The return of the super rich to India

A wave of estimates regarding Indian inequalities has recently sparked public interest. Whether we believe the wealth inequality figures presented by Credit Suisse or the income distribution accounts of Lucas Chancel and Thomas Piketty, the evidence suggests that India has sharp economic disparities. But inequalities are to be expected in a developing economy with a largely informal workforce, turbulent capital markets and unequal access to education.

In order to fully understand the direction of the concentration of wealth and income, we need to assess long-term trends and contextualize them with social structures and economic growth. The question is not only how big the inequality is, but also whether it has increased or decreased. Second, we must not confuse income and wealth inequalities. Income disparity represents the inequality of flows such as wages and returns to capital and is closely related to employment, mobility and education. Concentration of wealth at the top is an entirely different concept that combines past prosperity and disparities through monopoly inheritance, income and rents. Piketty and Chancel provide an answer to the former and despite the imperfections of their data based on tax returns, these are the best guesses given the paucity of statistics.

By its very nature, wealth tends to be more concentrated than income. Calculating wealth inequality in India is much more difficult due to the lack of similar data on tax returns. Survey-based estimates suffer from coding and underreporting problems, so estimates such as those by Jawaharlal University economists Nehru Ishan Anand and Anjana Thampi are an important but not representative indicator of actual levels of inequality of wealth.

In my recent research (Capital And The Hindu Rate Of Growth, 2017), I provide some answers on the trajectory of elite wealth using rich lists, inheritance data and probability models. The key to this is to trace wealth inequalities in India’s nascent stages of development and compare them to contemporary magnitudes. Due to the lack of consistent data, I have instead put the rich in a contextual perspective in India’s economic history for the past seven decades. The main question I try to answer is whether contemporary wealth concentration levels are part of a continuing pattern or represent a dynamic shift from decades of post-independence India’s socialist experience. .

After all, for centuries India has been home to extreme poverty and some of the richest people on the planet. In 1937, the Hyderabad nizam was declared the richest person in the world by Time magazine. Its wealth was estimated at around 30% of India’s gross domestic product (GDP). Dominant social structures meant he was joined at the top of the wealth hierarchy by other princes and a handful of industrial tycoons.

In the aftermath of independence, India faced enormous pressure for social emancipation. The structures inherited from the colonial era were incompatible with its goals of equity in a new democratic society. The former royal wealth was wiped out by the abolition of princely titles and the annexation of private lands to national wealth as part of Indian unification. A combination of Nehruvian socialism, the nationalization of Indira Gandhi, and hyper-progressive fiscal policies led to a sharp decline in the wealth of the elite for the period 1950-80. By my calculations, in 1966 the richest 200,000 families (the richest 0.1%) had enough wealth to finance 16-17% of India’s GDP. Although this was a dramatic fall from colonial times, it was better than what followed until the eve of liberalization.

In 1985, the richest 0.1% had a net worth of less than 4 to 5% of GDP. There was also a change in the social makeup of the elite. Old wealth has been replaced by more dynamic and financially savvy industrial wealth. New wealth is closely linked to economic dynamism. When India began to embrace the market, private capital adapted to more modern investments and, combined with market reforms, made the privileged few extremely wealthy. This is why, when rich lists are compared over decades, it is the captains of industry who now dominate the wealth rankings in India. In 1985, it took thousands of personal properties to build up wealth equal to even 2-3% of GDP. Between 1996-2000, the (less than 100) members of the Forbes Rich List were able to reconstitute this fraction themselves. In 2007, the pace of market capitalization led Mukesh Ambani, president of Reliance Industries Ltd, to temporarily become the richest man in the world. The Indian billionaire club could now claim a stock of wealth equivalent to nearly 20% of GDP.

Indeed, the events of the past decades are unique and were the result of nation building after colonial rule. Tools such as inheritance, wealth, and capital transaction taxes were central to the initial decline of the wealthy, and these measures were the first to be diluted, if not abolished, to pave the way for market reforms.

Certainly, the trends mimic some patterns of wealth inequality seen in the rich world and documented by Piketty in his book Capital In The 21st Century. Namely, India was also subjected to an “inverted Kuznets curve” – a long term U-shaped trend in the concentration of wealth. In the industrialized world, on the eve of World War I, wealth inequality was extremely high, but the economic events of the period 1914-45 led to a sharp decline in the most important stocks until a resurgence in the 1970s which continues today.

But what sets India apart is the pace of decline and the resurgence of the concentration of wealth. The decline in income and wealth inequalities between 1950 and 1980 did not imply the spread of prosperity in India. But the effort to democratize economic resources is an essential component of equitable growth. The return to the concentration of wealth in India and the dominance of the rich threaten allegedly high rates of income growth (GDP). India could increase its income, but growth cannot be equitable if the super rich are able to accumulate wealth at even higher rates.

Rishabh Kumar is Assistant Professor of Economics at California State University, San Bernadino.

Comments are welcome at [email protected]

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