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Decoding the inequality report with Lucas Chancel, Paris School of Economics

In the year 2014, 1 percent of India's population cornered more than 22 percent of the national wealth. What's more, merely 0.1 percent of India's population saw their incomes grow more than the 50 percent of the Indians. Has India entered a new gilded age. That is the question CNBC-TV18's Ronojoy Banerjee poses to Lucas Chancel of the Paris School of Economics.

December 20, 2017 / 07:48 PM IST

In the year 2014, 1 percent of India's population cornered more than 22 percent of the national wealth. What's more, merely 0.1 percent of India's population saw their incomes grow more than the 50 percent of the Indians. Has India entered a new gilded age. That is the question CNBC-TV18's Ronojoy Banerjee poses to Lucas Chancel of the Paris School of Economics.

Below is the verbatim transcript of the interview.

Q: Let us focus on some of the striking numbers that you have come up with respect to India. What one wonders here is that you have said that since 1980s, the level of inequality in India has reached a new high. It is almost like India's own gilded age that we are perhaps living in. But at the same time, post 1980s and especially post 1990s, we have seen millions of people being pulled out of poverty and perhaps, it is not an exaggeration to say that the average Indian today is far better off than what she may have been in the 1960s and the 1970s. How do you then reconcile these seemingly irreconcilable trends?

A: Basically, no one is denying and we are clearly not denying that since the 2000s, there is much higher growth for everybody than in the previous decades. If we look at the average Indian that you just referred to, income growth net of inflation increased by 220 percent since 1980. This an impressive growth, but that is the average value. If we look at different groups of the social ladder or what economists call the income distribution, there is a lot of variations between the growth rates enjoyed by different groups of the distribution. Look at the bottom 50 percent for instance. They did not grow at 220 percent, but 100 percent. So that is an impressive growth, but that is twice less than the average.

Q: But that is what capitalism has always said that eventually the rising tide will eventually lift all boats. And this is going to be a natural consequence that when economies open up, when they start growing, it is going to lead to some amount of inequality. But when you look at the ground reality in India and look    at the, again on an average, the relatively better life that one is leading vis-à-vis 30-40 years ago, how seriously should a country like India then take this issue of inequality?


A: Let us look, for instance at this question from an international perspective. It is very interesting to look at Europe from the 1950s to the 1980s when Europe experienced the highest growth rates it has ever experienced and this is when actually the bottom 50 percent of the population was able to rise faster than the average. So you have moments, you have periods of even capitalistic economies because Europe was a mixed economy in the period with an important government but also a very important private sector. Europe was able to have high growth at the bottom, higher than the average, so was able to moderate or even reduce inequality in certain countries.

Now let us compare India to China. China also experienced a rise in inequality. As you said, the top income groups grew faster than average. But the bottom in China grew much faster than in India. So the question is not whether or not there has been poverty reduction but whether India could have done better over the past 30-40 years. And our view is that yes, things could have been much better in particular for the bottom and for the middle 40 percent group of the population.

Q: I will get into the methodology you have used, but if we were to look at the Gini coefficient, since you bring up China, is it not also true that according to the Gini coefficient, China is a little worse off than India when it comes to inequality?

A: No, the problem with the Gini coefficient, the statistics that we see in general in public debates is that these are based on survey data, self-reported data. The problem with survey data is that it is like looking at a race with goggles that blur the action. You do not see who runs fast because surveys, they actually misreport, they generally under-represent top incomes and top wealth because of how the surveys are designed and because statistical properties known by technicians and by economists. So you cannot use only survey data to look at the inequality of a country. And this is what people have, when people look at Gini coefficients, these are coefficients based on survey data. So we need to use other sources.

Q: And that is where income tax data comes in to complement that?

A: That is where income tax data comes in, not to replace surveys but to have a better representation of inequality, so to complement surveys. And now, if you reuse your Gini coefficient which also has other problems because the Gini coefficient, even experts do not really understand what it means in practice and the theoretical assumption of the Gini coefficient even some economists sometimes do not have them in mind. So what we prefer to use is much more simple. That is the share of income retained by the top 1 percent, by the bottom 50 percent, by the middle 49 percent for instance. And when we look at that, with Gini or with the shares indicators, if you look at it with the proper data, data that reconcile surveys and fiscal income, India performs worse than China.

Q: How conclusive is your data because that is a question that has been raised since your report was published saying that in India, income tax, at the end of the day, there is barely a miniscule percentage of people, barely 80 million people in India are paying income tax today. Then how do you reconcile such a small percentage of people paying income tax with the household survey that you are talking about? How do you marry the two and have you also relied on inferences like where you have drawn, maybe through a regression analysis, trying to figure out what the level of inequality will be? Is there an element of guesstimates also that you have brought into your findings?

A: Basically this raises a much more general question on the quality of economic data in general in emerging countries. Data quality, data availability is lower in merging countries than in the rich countries and it is a problem in itself, beyond whether we see a reduction in inequality or increase in inequality, there is this transparency and this quality issue with data which is key. You cannot have informed public debates without proper sound data. And clearly, the situation could be much better in India today.

So for instance, in 2000, the Indian government stopped publishing tax statistics and it has published them following public pressure and debates on television last year, very recently. So this led to the release of the data that we are using in this report and that we have harmonised and worked on to produce comparable consistent estimates. But more data should be released. More data should be released to assess these questions. So now how do we do? To combine the survey and the tax data, basically we have tax data for about 6-7 percent of the population today.

Q: But again, 7 percent are not paying income tax is the question. 7 percent come under the income tax net. But eventually, the people who are paying income tax because there is a minimum threshold level in India which is Rs 2,50,000. If you are less than that, you do not pay income tax. Therefore, questions are being raised. But I do not want to tie you down to the specifics of your methodology. Let us talk about one concern that has been raised by some economists in India.

In India, Surjit Bhalla is a well known economist, member of the Prime Minister's Economic Advisory Council. He has come up with his own numbers where he said that when you take inequality, when you assess wealth, you take into account financial wealth, you take into account non-financial wealth, assets, but somewhere, you do not take into account human capital or educational wealth and he has done his own analysis where if you add educational wealth to this, the inequality numbers in India does not look as dire as is being projected.

So, is that at all a case where in the future, maybe you could take education also into account because that gives you an indication of the potential of an individual to earn in the future would be?

A: Let me come back to education in one minute. Just come back on this question on the quality and the robustness and the reliability of the data that we are using. We make the case and the strong case that this data still is to be improved, but it is much more reliable than official estimates that are out there. Official estimates of inequality in this country based only on survey data for the reasons which I was describing earlier.

Now if we look at this question of education and of factoring in education in wealth and inequality estimates. So in terms of wealth inequality, there is a recent study in 2017 which shows a sharp rise in wealth inequality in India which is consistent with the rise income inequality that we discussed and that we report in this new publication. What about factoring in education? In fact, what matters first is education is essential. What we look at is wealth inequality as measured by market terms.

So the value of things that you can buy or not on the market and this is essential in itself. Now education is key in order to reduce inequality. I think there are also several methodological limitations, problems, issues linked to the measurement of education as an asset for an individual. But what is certain is that you need to invest a lot in education in order to reduce inequality and this is, in particular, something that India could do much more if it wanted its bottom 50 percent to grow as much as in China.

Q: You have talked about the period between 1947 and 1977, that is when inequality levels came down. But that is also a period where India does not look back at that period with any kind of fondness. That period is derided. Poverty was rampant, growth was anaemic. What are the key things that India can learn perhaps from that period?

A: Clearly we are not saying that India should go back to the past. At no point, this is the conclusion of this message. Perhaps, a good comparison here is China or Europe or even the US during 1960s and 1970s during the mixed economy period where you had a mix of public investment, public sector, investments in health, in education, in infrastructure that allow to make the bottom 50 percent grow even in a globalised context with new technologies, with innovation, etc. So the question is not going back to the past, it is looking at the future, a future where there is a better equilibrium.

Q: So one country that India can learn from then?

A: Again, the comparison with China has its limitations. You have a democracy in one case, you have a much more strong powerful authoritarian government in the Chinese case. However even in democracy, you can invest more in education, in health, in infrastructure in rural areas of this country in India. This is something that India can learn from China.

Q: Your report has come out at a time when America is talking about cutting the corporate tax rate and many feel that that could create amount of pressure on some other countries. India is thinking of bringing down their overall corporate tax rates to 25 percent. Does that concern you because on one hand you want progressive income tax, you want taxes to go up, you want to create and to ensure that public wealth increases. But on the other hand, countries may now come under pressure to bring down the corporate tax rate. How do you reach upon that problem?

A: First one point, it is not necessarily increasing taxes for everybody. The bottom 50 percent, the middle class do not necessarily need to see their taxes go up if the very rich pay their fair share. If the very rich stop tax evasion which is also undermining the ability of government to invest in these important sector for the future. So what the US is doing right now is basically a plan that will turbocharge inequality.

Q: Turbo charge inequality?

A: It is continuing the trend that we have been witnessing since the end of the 1970s of reduction in tax progressivity. So what Donald Trump is doing is a multi-billion dollar gift to the richest of the richest, is a reduction in the corporate tax rate. So far, the US had more or less succeeded in preserving relatively high corporate tax rate, but now it is letting this down. So this can go to 10 percent in the US in a few years to zero percent and then governments will have to subsidise the corporate sector to come.

Q: We are already seeing some of that, aren't we?

A: We are already seeing this in some countries and this is a race to the bottom because at some point, governments will not have any more money at all to invest again in these important sectors like infrastructures for instance which are by the way, necessary for the corporate sector to work, to function properly because the corporate sector cannot work without decent communication system, without decent transportation system and even without decent health and education for its worker to perform, to be very productive and to actually innovate in the corporate world.

Q: What is the message for India then?

A: The message for India is that there is no determinism, there is no mechanical increase in inequality. It is the result of policy choices or lack of policy choices and if you look at international comparisons, these suggest that much more can be done to trigger more inclusive growth in India. India does not have to choose between high growth and high inequality. It can actually have higher growth with much lower inequality if it invests in the bottom income groups of its population.

Q: Failing which, Martin Wolf recently has said that inequality today, poses the biggest threat to democratic societies, failing which if we do not slow down the pace of inequality, do you really feel with that kind of a comment that this could be well be one of the single biggest challenge that the democratic societies could be faced with in the future?

A: I personally believe and the other co-authors of this report believe that there is indeed a link between the rise of populism in rich countries, in emerging countries including the example of Donald Trump's election, of Brexit. There is a link between the stagnation or the moderate increase in incomes at the bottom, in the middle 40 percent and the frustration of these immobile people who see the mobile individuals, the top 1 percent that can move around their capital, that can benefit from tax cuts, that can benefit from the reduction in corporate taxes and in the end, these immobile individuals, when they are very frustrated which is understandable when incomes stagnate, their reaction is whatever is left is their voting ballot and their voting ballot may be put in the hands of populists.
first published: Dec 20, 2017 07:20 pm
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