3. Growth and Inequality Argument: Piketty inaccurately claims India’s government supports inequality to incentivize growth. However, India has achieved over 6% growth annually for 30 years without extreme inequality.
4. Redistribution Hypothesis: Policies must be data-driven, not based on speculative claims.

What Should Be the Next Steps? 

1. Conduct an official income distribution survey to accurately measure inequality (current consumption Gini: 0.34; likely income Gini: ~0.4).
2. Reassess taxation policies with updated tax-to-GDP ratio (16.7% in 2019-20; 18-19% today, higher than China’s 16% and Vietnam’s 13.3%).
3. Avoid policies based on speculative claims like Piketty’s 13% tax-GDP ratio or extreme inequality assertions.
4. Align tax strategies with factual data to foster sustainable growth and redistribution.

Question for practice: 

Evaluate the validity of Thomas Piketty’s claims about income inequality and tax collection in India based on the data and critiques presented.