India鈥檚 opposition leader has

The largest democratic process in human history is a few months away. India鈥檚 political parties are scurrying to offer appealing policies to听the masses in a bid to unseat the ruling right wing (BJP) party. A recent scheme has especially caught attention. . Statistically, the policy benefits a large enough mass of voters so that the similar proposals will eventually be offered by nearly all competing parties. India is a country with substantial poverty and few (if any) would disagree that social welfare nets are needed to emancipate those left behind by 7-8% national income growth. Experts have raised doubts, .

The LSE based economist . This money would bridge the gap between subsistence income and actual incomes of the poor. The caveat? There is an incentivization problem because the size of the income transfer depends on this gap. Those households that are close to (or above) subsistence will have incentive to under-report to derive larger transfer and ultimately waste precious fiscal capacity. The policy could backfire if it eats into government funds currently being used for subsidies and in-kind transfers.

But there is an alternative. It is equally realistic and only requires follow through from enthusiastic politicians. If India鈥檚 richest are wealthy enough to be globally ranked, then they听surely have the capacity to generate elsewhere. Taxes for transfers should look to the wealth holdings of the tiniest top fraction. As a simple back-of-the-envelope exercise, I was able to derive the tax rate and eligible population whose wealth could finance 1.5% of GDP. Using named rich lists, I found that a 3% tax on the net worth of India鈥檚 richest 3000 individuals (Rs 93 trillion or almost $1.5 trillion) just exceeds the targeted funds. The wealth of the Top 10 Indians alone is worth over 5% of GDP and the Top 100 taxed at 3% alone would generate revenue equal to 0.5% GDP. There is extreme inequality at the top, but that means drawing on such wealth is not impractical. A tax (or surcharge) would not inconvenience over 99.99% of India鈥檚 voters and so has political advantages. Will it increase the burden on fiscal balances? If we consider that the wealthy predominantly get rich via (realized or unrealized) capital gains, then by definition they accumulate wealth outside the domain of GDP itself; GDP is an accounting concept and only counts income from new production, not from revaluation of existing assets. Ultimately the target is a monetary amount measured relative to GDP. The money itself does not come from within GDP.

The net benefits are numerous but will become even clearer with transparent public debate. Aggregate demand will go up in poorer regions via the consumption of the poor. The taxable base will be limited in size (between 3000-5000 individuals) and the staff needed to make the necessary audits kept to a minimum (roughly 30 officers looking into 100 accounts annually). Will the rich be expropriated? Consider this following: if a billionaire derives a respectable 10% return to their equities on average then a 3% tax still leaves them with 7% returns on their wealth. To draw down their wealth, the richest 3000 Indians would for example need to spend听over Rs 8.5 million daily! Ironically, in much tighter fiscal times, India has actually run redistributive support incomes the other way, because the political class accepted that the costs were worth it. In its early independent decades, the government transferred a stipend to (the richest 500 or so) former aristocrats as compensation for their bloodless accession to the Indian Union. These sums were minimum income support for hereditary rulers to retain their lifestyles. Clearly, if the costs are justified for democracy over revolution and conflict, then the appetite to offer income support already exists.

The numbers are certainly there to engage discussion over this proposal today because India鈥檚 wealthy have now re-entered their positions amongst the global elite. They are able to acquire international companies, purchase foreign citizenships and . At the same time, India is home to the highest number of persons living in poverty. The core issue is deeper. In the interest of circumscribing class conflict, it is difficult to justify the existence of the world鈥檚 richest and poorest under the same national boundaries. in the run-up to the farcical World Economic Forum. Populist movements are consuming social democracy. Surely, once again, the costs of redistribution are worth it.

Rishabh Kumar听is Assistant Professor of Economics at California State University.听听

Calculations are available as excel files on the .

Photo of Rahul Gandhi speaking at The Doon School Model United Nations’ (DSMUN) conference in August 2017, by听

Had we assumed rising wealth was a phenomenon for the rich world only, the problem would be mostly explained away using the standard model of capital accumulation. In the long run, the economy reaches a steady state so that b= s/g where s is the rate of saving and g is the rate of economic growth, and b is the wealth-income ratio. Differences between Europe and the US (b is greater in Europe) stemmed from differences in saving rates (s is higher in Europe) and economic growth (g is higher in the US). Facing low growth due to demographic stagnation, past savings would dominate income growth and . The beneficiaries would be those who own private property since they could rely on profit rates (r) to generate capital income. But the case of China, Russia and India tells us that something else is also at play here. China and India have some of the highest rates of economic growth in the world and yet wealth-income ratios are rising鈥nd rising fast. Simultaneously, public capital is being expropriated by private wealth. It stands to reason that wealth accumulation is being driven by more than simply the relationship between savings and growth.

Ricardian forces

Many assets have the potential to become valuable without actual accumulation. Writing in the initial stages of capitalism, Ricardo recognized the unusual position which landlords occupy: they control a non-reproducible asset, which generates rents under expanded capital accumulation. These rents extract away from surplus value and get capitalized into higher land prices. His vision was partially invalidated by gains in agrarian productivity but the history of wealth-income ratios testifies to the strength of the underlying principle. A monopolization of resources has the potential to drive up the magnitude of wealth as much as the accumulation process (if not more) 鈥� think of real estate prices in Manhattan, San Francisco, London, Shanghai, Mumbai and Bangalore. For any rate of capital gains (1+q) on existing assets, if q > g then wealth rises relative to income due to the divergence of asset prices and consumer price inflation. This inequality (q > g) is critical to deciphering large swings in wealth-income ratios. Over the long run, capitalists may steadily accumulate reproducible capital but in the medium run there can be strong redistributions of wealth towards the rentier class.

Indian wealth-income ratios 1860-2012

To draw up answers to these trends, I decided to go back as far as possible to build wealth-income ratios for India and investigate their relationship to the structure of national savings. National wealth can be seen in two ways. It is the sum of private and public wealth. Or it is the sum of non-financial assets (reproducible capital and land) plus a country鈥檚 net foreign asset position, all valued at nominal market prices. My benchmark series for India covers the colonial period (1860-1947), the socialist experiment (1950-1980) and the more modern neoliberal phase (1980-2012). Data were constructed using historical studies, surveys, official national accounts and statistical abstracts. Until World War I, b lagged far behind the two major imperial powers 鈥� it was around 250% in India whereas it exceeded 700% in Britain and France. This is the state to be expected in a wealth-poor colonial economy where accumulation had been stagnating for decades. But the capital destruction due to war transformed relative wealth-income ratios. The shocks of the war transmitted into dramatic price shocks for Europe, while Ricardian forces took hold in India. In the inter-war period b in India rose very fast to reach almost 600% while in Britain and France it fell to half its pre-war value. Yet this upsurge was not related to rising s/g ratios. The national saving rate averaged only 2-3% between 1900 and 1946 and rates of economic growth actually rose modestly after much of the stagnation in the late 1800s. Instead, the rising magnitudes of wealth reflected a phenomenal upsurge in land values which easily captured most of what constituted national wealth. The fundamental point is that if q > g even for a few decades, then the national profile of wealth can be altered tremendously.

India became independent soon after World War II and lost much of its most fertile land to the newly created country of Pakistan. The shocks from the turbulent period preceding and following independence substantially drove down land prices and were accompanied by the rise of industrialization. The development planning model in newly independent India (itself model) raised the level of savings compared to the past and drove up the national capital stock. It was envisaged that capital accumulation would raise the level of economic growth. Wealth-income ratios declined until 1960 because the importance of land fell more than the increase in productive capital. Put simply, anti-rentier policies (estate & wealth taxation, nationalization, land reforms etc.) were able to withstand a further enriching of property owners relative to income growth. At the same time, an increasing claim on capital was being extended by the public. The rise of national savings was mostly driven by public rather than private or foreign savings. Even though economic growth was low by international standards (roughly 3.5%), it was meant to be equalizing.

A range of staggered policy changes slowly reversed the decline of the wealth-income ratio, b. India began a series of market reforms in the 1980s and opened up to globalization in the 1990s. Wealth-income ratios in India have actually been rising since the 1970s, with a particular acceleration in the 21^st century. By 2012, b was approaching 560% – the closest it had ever been to its historical high in 1939 (b = 600%). This resurgence was due to a combination of sustained accumulation of capital stock and a re-emergence of the importance of land (almost 200% of national income) following significant changes in incentives to hold private property. Domestically, corporate capital began rapidly eating into public capital as – this should be expected, since many public companies had been privatized already and many more national assets should be . Overall, these findings pose new questions regarding the trajectories of development. At the aggregate level, today Britain and India have roughly the same level of wealth 鈥� a remarkable turnaround since the era of colonialism. But on a per-capita basis living standards in India are a fraction of that in Britain. The situation is strikingly similar to the last decade of colonialism. Wealth is rising in times of great poverty.

Conclusion

The rise of wealth is not simply a matter of accumulation but the designation of control under the institution of private property. Whether for the production of agricultural commodities or the provision of housing services, gaining property rights to land can redistribute wealth very rapidly. Demographic dividends and urbanization create tremendous pressure on space and have the potential to rapidly drive up wealth-income ratios. These effects can be very strong when growth creates competition for such limited assets or when lack of growth empowers those who already possess them. For example, even in rich countries like and , modern trends seem to be a capital gains phenomena related to real estate. The demand for such an important property right residing with rentiers is as much a driver of wealth today as the steady accumulation of capital by capitalists. Today both capital and land values are rising faster than national income. As long as such private wealth grows faster than income, workers will remain excluded from any notion of shared prosperity. This is one of the reasons why Smith, Ricardo, Malthus and Marx spoke about class dynamics in rigorous terms. Much may still be learned from taking these classical political economists seriously.

References

L铆dia Brun and Ignacio Gonz谩lez: (2017).

Rishabh Kumar (2018): .

Filip Novokmet, Gabriel Zucman, Li Yang (2018): From Communism to Capitalism: Private vs. Public Property and Inequality in China and Russia (2018). American Economic Association Papers & Proceedings (forthcoming)

Thomas Piketty, Gabriel Zucman (2014):

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

Inequality in India may be returning to levels last seen during British Rule. To understand this, it is necessary to put India鈥檚 elite at the center of macro-history.

One of the central questions in political economy is how wealth evolves, particularly at the top. In Europe and the USA, we now accept that progression of wealth inequality followed a 鈥淯鈥� shape or what has been called the 鈥淚nverted Kuznets Curve.鈥� Briefly put, on the eve of World War I, the richest few percentiles dominated Western society with their massive wealth holdings. Fast forward to a decade after World War II and we see that their wealth declined substantially, but then started rising again in the late 1970s. Much has been written on this since (and due to) the publication of Piketty鈥檚 (2014) . My new and revised paper () puts the rich at the center of India鈥檚 economic history over the last eight decades. The main question I want to ask is the following: Is the state of contemporary wealth concentration in India a continuation or a break from its history?

India is not Europe and by no means the USA. It is however home to almost 1/6th of the world鈥檚 population and has been home to many of the richest people on the planet through most of known history. Understanding India鈥檚 rich is critical to understanding the political economy of development (the country also accounts for large chunks of global poverty). The rich elite is inexorably linked to prevalent social structures.

A (short) long history of the rich in India, Europe and USA

In 1937, the Nizam of Hyderabad as the wealthiest person on the planet. His lavish lifestyle, expensive gifts and unparalleled collection of jewels were globally renowned. The Nizam even owned and operated his own private bank and to his credit was also involved in philanthropic work. His wealth was very much characteristic of the social structure of colonial India. Poverty and famines co-existed with a few wealthy industrial magnates, landlords and ancestral royalty.

The achievement of independence in 1947 and adoption of a constitution based on equality created tremendous pressures to dismantle these unequal structures of the past. Feudal and royal land was annexed into national wealth 鈥� on occasion voluntarily, otherwise by threat of military action. To be sure, the constitution protected private property but it also promised egalitarianism 鈥� dynastic titles were incompatible with this provision. The influence of western ideas of progressive taxation of inheritance and income were combined with elements of Soviet collectivism. As the reign of Indira Gandhi progressed (starting 1966), the need to appear progressive was reflected in ever-rising marginal tax rates on inheritance, transfer and ownership of wealth. This was combined with anti private business attitudes, a range of nationalizations and abolition of titles. This severe strain of 鈥榖eing clearly rich鈥� depressed the wealth of the richest 0.1% (around 200,000) families. Old wealth was destroyed by fiscal and political instruments as India grew at the Hindu Rate of Growth (3.5%). Seen from the lens of convergence, Indian incomes did not grow fast enough to emancipate its vast poverty. But on the other hand there were substantial achievements in social equity by democratizing generationally circulating wealth. While the Nizam of Hyderabad had wealth equaling 30% of colonial India鈥檚 GDP, by 1967 his estate was not even the largest in India (ranked 13th). In 1986, the top 0.1% (almost 300,000 families) owned the equivalent of only 3-4% of national income – down from almost 18% in 1966. Trends in income concentration more or less mimic these trends in wealth concentration (see ). Inherently, wealth is more concentrated than income. This experience fully matches the story of private wealth in industrialized countries. The transition from aristocratic wealth and rentier societies was sharp, turbulent and at large scales as progressive taxation and wars broke up old wealth. The economic logic owes much to Piketty鈥檚 explanatory 鈥榤achine鈥� 鈥� when income growth is slow then wealth from the past dominates. The political logic is rooted in the theory of 鈥榗onscription of wealth鈥� (a class based justice where the rich pay their share), proposed by . The graph above encapsulates this entire history in one chart.

The Hindu Rate of Growth was mediocre but 3.5% is still better than the 0.5% experienced by colonial India. Starting in the 1980s, many policies of the 1950-1980 period were reversed one by one. 1985-1986 was a watershed moment for direct taxation in India – tax rates were lowered, diluted or in the case of the inheritance tax, even abolished. It is what happened after 1986 that makes India stand out and yet parallel trends in global inequality. In the advanced economies, wealth inequality is rising again due to lower taxes, rising monopoly rents, stock market capitalization and income inequality. This is coupled with the demographic issues 鈥� low population growth is translating into lower growth in the long run. Wealth inequality is thus accompanied by rising importance of private wealth relative to national income. This is the infamous U shape of wealth accumulation and inequality.

A metamorphosed return

In the early 1990s, India fully embraced the market. The sale of public assets began intensifying between 1995-2005. Stock market capitalization accelerated well beyond growth of GDP, which by the way was growing at unprecedented rates (over 5% between 1990-2010). The political machine was capital-friendly but the impact on inequality became ambiguous with respect to what could be expected. Without precise data it is impossible to accurately predict the fate of the top 0.1%. But combined with stock market capitalization rates and the rise of 鈥榖illionaire wealth鈥� on the Forbes Rich List, what seems almost certain is that inequality is back to levels seen before 1970, perhaps approaching the levels right before Indian independence. In 1996, the two wealthiest Indians owned the equivalent of 1% of GDP (). In 1986 it took hundreds of thousands of rich estates to makes this number. In 2007 exactly seven decades later, anecdotal history repeated itself when Mukesh Ambani became the according to Forbes magazine. This would mark the second time (since the Nizam in 1937) that India would be home to the richest person on the planet. In the same year, India鈥檚 billionaires owned almost the equivalent of 20% of GDP 鈥� not quite the level of the Nizam, but approaching it. Were we to extrapolate downwards, the net worth of the top 0.1% relative to GDP is likely to be somewhere between relative stock market capitalization and the wealth in the Forbes rich list (between 46-400 individuals).

In a related paper published in February () I calculated the cumulative number of tax returns based on income category (see the table below). These income flows are a good approximation of wealth since all types of income barring salaries accrue to asset holders. Capital gains, linked to the stock market and reported to the income tax authorities, are concentrated within a fraction (less than 0.5%) of the taxpaying public. Add up the number of taxpayers (themselves not mutually exclusive) with capital income above the Rs 1 million threshold and the sum does not even make 1%. Note that the number of taxpayers themselves are a minority of the total population given the low tax base in India. Thus, these estimates are at best a conservative estimate of capital inequality.

Source: Kumar (2017, EPW). Cumulative returns filed above cutoff levels Income thresholds in thousands of (2012) Indian Rupees

Does this mean India achieved superb social justice in the period 1950-1980? Not by any stretch of the imagination. But the dismantling of old structures of wealth were essential not just to the cause of equitable growth but also to overcome the importance of the rich in crucial times. The speed and magnitude of decline at the top during India鈥檚 quasi-socialist experiment are unparalleled in comparative terms. The legacy of the term 鈥淭ata-Birla鈥� persists because these business houses were the few top private entities that survived the fall and rise of private wealth. Since 1986, a new class of wealthy have emerged, fueled by modern investment practices and capitalizing on market dynamism. The Ambanis, Birlas, Jindals, Hindujas are even joined by newer self-made billionaires. Take for example, the investor Rakesh Jhunjhunwaala. To be sure, inheritance is not absent and even stronger at the absolute top of the Forbes ranking but both self-made and inherited fortunes seem to be growing 鈥� and growing faster than national income.

The three main lessons from these long run trends for India are:

• Wealth inequality in India may be rising again to levels never seen since before independence. The concentration of wealth in India is most likely much, much higher than in the 1970s.
• The experience of India between 1980-2010 defies the trends in wealth inequality seen in rich countries. High growth and high inequality have gone hand-in-hand. The gains in asset price returns have surpassed the gains from income growth.
• The rich have transformed. From Nizams, princes and colonial era tycoons, a new business and entrepreneurial wealthy class has emerged. Most of India鈥檚 top wealth-holders now comprise self-made or inherited yet growing wealth.

To understand India鈥檚 interaction with advanced capitalism, it is essential to understand how the richest and poorest persons in the world exist within the same set of laws and political rights. In more forthcoming research I will build further on these ideas.

References

• “Top Indian Incomes, 1922鈥�2000.” The World Bank Economic Review 19, no. 1 (2005): 1-20.
• . “Where Do India鈥檚 Billionaires Get Their Wealth?鈥�.” Economic and Political Weekly 47, no. 40 (2012): 10-14.
• . 鈥淭wo class distribution of income in India: Evidence from income tax data (2012-13).鈥� Economic and Political Weekly 52, no. 6 (2017a).
• . “Capital and the Hindu rate of growth: Wealth concentration in new independent India 1961-1986.” SSRN Working paper. (2017b).
• . Capital in the twenty-first century. Harvard University Press, (2017).
• . “Democracy, war, and wealth: lessons from two centuries of inheritance taxation.” American Political Science Review 106, no. 1 (2012): 81-102.

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

I found it notable that despite the detailed historical analysis in Piketty鈥檚 book , there was no mention of Indian wealth (Piketty did study top Indian incomes). To an extent this is understandable because data on India is so limited and unreliable that documenting it would require a book in itself. Till date, the Indian central bank (RBI) does not follow the tradition of publishing regular household and private sector balance sheets at market value, to assess accumulation and asset prices. And yet due to its sheer size and importance, India presents a unique challenge to the notion of prosperity – it is simultaneously home to some of the and global citizens. In the past, the question of India鈥檚 colonial subservience was related to the , rather than income – the British enriched themselves at the cost of their prized colony. What happened once India became independent?

My new paper 鈥溾�� tries to answer this question for a particular historical phase in Indian history. The term at the levels seen in other Asian countries undergoing development at the time. At death people鈥檚 assets are disclosed to tax authorities for the purpose of inheritance and because India had an estate tax in place until 1985, I was able to develop a series of top wealth holders using this information. Due to the exemption limits, it turns out that the series could only start from Top 0.1% – a further indicator of how concentrated wealth was in the first place. Unfortunately, comparison with the wealth of the nation as a whole could not be made, because such aggregate series are not available. Sometimes the National Sample Survey Organization makes an Asset and Liabilities survey, but it is decennial at best and as with most surveys, underestimates the wealthy. To 鈥榥ormalize鈥� values, I take the ratio of these 鈥渢op鈥� groups鈥� wealth against national income amongst other things.

My findings seem quite reasonable in historical context. The elite declined in importance relative to national income due to a series of (oil driven) inflation shocks and targeted anti-elite policies () such as the abolition of the and nationalization of private assets in banking and coal. In 1966, the wealthiest 200,000 families鈥� could have financed around two months of national income but their decline was so dramatic that the Top 0.1% could barely finance a few days of GDP by 1986. The composition of portfolios suggests that land related properties (urban and agricultural) lost a lot of their inflation adjusted values. On the other hand movable assets such as equities, bonds, gold etc were able to recover their real values by 1986 consistent with the eventual relaxation of a super aggressive tax policy. All this points to a rise of a new kind of savvy wealthy class amongst the elite themselves, because disparity within the elite themselves began increasing (after a decline until 1972) and the decline of the Top 0.1% was mostly due to the decline of the Top 0.01% or the super elite. Thus on net, the gainers were the intermediate elite (just below the Top 0.01%). One way to rationalize these results is which suggests that wealth concentration increases with liberalization of capital transaction activities.

Amongst other things, this study contrasts the relationship between wealth concentration and economic growth as Piketty hypothesizes for the industrialized world – during low growth phases, past saving made wealth more important. Indian growth during this era was quite low and driven by national capital accumulation for the development objective (Nehruvian Socialism, as its called). If national capital crowds out personal wealth, then it makes sense that wealthy classes lose their importance. On the other hand, tax policies aimed at equalizing wealth distributions also play a huge role in breaking the endless cycle of inheritance and accumulation which otherwise perpetuates inequality. As more data becomes available, longer time series of top wealth-holders will tell us if these trends have been (as expected) reversed and whether the Indian elite are back again.

Rishabh Kumar is a PhD student in Economic at The New School