Tax cut, the stimulus effect and other links

The Financial Times had the following header, “Sugar rush from India’s tax cut starts to wear off” in an article yesterday. The contents were less negative. Stock market euphoria might or might not fade. But, the medium-term positive impact on corporate cashflows and hence on investments will be there. It might take some time.

Abhijit Banerjee, one of the winners of the Swedish Riksbank Prize for Economics, had wanted India to roll back the corporate tax cut. He has argued that the sure way to boost economic growth is to put money in the hands of the people and that the resulting higher demand would boost investments. Fair enough.

But, whether tax cuts for big businesses are an unfair advantage conferred on big businesses are entirely a matter of context. In the Indian context, the tax cut offered seems par for the course. The best response to the point put forward by Abhijit Banerjee came from R. Jagannathan, Editor of Swarajya, through his regular column (‘Arthanomics’) for Mint. He had explained beautifully as to why, in the Indian context, the corporate tax cut was not wrong and that higher taxes would not be welfare-enhancing. It is an important read.

Now, back to the context of this blog. I came across this review of the recent book by Piketty (ht: Ramagopal). The review was somewhat short and ended abruptly but it had an important statistic:

Per capita income growth was 2.2% a year in the U.S. between 1950 and 1990. But when the number of billionaires exploded in the 1990s and 2000s — growing from about 100 in 1990 to around 600 today — per capita income growth fell to 1.1%. [Link]

Piketty has a point about extreme inequality. But, I am not sure if forced redistribution would work simply because political economy forces would not allow the redistribution to happen. There is a moral hazard. Nations can cheat and allow tax arbitrage even if they agree on harmonisation of tax policies and rates.

OECD’s proposal for taxing the income of multinationals would be an important step forward, if it came about. In fact, this could be one of the most far-reaching tax reform to be proposed in recent years. Without that, redistribution of surplus between labour and capital would be a non-starter. However, it is chastening to note that OECD has been at it at least for six years if one went just by the first page hits when one searched for ‘OECD TAX PROPOSAL’

This F&D article (somewhat long) has a very useful overview and a wealth of links to pursue. It links tax-havens and tax-evasion to ‘Too much finance’. In other words, the jurisdictions that are willing to act as tax havens end up suffering from the ‘Finance’ curse.

One wonders if the post-Brexit Britain wants to or can double down on its role as a financial/tax haven?

Macron bubble and protest vote in Spain

Recent French protests at the Fuel tax has multiple dimensions:

France is a high-tax country; but the question is whom does government provide relief – Macron reduced wealth tax earlier; fuel tax affects all; it is also a climate change issue; the vandalism that the protesters engaged in, targeted affluent communities, cafes and boutiques. Macron’s approval rating is one-fifth. 

Gideon Rachman on the Macron bubble that has burst. A rare piece of candour and correct opinion.

Much to reflect on the global angst and anger, manifested in the protests in France and protest vote in Spain.

Recently, Wall Street Journal has gloated that Thomas Piketty’s work on inequality has been discredited by recent research from the American Institute of Economic Research. May be, they are right. I have not seen their work. But, that makes the global angst and anger an even bigger puzzle. What is the motivation?
Wolfgang Muenchau on how the broken plane that led Merkel to catch an Iberian Air flight to go to Buenos Aires for the G-20 summit meeting is an apt metaphor for Europe. I agree with him. [Link]

Soulless capitalism is now global

In the last three years, CEOs’ combined compensation has expanded at a compound annual growth rate (CAGR) of 18.3 per cent, against 13.3 per cent growth in corporate earnings, 4.8 per cent CAGR in net sales and 10.1 per cent annual rise in the total salary and wages bill. [Link]

There are at least seven top executives among listed companies who earn more than a thousand times the compensation of their median employees….The gap at the very top of this ranking was actually higher in this larger sample, with the top executive earning over 25685 times the pay of the median employee.

The top companies in terms of this difference for 2017-18 include information technology, auto and engineering companies.

There are also no women in the top ten list of remuneration multiples for either year. [Link]

The above two are from Indian corporate sector!

Nearly 50% of the US Foreign Direct Investment Income for the United States come from five tax havens. In other words, profits-shifting by US corporations overseas is rampant. [Link]

Gabriel Zucman, Professor at University of California, Berkeley, author of the paper above, has this to say:

If globalization means ever-lower taxes for the rich and for multinational companies, and ever-higher taxes for those who presently don’t benefit from globalization—for retirees, for small businesses—then it’s a scam. It doesn’t work. [Link]

Check out this discussion of a paper by Thomas Piketty published in April 2018. The link to the paper is here.

Piketty says that both the Left and the Right mainstream parties have been captured by elites – intellectual or moneyed or both. He takes three countries – US, UK and France. So, the only option left for the people is to go with the populists because there is no consideration for their concerns in the mainstream parties of the Left and the Right. It is not about the Left vs. Right but Globalists vs. Nativists. Makes sense.

Instead, both the left- and right-wing parties have come to represent two distinct elites whose interests diverge from the rest of the electorate: the intellectual elite (“Brahmin Left”) and the business elite (“Merchant Right”). Piketty calls this a “multiple-elite party system”: the highly educated elite votes one way, and the high-income, high-wealth elite votes another.

There is a very good summary of the critique of the Piketty paper and other related papers by Thomas Edsall here. But, I personally believe that Piketty is on the ball here, notwithstanding the neglected role of race in Piketty’s analysis, as his critics charge.

I don’t think it is a white vs. black thing in America or white vs. non-white (black or brown). It is about ‘globalists’ and ‘nativists’ as Piketty put it. Globalists are comfortable with racial and religious minorities and immigrants as they see these minorities as similar to them although they are not in economic terms. Far from it. It assuages their guilt at being self-centred globalists, unrooted locally and unconcerned about local issues where they reside.

Thomas Edsall’s NYT article had a link to this very interesting sounding paper, ‘Why Hasn’t Democracy Slowed Rising Inequality?’. The paper is co-authored by four  academics and can be found here. Have not read it yet.

On a related note, the interview with Dani Rodrik, also by, a month before the discussion of the paper by Piketty took place is also interesting. In this interview, Dani Rodrik distinguishes between economic populism (‘good’ populism) and political populism (‘bad’ populism).

He defines economic populism, in the context of the United States as follows:

Today in the US, economic populism would take the form of bringing the financial sector down to size, reducing the influence of Wall Street in political institutions, and having much greater regulation of the financial sector. It would mean taking aim at concentrations of power in high-tech and digital industries. It would mean taking aim at our current pattern of trade agreements, which often privilege particular corporate interests and investors. [Link]

Gulzar Natarajan deal with some of the elements of ‘economic populism’, as outlined by Dani Rodrik above, in our forthcoming book, ‘The Rise of Finance – Causes, Consequences and Cures’.

As for market concentration, high-tech and digital power, lest we forget, here is the story of Barry Lynn of (formerly) the New America think-tank who was fired (in 2017) because they had dared mention Google by name:

In the run up to that event, the leadership at New America became very concerned about the fact that some of our work was focused on Google, and they asked us to maybe add different people to the panels, to frame panel discussions in different ways, to give them a heads up, to let other organizations have a say in what we’re doing. That had never happened before and it was very clear that it had to do with Google. Because we’ve done events in which we’ve really hammered Wal-Mart or Anheuser-Busch or Amazon, and there were no problems. But that event, it was the fact that we were mentioning Google by name that got people really upset. [Link]

UNCTAD’s annual report for 2017 presents the evidence for and the consequences of market concentration:

Concentration has increased markedly in terms of revenues, assets (both physical and non-physical), and market capitalization: in 2015, the combined market cap of the world’s top 100 firms was 7,000 times that of the bottom 2,000 firms, whereas in 1995 the same multiple was 31. At the same time, the share of surplus profits grew significantly for all firms in the database, from 4 percent of total profits in 1995–2000 to 23 percent in 2009–2015. For the top 100 firms, the share of surplus profits grew from 16 percent of total profits in 1995–2000 to 40 percent in 2009–2015.

The trend toward concentration, the authors note, has not extended to employment. Between 1995 and 2015, as the market cap of the world’s top 100 firms quadrupled, their share of the job market didn’t even double… [Link]

There is a counter-argument that much of the surplus that accrues to market concentration is not rent but due to technology leadership and productivity. But, it is strange that such critics do not acknowledge that both arguments need not be mutually exclusive.

A former Google Scientist tells Senate to act over Google’s unethical and unaccountable China censorship plan. Bravo!

Finally, this review of Walter Scheidel’s book, ‘The Great Leveler’ is worth a read. I had not heard of the book until my good friend Ajit Ranade mentioned it to me. Walter Schidel, I understand, thinks that violent levelers have been more often the answer to inequality – Four Horsemen’ – warfare; revolution; state collapse; and pandemics – have been the primary mode through which income levelling has occurred throughout history.

Despite overwhelming evidence, this LSE blog expresses the hope that peaceful levelers will achieve the job as they have done sporadically and feebly in a couple of minor instances.

But, let me end this blog post on that hopeful note.

Plenty of poverty – Congress’ analysis of India’s economic situation

The Congress Party has done a feisty analysis of India’s economic situation. The author of the document has used strong language that attempts to make up for the lack of substance in it.

More importantly, in terms of its own prescription, the document is eloquent on principles. But, the accompanying document, ‘Draft resolution on employment, agriculture and poverty’ gives the game away in the sense that it is not even old wine. It is stale wine or worse, a toxic brew. It is unsustainable and contains internally consistent prescriptions. Indeed, the specifics contradict the principles in the Economic Situation analysis.

(1) Let me start from the bottom. The document concludes on a sensible note. Well, half of the last paragraph was sensible:

Sustained economic growth is the path toward becoming a middle-income developed country. It is the path to lifting the poor out of poverty. It is the path toward creating a large, vibrant and productive middle class. It is the path to creating wealth and generating government revenues that will enable the State to spend adequately to attain social and redistributive justice.

Fair enough. But, the proof of the pudding is in the eating.

(2) Now, the fourth sentence of the last paragraph is this:

Such sustained economic growth can be achieved only if the country can be rescued from the hands of incompetent economic managers and entrusted to those who have for many years nurtured the economy and guided it on the path of all-round economic development.

That is pushing things a bit. The country voted to remove incompetent economic managers in 2014 and the problem with the present government is that they never realy understood the gravity of the outcomes that incompetent economic mismanagement had left behind.

When Pramit Bhattacharya of MINT wrote a piece on the jump in India’s ‘Misery Index’ in recent months,  I wrote him a mail as follows:

UPA II had a direct hand in the misery index spike. To what degree, it applies to NDA-II?

Even if one points to demonetisation and GST. Could GST have happened any differently in India, under any party?

Not a challenge to you or to any one but sharing some loud thinking.

NDA’s ‘incompetent economic mismanagment’ is one of errors of omission rather than commission. Yes, we will come to demonetisation later.

Those of you who have not seen Pramit Bhattacharya’s article, here is the ‘Misery Index’ chart. It takes into inflation, real rural wage growth and non-food credit growth. Despite poor ‘rural wage growth’ since 2014 as the Congress Party’s document claims, the composite index was declining until recently since 2014.

The misery spiked up between 2006 and 2010 and after a brief rest, began to move sharply higher from 2012 until 2014.

India_Misery Index_27022018

(3) The document makes a somewhat strange statement on the Modi government’s attitude to the public sector:

The Modi government, keeping with its track record of hollow slogans and promises, indulged in a rhetoric of privatisation but instead has created an opaque and inefficient public sector.

The Modi government had forsworn privatisation. So, that is a wrong statement. It did not engage in a rhetoric of privatisation. But, quite how it created an opaque and inefficent public sector is asserted with the following illustration:

This is most manifest in its handling of the Gujarat State Petroleum Corporation (GSPC) issue where, in order to hide the shenanigans of GSPC, it coerced a navratna public sector company – Oil & Natural Gas Corporation (ONGC) — to take over GSPC. This is a prime example of the shabby treatment of the public sector that the Indian National Congress condemns.

I do not know much about the context either to rebut or to agree with the above. But, this is Standard Operating Procedure for all  goverments cutting across party lines in the country, including in States.

(4) On inequality, the document states the following:

Recent research by economists Thomas Piketty and Lucas Chancel has documented that individual income inequality in India has widened significantly in the last three years.

One small problem: Piketty and Chancel paper only analysed data up to 2014. The UPA was in office between 2004 and 2014 when inquality in India widened big time. It is somewhat amusing to see the criminal accusing the plaintiff of committing the crime.

See the chart below on the rise of the networth of India’s billionnaires relative to GDP and judge for yourself:

Networth of India's billionnaires relative to GDP

Source: ‘India 2039: an affluent society in one generation’. You can download the report from here or buy it from

The bottom 90% saw their wealth decline and the wealth share of the top 1%, 5% and 10% increase during the UPA years. Their share of wealth has declined since 2014. The wealth of the bottom 90% has grown much faster than the wealth of the top 1% since the Modi goverment came to office.

Pl. see my blog post on this, published today.

(5) The Congress Party document claims that some economists have written on the disparity between different States. Well, Praveen Chakravarty, its head of Data Analytics has written quite often about and sometimes, in association with Prof. Vivek Dehijia.

Again, the issue is not new nor is it unique to India. For example, the document cited above ‘India 2039’ had commented on it:

Spatial differences have risen sharply in the past 20 years, across different states and between rural and urban areas. The ratio of per capita product between Gujarat and Bihar went from about two times in the late 1980s to almost four times the mid-2000s. Such spatial inequalities rose as some regions took off faster than others, in part because of the removal of the spatially equalizing industrial policies of the licensing system. But powerful influences from economies of agglomeration and institutional divergence also cause spatial differences to persist. This is particularly problematic in India because lagging regions include such populous and politically important northern states as Bihar and Uttar Pradesh.

Notice the reference to the ‘past twenty years’. It is not a phenomenon that arose under the NDA government of 2014!

In any case, see here for a scholarly rebuttal of the tendency to stoke fissiparous tendencies by referring to inter-State disparities.

(6) For a ‘too clever by half’ statement in the document, this one is declared the winner:

This was despite the fact that global economic growth has been robust during the Modi government’s tenure while there was a severe global financial crisis in 2008 during the UPA tenure.

It was in the context of India’s export performance. The document asserts that India’s exports rose from USD64.0bn in 2003-04 to USD314bn in 2013-14 despite poor world growth in 2008 (?!) and that India’s exports have stagnated since then despite robust world economic growth.

According to World Bank data, world GDP growth (in constant 2010 dollars) averaged 2.9% between 2004 and 2014. If we exclude the data for 2009, it averaged 3.4%. Before the crisis of 2008-09, world growth had averaged 4.2% and including the slowdown in 2008, the average drops to 3.7%. Thanks to massive fiscal and monetary stimulus, global growth rebounded to 4.3% in 2010 and to 3.2% in 2011. This is the global backdrop for export performance during the UPA regime.

After NDA came to office, we have data for 2015 and for 2016. It had averaged 2.65%. This is World Bank data.

According to IMF data (GDP growth in constant prices), global growth averaged 4.03% between 2004 and 2014 (both years included) and if one excluded 2009, it averaged 4.46%. Between 2015 and 2017 (both included), it had averaged 3.4%. Data for 2017 must be an estimate.

Modi government’s demonetisation and the introduction of Goods and Services Tax might have had a hand in the export growth slowdown but global growth picked up only in 2017.  In any case, to blame the government (or to credit it) for export growth may be a good political argument but a poor economic argument. To be sure, governments can hurt export performance but cannot do much to help it. World growth did much to flatter India’s economic performance between 2004 and 2007.

(7) On education, the document states this:

The Indian National Congress reaffirms its conviction that the State has to play a critical role in ensuring that every Indian receives high quality primary education and healthcare.

Well, I did not have to look too far for a stinging rebuke. It came from this incisive comment by Ms. Geeta Kingdon in ‘Times of India’. The header of the article sums it up all:

When ideology overcame sense: RTE imposes a bureaucratic, grotesquely inefficient regime starving our children of good education.

The first paragraph rams home the point again:

It is no hyperbole to say that the well-intentioned Right to Education (RTE) Act, 2009, has been a disastrous experiment. Contrary to its avowed intent, its effect has been to deprive millions of children of their right to education by closing down schools.

I will leave you, dear reader, to read the rest of the article. It is well worth it. Yes, the current NDA government has been guilty of retaining it. That is what we meant by referring to their ‘error of omission’ earlier.

But, sometimes, mistakes cannot be undone without paying a political price. That the NDA government has not been willing to pay the price for the future intellectual growth of India’s children and for the country’s future economic growth is a separate issue.

(8) On the measurement of job creation in India using data available from enrollment into the Employees Provident Fund Organisation, Employee State Insurance Corporation and the National Pension scheme, the document has this comment to make:

Hiding behind a façade of compromised research claiming that the economy generates more formal sector jobs than any other country in the world!

A critique of the work by Pulak Ghosh and Soumya Kanti-Ghosh appeared in THE HINDU. It was written by Praveen Chakravarty and Jairam Ramesh. The authors responded persuasively. I wrote a rejoinder too for MINT.

The Congress Party’s MP Rajeev Gowda had written this in December 2016:

If one needs to look at empirical data for jobs numbers, one indicator is provident fund (PF) registrations. Most permanent salary-paying jobs in the formal sector entail PF payments to employees. The UPA-1 period had an increase of nearly two million PF registrations compared to less than a million during the NDA-1 period. [Link] (ht: R. Jagannathan of Swarajya)

That is what Ghosh and Ghosh had done! They had taken care to avoid overestimating and, if anything, they had erred on the conservative side. Their figures are gross of retirement.

(9) Commenting on real economic growth in the NDA period since 2014, the document states the following:

The 7 per cent growth rate (under the new methodology) flaunted by the government may, according to many economists, be equal to 5 per cent under the old methodology.

I know for a fact that the input for this statement above came from research that I had done and shared with friends.  But, in that research, I had also pointed out that,  by the same token, the economy grew at 2% and 3% in 2011-12, 2012-13 and in 2013-14! More than lending respectability to economic growth post-2014, the new methodology adopted by the Central Statistical Organisation vastly overstated growth between 2011 and 2014.

(10) The document has this to say on demonetisation, tax terrorism, etc.:

The Modi government’s economic policy of shock and awe has severely dented business confidence. Millions of small and medium businesses have been hurt by sudden radical announcements such as demonetization and a steady dose of tax terrorism unleashed by the government.

Finance Minister Arun Jaitley used to accuse the previous UPA  goverment of tax terrorism. But, it has come back to haunt him. That is one of the single biggest failings of this government. It had done nothing to dismantle it and may even have reinforced it. Then, again, it only underscores the point that this government has been walking the path that the Congress-led government had trodden. That is a mistake.

But, the government had also removed the favourable tax treatment afforded to investments coming via tax havens. That is a very big reform. Naturally that does not find a mention in the Congress party document.

Quite possibly, one of the authors of the document that we are discussing here, ‘The Economic Situation’ is Praveen Chakravarty. Well, this is what he had to say about the Modi government ending the favourable tax treatment to investments originating in Mauritius. He co-wrote it along with Dr. Ajit Ranade:

Many governments in the recent past have grappled with this challenge, and mostly ended up with “consequence management” rather than tackling the problem at the root. To understand the true magnitude of this achievement and its profound impact, it is important to look back and understand the structural damage that this treaty had inflicted on India’s economy and tax structure over three decades. [Link]

Damage inflicted over three decades (Congress governments have been in office for the most part)…. true magnitude of this achievement…. H..mmm. Times change!

(11) On demonetisation, the NDA government botched up a good idea through poor execution and through unimaginative tax amnesty schemes. It was too focused on catching the wrong guys that it took its eyes off the hardship it was causing the rest of the country. Further, its policies on the funding of political parties through bearer bonds and the introduction of the new 2000-Rupee note are inconsistent with tall claims on morality, on eliminating black money and corruption. Infusing public policy with excessive morality has been one of the big mistakes of the present NDA government.

The two errors of commission of the present government are the execution of demonetisation and the infusion of excessive morality into public policy to the detriment of overall public good.

See my article on the six big economic mistakes of the NDA government published in September 2017.

(12) Notwithstanding all that I have said in (11) above, I must comment on this observation of the document on demonetisation:

The Indian National Congress re-states its conclusion that the “demonetisation” experiment of November 2016 will rank as one of contemporary India’s most ill-thought and reckless economic misadventures.

H…mmm. Really? What about the Land Acquisition Bill? Has the Congress Party forgotten the criticism of N.C. Saxena, one of the members of the National Advisory Council, under the UPA government?

Or, its disastrous farm loan waiver in 2007 that did not really help the farmers but hurt the banks alright?

(13) It must take tremendous chutzpah for the Congress Party to talk about non-performing assets in the banking system. Much of it was created during its time in office. In fact, cronyism that emerged in that period was one of the reasons, according to the Economic Survey of 2017-18, that delayed the resolution of the problem. Yes, the Modi government had underestimated the problem of NPA in the banking sector. But, that again, is more of an error of omission than commission.

(14) The Economic Situation document talks of low ‘Minimum Support Prices’ to farmers, etc. But, had the government been generous, the document would accuse the ruling party of hurting urban poor through higher food prices. The UPA government did that rather well. An intelligent document will discuss policy trade-offs and offer solutions. India cannot boost farm income while not letting farmers sell whenever, wherever and at whatever market determined prices. Freedom to farmers means that India should re-think its inflation targeting monetary policy framework. The Congress document is silent on that.

(15) On Aadhaar, on the Goods and Services Tax (GST), the document chastises the government for being intrusive and for tardy implementation respectively. This piece in ‘Business Standard’ is a thoughtful critique of the mandatory Aadhaar requirement.

But, all Opposition parties have the luxury of hindsight and lack of accountability. It is very difficult to say if the Congress Party would have implemented either differently.

(16) On the introduction of the GST, the Congress Party claims that it mooted the idea in 2006. That is a bit brave but not true.

Check out this article in ‘Indian Express’ on the 17-year journey of GST:

When Yashwant Sinha was Atal Bihari Vajpayee’s Finance Minister, a decision was taken to put an end to the sales tax war among states, and to have uniform floor rates for sales tax of various commodities with effect from January 1, 2000. More importantly, to monitor implementation, Sinha proposed the creation of an Empowered Committee of State Finance Ministers in 2000, which was approved by Vajpayee. West Bengal Finance Minister Asim Dasgupta headed this Committee — a nod not only to his impeccable credentials, but also to efforts at building a consensus and at signalling cooperative federalism. [Link]

(17) Having dedicated its Economic Situation document to a critique of the BJP-led NDA government, what does the Congress have to offer?

There is the resolution on Agiculture, Employment and Poverty Alleviation. See it here. It is about loan waivers for small and marginal farmers, about Minimum Support Prices and about a 5% cess on the top 1% richest Indians for a National Poverty Alleviation Fund.

The only way to square the fiscal circle is to tax and drive out the rich.

At the ‘Rising India’ summit, Ruchir Sharma had this to say

Sharma said since 2014, 23,000 millionaires have left India. In 2017, 7,000 millionaires left this country—the largest number in recent times—compared to 4,000 in 2016. “In absolute terms, this is still behind China. But as a share of total millionaires living in this country, this is the largest compared to any nation in the world,” he added.

Sharma said some may some may say this is a good thing as India is driving away the most corrupt from the country, but there is a side effect. “At the end of the day, you need your own domestic people to invest in this country. Foreign investment is needed, but it is the domestic investors who make a nation going forward,” he added. [Link]

The Congress, if it returned to office, will probably ensure that there is no rich left in India to make investments and generate employment. Who will top up its National Poverty Alleviation Fund then?

In short, there is plenty of poverty in the Congress Party documents – poverty of imagination, aspiration and of truthfulness.

The truth about the Indian economy – 2A/4

I had to change plans and include an Amendment or Appendix or Annexure to the second part because I had received quite a bit of ‘feedback’ to my part 2. Quite why, I am still trying to figure out because the post did not endorse Piketty’s policy prescriptions and it noted with sarcasm that India did a far better job of distributing its poverty than of its prosperity and three, it accused the present government of giving India the worst of both worlds – neither growth nor healthy re-distribution. So, quite why the so-called ‘Economic Right’ had to be riled by the post is beyond me.

Let me clarify or reiterate one more time:


(1) I have no axe to grind and nor am I enamoured of inequality as a problem to be treated, in and of itself.

(2) I hold no brief for Piketty’s explicit or implicit policy recommendations or predilections. His bias for explicitly re-distributive policies does show through in the paper even though he does reiterate that it was purely a data exploration paper.

(3) Addressing crony capitalism is desirable in itself.

(4) There is no danger of this government being captured by Piketty because it has already been taken hostage by one line uttered by an Opposition politician.

(5) My own policy recommendation in the end is to make an omnibus case for administrative and governance reforms and accountability. There can be no disagreement over it, regardless of whether one believed in inequality as a problem in India or not.

Regardless of Piketty’s agenda, the issue merits a debate and then acceptance as serious or rejection as undeserving.

Credit Suisse which, probably, is happier to see wealth accrual in developing economies, has been putting out its own independent research every year (‘Annual Wealth Report’) and they have data on wealth distribution that align with Piketty’s data on income distribution. Credit Suisse would, if anything should be expected to be on the opposite side of Piketty.

While the inclination to oppose the man is understandable, it is not reasonable to oppose his matter if they are data based and if the data are made available, as he has. One can tweak it and show how sensitive his conclusions are to the assumptions one makes on the source of data (survey vs. fiscal) and to the demographic profile.

Also, in our earnestness to dismiss Piketty, we are also unwittingly dismissing the contribution that UPA’s ‘crony capitalism’ might have made to the issue of inequality.

It is actually inequality of opportunity for the scarce resources such as seats in colleges and beds in hospitals are bought with money while public institutions that are aimed at providing them for the ‘middle and bottom deciles’ are failing to do so.

That is where the interview of Devesh Kapur that I had linked in the blog post (Part 2) has salience.

The Asian Development Bank (ADB) brought out a volume in 2009 (“INDIA 2039: An affluent society in one generation’). It was written by the Centennial Group for ADB, including by my friend Manu Baskaran who is as far removed from Piketty as anyone can be, and the report had the following chart on page 35:

Indian Oligarch ratio

Second, recent work by Praveen Chakravarty and Vivek Dehejia – incidentally even the aforesaid report mentions it as far back as in 2009 – has comprehensively documented the spatial inequality in the country.

It is one thing to oppose Piketty’s agenda and it is another thing to dismiss the issue. Even worse is to be pursuing policies, as this government is doing, that are worsening the problem, in the guise of addressing it. ‘Growing the pie’ is important before distributing it. This government is not doing it.

Further, inequality need not be an explicit policy target. But, egregious inequality (not just in those dimensions that Piketty reports them) will be and is a problem.

The truth about the Indian economy – 2/4

On Tuesday morning, 12/9, I woke up to see two pieces in MINT dealing with the new paper by Thomas Piketty and Lucas Chancel on inequality in India. Manas Chakravarty and James Crabtree had written the articles. Interestingly, I learnt from an email sent by James Crabtree that his forthcoming book on India has also been titled, ‘Billionaire Raj’. Unbeknownst to him, Piketty and Chancel have also chosen to name their piece, ‘Indian income inequality, 1922-2014: From British Raj to Billionaire Raj?’. Manas helpfully provided a link to the original paper.

Manas contents himself with summarising the original paper. The paper looks at India’s income trends from 1922 to 2014.  Yes, the data stops with 2014 before NDA came to office. But, you would not guess that from reading James Crabtree’s article. Somewhat unsurprisingly and yet disappointingly, the sub-title of his article is ‘The massive inequality in the country gives the lie to Narendra Modi’s rhetoric—and poses several economic threats’. May be, he did not write it but MINT editors did.

I did not quite get it since the data ended in 2014. For all the rhetoric of poverty and ‘reforms with human face’ it is clear that inequality trends had worsened in India in the years between 2004 and 2014 – the UPA I and II era. Look at any of the charts in Appendix 13 (1 to 4), 14 and 15. Also, take a look at Figure 6 in page 20. Reproduced below. Figure 9 in page 23 is equally dramatic but not reproduced here.

Top 1 percent income share in India

You will get what I say. Inequality trends accelerated under UPA (I & II). That is par for the course in India. Policy discourse/rhetoric is one thing and policy effect is another. Reading James Crabtree’s piece would not give you the impression that the problem became big in the UPA era. That said, UPA’s failure – it not only failed to stem but it also actually witnessed an acceleration in inequality – holds lessons for the current NDA government. Lessons which it has shown no sign of learning from, however.

James Crabtree’s concluding lines are not too far off the mark, however, even though the NDA government is not providing much hope for crony capitalists as the previous government did:

Beyond this a far more radical agenda is needed, to improve basic social services at the bottom, while using competition policy and regulation to stamp out crony capitalism and entrenched corporate power at the top.

For all of his talk of fairness, Modi is doing little of this. If he does not change course, the Billionaire Raj is only going to grow stronger. [Link]

Piketty and Chancel write:

Under Prime Minister Jawaharlal Nehru (in power from 1947 to 1964), India was a statist, centrally directed and regulated economy. Transport, agriculture and construction sectors were owned and administered by the Central Government, commodity prices were regulated and the country had important trade barriers. Nehru’s followers, including Indira Gandhi’s (1966-77 and 1980-1984) prolonged these policies and implemented a highly progressive tax system. In the early 1970s, the top marginal income tax rate reached record high levels (up to 97.5%).

It is difficult to call a top marginal tax rate of 97.5% progressive in many ways, except if one believed in an usurious State.

Once India’s so-called liberalisation started, it did boost average incomes:

Real per adult national income growth, which has more sense from the point of view of individual incomes than commonly used GDP, significantly increased after the reforms. It was 0.7% in the 1970s, 2.5% in the 1980s, 2.0% in the 1990s and 4.4% since 2000 (Figure 1). However, little is known on the distributional characteristics of post-2000 growth.

When national incomes accelerate, top income earners see their incomes rise faster (see their Figure 11 in page 245). But, India is an outlier:

Unequal growth dynamics over the period are not specific to India. Income growth rises the higher up the income distribution one proceeds in China, in the USA and in France as well. India’s dynamics are, however, striking: it is the country with the highest gap between the growth of the top 1% and growth of the full population. It is also interesting to note that bottom 50% of earners grew three times more slowly in China than in India, the middle 40% six times more slowly than their Chinese counterparts, but that the incomes of those at the very top of the Indian have grown at a faster pace than in China.

Looking at figures 12 and 16, it is clear that India did a far better job of distributing its poverty between 1951 and 1980 than it has done distributing its prosperity between 1980 and 2014 (Pages 26 and 29 respectively). At 49%, the middle 40% had a much better share of total income growth in the period between 1951 and 1980 than it had in the period between 1980 and 2014 (23%).

At one level, this should not be surprising. The annual Credit Suisse Wealth report (forget which year – 2015 or 2016) had mentioned that India had extreme wealth inequality. Then, this news report in ‘Business Standard’ in July this year mentioned that the ratio of executive compensation to median worker pay was 1200 times dwarfing the 276 times in America!

What the present NDA government is doing is somewhat similar to the equality that India had achieved before 1980. Everyone was relatively poorer. No one was extremely rich or very very few. This government has so far managed to steer clear of crony capitalism, as far as we know and at least not in a big way. On paper, it is going after big defaulters on public sector bank loans. Even as it hurts (assuming it is true) the big guys, the sad truth is that it may be hurting the small guys more!

The current NDA government has not been able to boost incomes at the lower income strata. If anything, its well-intentioned (or so we believe or that they would like us to believe) policy measures such as the Note-Ban exercise of 8th November  2016 and its implementation of a nation-wide Goods and Services Tax seem to be hurting the rural poor and small businesses more than it is hurting the richer and larger businesses and urban dwellers. In that sense, paradoxically, this government too might be contributing to worsening inequality. It is trying to make up for it with harsh rhetoric directed at the rich and big corporations and tax investigations. In other words, India might be having the worst of both worlds.

The world over, growth vs. distribution trade-off challenge is a real one. One needs to grow the pie to divide it among many. But, growth would see inequality rise as those who are in the centre/core benefit from opportunities that growth throws up before those opportunities percolate to those in the periphery and poor. The big re-distributor is the government with special schemes and subsidies for access to education and health for the poor and low income classes.

This is where India may be failing big. In other words, more than economic policy reforms or more redistribution, India’s challenge in confronting its stark inequality lies in governance reforms and greater accountability in government – both at the Ministerial and at the bureaucratic level. For example, read this interview by Professor Devesh Kapur in THE HINDU in July and weep.

Who will bell the cat?

It needs a politician who is prepared to be in office just for a term or even less but is clear about what he or she needs to do and is determined to do them.

At your service

What is common between India, Britain and America? Not that English is an official language in all the three countries. All three of them have a trade surplus in Services! That, in itself, is a clear and sure sign that something is amiss in India’s development trajectory.

You will find below charts of US overall trade balance, balance in goods and balance in services. The same goes for the chart for Britain.

US Trade Balance.png

UK Trade Balance

Of course, the composition of the Services exports of India and that of these two countries are different. India’s is dominated by Software exports and other IT enabled Services. For these two developed countries, education, entertainment, financial services (banking, asset management, pensions and insurance), legal and accounting services and healthcare (don’t people still go to these countries for treatment?) would be dominant.

Now, we know why in the last ten to fifteen years, the door is being banged upon liberalisation of services in developing countries. These countries are competitive there. Exchange rate undervaluation does not help in exporting services. Well, not as much as it does with respect to export of manufactured goods. Conversely, exchange rate overvaluation would not hurt much either.

Given that their services exports began to grow in the Eighties, some interesting questions arise. Indeed, the 1980s marks the beginning of a lot of things. Global debt levels – private and public – began to accelerate. Globalisation began. The Soviet Union began its disintegration. Long-term interest rates began their long decline and it continues to this day. Reagan and Thatcher arrived in America and Britain respectively. Deregulation and liberalisation became the mantra. Financial services were liberalised. Countries began to open up their capital accounts. EC countries did so in 1988. UK also did so in the Eighties. Volume of derivatives trade began to grow. China was beginning to grow rapidly, having begun its internal reforms in 1979. Well, finally, the Eighties also saw the beginning of the rise of wage and wealth inequality in the developed world. To a large degree, that last development is linked to all the other things mentioned before it.

Clearly, as their manufacturing industry shrank and so did employment in manufacturing (actually, the latter came down faster than the share of manufacturing in GDP), workers in these two countries found their wage growth slowing. Jobs were offshored. Clearly, wages in services were higher but so were the educational requirements. As advanced economies, these two countries offered only higher value-added services to the world. That required educational skills. Blue collars could not retrain themselves that quickly.

So, at first glance, it appears that, for Britain and America, their considerable success and competitiveness in Services had been more of a burden than a blessing in disguise. Will this reverse or can this reverse? More precisely, will this be allowed to reverse? Even if does, will it restore some share of GDP for manufacturing and restore better wage growth for workers in lower income strata? What role/hurdle will robotics pose to that swing of the pendulum back to the past? Interesting questions. I do not have answers.

Gathering data on goods, services and overall trade balance for other countries does not seem that easy. For Germany, with some difficulty, I finally managed to download OECD data. Trade in services data are available only up to 2013. Merchandise trade balance data  are available up to 2015. But, unsurprisingly, Germany has a big trade balance in merchandise goods and a small deficit in services.

Germany trade balance

Based on the Saez, Piketty, et al database of world income and wealth inequality, I got the following data for Germany and for the USA. Germany is less unequal than the US, no doubt. But, is it convincingly so? May be, a decent manufacturing share of GDP is a necessary condition but not sufficient. May be, more importantly, the bargaining power of labour has weakened considerably everywhere, including in continental Europe. Therein may lie the clue.

Income shares

German data are from the year 2010. America data are for 2015.  For America, the income shares of top 10%, 5% and 1% have increased slightly from 2010.