Indian inequality is back in the news, thanks to James Crabtree’s excellent description and analysis of crony capitalism in India (Billionaire Raj). This book is a must read for anyone who wants to understand the guts of crony capitalism, in India or elsewhere. However, Crabtree also wants to paint on a bigger canvas – crony capitalism is associated with increasing inequality. The argument, I believe, is this: the rich are getting richer, and maybe the poor are getting less poor, but the gap between the two is widening.
So far, the argument is flawless. Whether empirically true or false, the argument that increasing inequality accompanies rapid growth has an intuitive appeal. But billionaire Raj wants to go much further – that there has been an exceptional increase in the number of crony billionaires in India and that this has been associated with an unusually large increase in income inequality in India. My comments and analysis focus on the claim that there has been an unusually large increase in income inequality in India. There wasn’t, as I point out below – ironically, Crabtree doesn’t need to show growing inequality for his justifiable case of crony capitalism to go insane.
Only three income distribution surveys have been carried out in India. All three were undertaken by the NCAER – in 1975, 1995 and 2004/5. The latest survey was conducted with the University of Maryland. This exercise (India Human Development Survey, IHDS) was repeated in 2011/12 on the same households as those interviewed in 2004/5. Based on all available data and the compilation of various surveys, there is no indication that income inequality in India increased between 1950 and 2003 – the Gini has been essentially constant around 42. This popular measure of l Inequality has a value of 100 if one person has all incomes and 0 if all have equal incomes.
The surveys on consumption inequalities of good reputation (gold standard) have been carried out by the ONSS since 1950. They show a decrease in inequalities and a slight increase in Gini since 1983. In 2011/12, Gini consumption was 36, just four points higher than that observed in 1983. However, unlike advanced economies, India has a large difference in the price of goods between towns and villages, and between rich and poor states. If we take the official Tendulkar poverty line (a proxy price index), then there is a ratio of 2 to 1 between the price index of the poorest and the richest state. Price adjustment, the real Gini index goes from 30 in 1983 to 32 in 2011/12. In the annals of academia, a two-point change over 30 years is trivial, insignificant.
The evidence for increasing inequality certainly does not come from trends in consumption inequalities. Where does it come from? In a much-cited article by Praveen Chakravarty and Vivek Dehejia (“ India’s Curious Case of Economic Divergence ”) – Crabtree also cites this with approval – the authors argue that unlike other countries, India shows divergence over time. In other words, inter-state inequalities increased between 1960 and 2015. The statistical evidence? Very weak. For those oriented in this way, they reach a section R2 on only 0.08. They do not report the statistical significance of their inequality variable (beta-convergence). We are able to reproduce their results (R2 of 0.08) and obtain significance at the level of 57% only; if data for Jharkhand is omitted, significance increases (22 percent level) but no cigar. The net result: no evidence of growing inequality.
Before going any further, let me point out that the only source of evidence of high inequality in India (not growing inequality) is the IHDS survey for 2004/5 and 2011/12. Gini income for both years is estimated at 49 and 51. Unadjusted by price, this is a nine Gini point increase between data prior to 2004 and 2011/12. For consumption, we observed an increase of four Gini points.
An IMF study for Asia shows that India with a Gini increase of six points between 1990-2010, and for Australia, New Zealand, Japan, Taiwan, Hong Kong and Indonesia, l The observed average increase is around 4-5 Gini points. Not much different – so how is this increase in India an associated cause of crony capitalism, and not whether in Australia or Taiwan?
When all else fails, those who believe that high growth is associated with increasing inequality cite the Kuznets curve. Simon Kuznets won a Nobel Prize for hypothesizing that as a country develops, inequalities increase; when it reaches maturity, the inequality decreases – the famous inverted U-curve hypothesis. As I tried to document in two books (Imagine There Is No Country and The New Wealth of Nations), the Kuznets curve, like the invisible hand, is nowhere. Just to be clear, this negation of the Kuznets curve has been observed by very many researchers.
There are two other attempts “in search of a sharp increase in inequality” to support the conclusion that crony capitalism causes (?) An increase in inequality. The first is a comparison with the episode of the robber baron in the United States. While robbery barons existed and are (perhaps) a fair comparison to crony capitalists, the American evidence for increasing inequality is disappointing. Indeed, available estimates suggest that income inequality barely changed in the United States between 1870 (47-year-old Gini) and 1929 (49-year-old Gini). In the mid-1960s, Gini’s American income declined to around 40. True, inequality has increased in the United States over the past decade, and the Gini is now estimated to be around 55. There is only one. only one study which indicates a very high level of growing inequality in India. We have already commented on this study (Piketty Inequality in India: Fails Smell Tests, IE, January 20). In this article, I pointed out that Chancel-Piketty’s finding regarding both the level of inequality in India and the change defies credibility. Piketty finds (data from WID website) that income inequality in India had an average Gini of 43.9 between 1951 and 1990; then on average 45.8 1991-2000; then catapulted to 60.6 in 2014 (latest WID data available). The 14-year average Gini increase reported by the Piketty WID database for non-oil countries is two Gini points; 389 of these observations cover the period from 1870 to 2014. The largest change over 14 years was observed for Poland in 2002, ie 16.3 Gini points. The second largest Gini increase in 14 years: According to Piketty, India recorded an increase of 13.2 Gini points in 2014. The Gini level in 2000, 2004, 2011 and 2014 was: 47.4, 51.3, 59.2 and 60.6.
Note the close correspondence between the IHDS Gini survey for India for 2004 and the WID estimate for the same year – 49 versus 51. The similarity is not coincident; WID (Chancel-Piketty) estimates are “based” on the 2004/5 IHDS survey. After that, Chancel-Piketty is on his own and does not match the survey results on which his method is ostensibly based.
This article is a plea for objectivity in the analysis of the emotional and ideological subject of inequality. Readers, and the academic community, should ask the choice Cassius asked about Caesar: “What data (meat) does our WID (Caesar) feed that” has become so acceptable? “
The author is a senior analyst for India at the Observatory Group, a New York-based macroeconomic policy advisory group, and a part-time member of the Prime Minister’s Economic Advisory Council. Opinions are personal