Ashoka Mody and Michael Walton: Story of a Fraying Capitalism in India

Dave here. Regardless of your thoughts about Piketty itself, I like how the authors use the book, and the recent popularity of discussing the inequality problem itself, to discuss the growing inequality within India, particularly through forms of corruption that bear much resemblance to neoliberal policies stateside.

By Ashoda Mody, Charles and Marie Robertson Visiting Professor in International Economic Policy at the Woodrow Wilson School, Princeton University; and Michael Walton, Lecturer in Public Policy at the Harvard Kennedy School and Senior Visiting Fellow at the Centre for Policy Research, Delhi. Opinion published by the Indian Express; cross-posted at Bruegel.

French economist Thomas Piketty has written a scholarly tome with the humdrum title, Capital in the 21st Century. The book has become an overnight sensation because Piketty documents an inherent tendency for ever-increasing inequality of income and wealth in capitalist economic systems. It is not an accident, he says, that many will be left behind even as others become richer. The book taps into a collective anxiety, coming as it does amidst the lingering after-effects of the global crisis and slowing global growth.

India’s capitalist dynamic — as in other emerging economies — is different from that in the richer countries that Piketty focuses on. Yet, the lessons Piketty offers should ring a cautionary bell. Indeed, even more so than in the rich countries, India could find itself in a low growth, high inequality and high insecurity trap. These are the real fears that bubble under the theatrics and ugliness of the ongoing political debate.

Piketty is not an anti-capitalist. He sees capitalism as central to the innovation and entrepreneurial risk-taking needed for economic growth. But, using conventional tools of economic analysis, he warns that there is no automatic, ultimately benign, broad sharing of income and wealth over the development process. Rather, greater inequality — which perpetuates itself over generations — is the more likely outcome. And deepening inequality can fray capitalism’s virtues.

Piketty finds that countries are on the path to “patrimonial capitalism”, with inherited wealth increasingly concentrated in few families. As long as the rich earn a return on their wealth that is somewhat greater than the country’s growth rate, inherited wealth will rise relentlessly faster than national income. This process was interrupted, and reversed, in the first half of the 20th century, because the two World Wars destroyed private wealth and then helped create the political basis for the welfare state. But, over the past three decades, the wealth-to-income ratio has steadily recovered much of the lost ground and looks set to keep rising.

The US was historically different from Europe, with a much lower role for inherited wealth. But in recent decades, it has been a leader in rising income inequality, owing to a combination of soaring salaries for “supermanagers” and rising returns on capital for the richest. These large incomes are being turned into inherited wealth, generating entrenched privilege as in Europe at the beginning of the last century. All the while, for those at the bottom of the rung, it is becoming increasingly difficult to climb the economic and social ladder. As wealth and politics reinforce each other, equality of opportunity is a fading myth.

India is at risk of forging a potentially more pernicious form of rentier capitalism. Growth in the past few decades has brought gains to most, including the poor. But there is unmistakable evidence of rising concentration of income and wealth at the very top. Piketty and Abhijit Banerjee of the Massachusetts Institute of Technology find that the share in taxable income of the very-very rich (the top 0.01 per cent) was about 2 per cent in 1999. That brought the concentration of wealth back almost to the levels prevailing in the 1920s, the era when the maharajas cornered income and wealth.

While the Indian calculations do not extend beyond 1999, all indicators point to a stepped-up rise in inequality along the same pattern as in the US and Argentina. The “booming” 2000s witnessed the emergence of Indian billionaires, up from five in the late 1990s to 55 in 2014. The ratio of billionaire-wealth-to-GDP has risen from negligible levels to the 8-10 per cent range, comparable to that in the US and the UK. Add to this soaring land values in urban and peri-urban areas, some of it benefiting lucky farmers, but much of it captured by the wealthy and influential, often in deals between politicians and businesses.

While superficially similar to that in other countries, the rise in Indian inequality reflects more pernicious forces. Government contracts and relationships play a central role in fostering India’s wealth accumulation and concentration. Influence and connectivity create access to land, construction and mining permits and so-called “public-private partnerships”. Piketty is primarily concerned that if wealth mainly passes from one generation to another, the incentives to invest and grow will be undermined. More injurious, however, than such patrimonial capitalism is India’s rentier capitalism. The lure of easy money through investment in political connections draws entrepreneurship away from productive investment and innovation while it breeds corrosive social consequences.

India is in a political crucible. As the few with access are extracting resources from the state, the popular demands for broader social provisioning are rising. The unmet demands rouse ang er and create a perennial hunger for such elusive heroes as Anna Hazare and Arvind Kejriwal.

In the middle of the last century, Europe and America addressed the social and political conflict — to varying degrees — through the rise of the welfare state. But that option is not open to India, where the government lacks the capacity to collect sufficient revenues and is not organised to deliver adequate social services. This impasse, in a theme resonant with Piketty, will not automatically resolve itself. Indeed, precisely because the government cannot provide adequate safety nets, the populist demands become more insistent. This feeds back, at best, into symbolic gestures with little real value. At worst, the symbolic gestures become the grazing ground for more cronyism.

It is possible to imagine technical solutions to pull out of this trap with sound regulation, effective taxation and smarter delivery of social services. But that will require a different politics and a different bureaucracy. None of the major political platforms, caught up in their own pettiness, have the vision to deal with these challenges.

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About David Dayen

David is a contributing writer to Salon.com. He has been writing about politics since 2004. He spent three years writing for the FireDogLake News Desk; he’s also written for The New Republic, The American Prospect, The Guardian (UK), The Huffington Post, The Washington Monthly, Alternet, Democracy Journal and Pacific Standard, as well as multiple well-trafficked progressive blogs and websites. His has been a guest on MSNBC, CNN, Aljazeera, Russia Today, NPR, Pacifica Radio and Air America Radio. He has contributed to two anthology books, one about the Wisconsin labor uprising and another on the fight against the Stop Online Piracy Act in Congress. Prior to writing about politics he worked for two decades as a television producer and editor. You can follow him on Twitter at @ddayen.

11 comments

  1. Moneta

    Not so long ago, I read about how parcels of land have become so small that they don’t even feed a family anymore. This means an increasing number of Indians have no choice but to move to the city. However, urbanization will consume a lot more oil than what they are consuming now.

    I just don’t see how India and China are going to be able to consume more oil for their own use when the West needs an increasing amount to maintain their current and expanding energy requirements. Over the last couple of decades, emerging markets have been consuming energy to feed our consumerism but I am not sure we’ll drop ours so they can increase theirs…. especially considering the number of people in the developed world who want printed money and jobs for everyone, infra projects galore., meaning no end in sight for energy consumption and little thought about sharing with emerging markets .

    1. susan the other

      Paul Craig Roberts posted a piece on the new economic alliance between China and Russia, which now includes India. It is the economic block of the BRICS coming to pass. Between them they have vast natural resources which they can use to create their economies without any “help” from us, and hopefully better their societies. When the “West” finally achieved global capitalism it made the old adage ‘Be careful what you wish for’ come full circle. I wonder if we didn’t recruit Russia to be our partner, as Putin always refers to us, so that the sprawling, out-of-control mess we have created by exporting neoliberal capitalism can be contained by more serious-minded people. We have clearly failed to create anything good out of it.

      1. Moneta

        Up to now the emerging markets have been serving mostly the developed world. If they turn inwards, will the US let them exploit these resources peacefully?

        1. susan the other

          If you believe in the rationality and goodness of human nature, the answer is yes, the BRICS will be given their sovereignty but with lots of treaties and conferences – which will hedge the destruction of the rich. A gradual descent back to nature.

          1. Moneta

            Most people still think/hope there is enough energy for everyone without the developed world having to cut its energy consumption. Something tells me famines will push us to action before the benevolence kicks in.

  2. tyaresun

    An estimated 32.7 percent of the Indian population lives on less than US$ 1.25 per day. The country is home to a quarter of all undernourished people worldwide . Any global impact on hunger requires progress in food and nutrition security in India.

    India ranks 136th out of 186 countries in the 2013 UNDP Human Development Index and 94th out of 119 countries in the Global Hunger Index. While per capita income in India has more than tripled in the last two decades, the minimum dietary intake reduced during the same period. Levels of inequality and social exclusion are very high. The bottom 10 percent of the population account for only 3.6 percent of the total consumption expenditure and the top 10 percent accounts for 31 percent; the gap between the rich and the poor has increased during the high economic growth phase.
    http://www.wfp.org/countries/wfp-innovating-with-india/overview

    1. Chauncey Gardiner

      Excellent comment, tyaresun. I think the level of poverty there and the wealth differentials are even more difficult than we ourselves face. Although there is a growing middle class, India remains stressed in terms of population pressures, environmental degradation, massive inequality, corruption and other issues. This is not to say India cannot overcome its challenges. Education is one of the areas which that nation performs very well IMO, and the emergence of India’s tech sector is reflective of this.

    2. Vatch

      In addition to the huge problems of adequately feeding India’s growing population and of solving Indian inequality, there’s the need to do something about the increase in violence that accompanies high population density. The phenomenon of the behavioral sink is very ominous for any nation with a high and increasing population density. In addition to India, this applies to China, Indonesia, Africa, and other places, including parts of the United States.

  3. Lune

    I’m not sure how India’s rentier capitalism is all that different than America’s or Europe’s. The rentier class in India are generally industrialists who bagged enormous profits off of corrupt dealings with government (e.g. sweetheart giveaways of public assets, public-private partnerships, govt contracts, etc). And the rentier class in America are… generally financial folks who bagged enormous profits off of corrupt dealings with the government.

    And the Republicans look at India’s corrupt and ineffective bureaucracy with fondness: if they could only convince Americans that govt is at best useless and at worst harmful to one’s welfare, then they can repurpose the govt to serving its rentier class and not have to deal with pesky populist demands.

    1. tyaresun

      I used to be against having hundreds of political parties in India, now I am hopeful about India because I think it will be impossible for the oligarchs to buy-off all the parties.

  4. craazyman

    has anything in India actually changed at all in 5,000 years or has the only change been in the language used to describe it. I doubt much has changed. it’s even in the same place! that’s unusual, historically speaking. most places move around. Some places even jump across the sea, like ‘New England”. But India is still in the same place where it was in the times of the Pharoas. I don’t know how to spell Pharoas, like in Egypt. Those Pharos. The ones with the Pyramids and the Sphinx. And camels. What has changed in India? What can change in India? The answers are nothing and nothing. That’s what I think. At least for another 100 years or 200 years, too late for any of us. But the news will change, no doubt, there will be breathless reports of world-changing change. Remember though, that’s just words we’ll read or hear. Did anything there really change there? Probably not.

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