Thomas Piketty has the right diagnosis, wrong prescription

French economist Thomas Piketty is right that inequality isn’t a “rich country concern” and India shouldn’t wait to become richer before addressing what is definitely a serious issue. Whether inequality in India is widening is a moot point. Official household consumption expenditure surveys show a decline in the Gini coefficient between 2011-12 and 2022-23 for rural and urban areas. In other words, consumption inequality has reduced. The same may not be true with income and wealth inequality, which would well have gone up in the past decade or more. That, if so, isn’t good not just from a moral, social or political, but also economic standpoint. Leveraging the market potential of India’s large population cannot happen without incomes rising at the bottom of the pyramid. Less inequality and the aspiring poor having more money to spend is desirable even from a hard-nosed business perspective; ask any FMCG, two-wheeler or micro-finance company executive.

Piketty is equally right with his diagnosis. The real inequality is one of opportunity. A large part of India’s population suffers from a lack of access to quality education, health, nutrition and sanitation facilities. It makes them less productive. Incomes are ultimately a function of productivity — how much output and value a worker adds from economic activity. Incomes cannot rise without productivity improving. If the bulk of the workforce is, as Piketty notes, “stuck in a low productivity trap”, they cannot contribute to growth nor partake of its fruits. That’s all the more reason, then, why India needs to reduce inequality — in this case, of opportunity — early enough. It calls for increasing public investment in good schools, hospitals, provision of clean drinking water, human waste disposal and sewage treatment systems, and other physical and social infrastructure — much more than what the Centre and states are doing now.

Where Piketty, however, is wrong is in his prescription of taxing the wealth, and not just incomes, of the rich. Much of the Forbes billionaires’ wealth are held as shares in the companies promoted by them. This is paper wealth that can be realised only when the shares are sold. It’s one thing to tax incomes, capital gains from property or share sales, and goods and services transactions — which are all “flow” variables. Taxing unrealised wealth – which is a “stock” — is unnecessary. The tax reforms of recent times have helped broaden the base and reduce evasion. There’s enough scope to raise additional resources from the already existing avenues, including through better enforcement and advanced analytics. The last thing India needs is a new tax that will create more disruptions than revenues for funding essential public goods.

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