Ten reasons why Piketty’s paper gets it wrong on inequality in India

One, the authors have combined many different data sets and engaged in interpolations and extrapolations to arrive at their conclusions without reflecting much on the compatibility and consistency of data. Yet, it is surprising that, despite the availability of a new Household Consumption Expenditure Survey (HCES) 2022-23, they ignore and relegate it to a footnote (No. 11). Readers can refer to our article (alturl.com/8zm3g) on it.

Two, for 2017-2022, the paper uses consumption data from the Periodic Labour Force Survey (PLFS), which is not comparable with HCES data. The authors account for it by using 2017-18 HCES data from leaked reports that had serious quality issues. The International Labour Organization acknowledged, “In the model of labour force participation, the PLFS observations for 2018 and 2019 have been excluded as they appear to present limited comparability with both the previous NSS results and the newer PLFS results."

Three, the paper adjusts wealth distribution at the top end using Forbes’ and Hurun’s list data, which includes stock market wealth as a part of net worth. For venture capital (VC)-funded firms, non-market implied valuations are also considered. The top percentiles’ rise in wealth is attributable to greater financialization of the Indian economy, a stock market boom and VC valuations. Before the market boom, owners of companies had their wealth measured in terms of book value. Listed companies did well and saw their market cap grow, which is a natural outcome to the extent that market cap is considered wealth (which is a debatable assumption). Counterfactual: If our stock market was not booming, or very few firms were listed, India’s inequality under the paper’s approach would have come down significantly. In other words, if all that stands between India and a more equal distribution of wealth and income is a stock market correction, then we can ask if inequality is such a serious issue and whether it is an appropriate measure of the welfare of people at the bottom of the country’s income and wealth pyramid.

Four, if tax compliance has improved, then tax data will show higher income at higher ends not because income inequality has increased, but because of better compliance. On the other hand, for the pre-1990 or pre-2010 period (all the way back to 1920), taking tax tables to prove that the top 1% earned less than today assumes that tax compliance has been uniform throughout this period.

Five, various studies point to the progressivity of India’s tax structure and fiscal policies, including Kundu and Cabrera (‘Fiscal Policies and their Impact on Income Distribution in India’, April 2022) and Datt, Ray and Teh (‘Progressivity and redistributive effects of income taxes: evidence from India’, October 2021). According to Kundu and Cabrera, fiscal transfers pertaining to health and education reduce the Gini coefficient (a measure of inequality) by 0.05 percentage points. Thus, the paper’s findings of a regressive tax structure are contrary to existing literature.

Six, the paper, by singularly focusing on the top 1%, misses India’s emerging middle class. According to Rajesh Shukla (2010), the Indian middle class doubled in size between 2001-02 and 2009-10, growing from 5.7% of all households in 2001-02 to 12.8% in 2009-10. As per recent estimates from PRICE , the middle class comprises nearly 31% of our population and is expected to rise to 61% by 2046-47.

Seven, while inequality is a relative concept, absolute poverty is a more urgent and tangible reality lived by millions of people. The Niti Aayog’s ‘National Multidimensional Poverty Index Report’, 2022, shows a remarkable decline in multidimensional poverty in India, attributable in large part to the government’s strategic focus on achieving universal access to basic amenities. The largest improvements were reported in states like Bihar, Madhya Pradesh, Uttar Pradesh, Odisha and Rajasthan, with rural areas leading the decline in poverty. India is on a path to achieving SDG Target 1.2, of reducing multidimensional poverty by at least half, well ahead of its 2030 deadline. For the average aspirational Indian, data showing that 248 million people escaped multidimensional poverty between 2013-14 and 2022-23 matters much more than the number of billionaires in the country. Reduction in poverty, not inequality, is the litmus test of inclusive growth.

Eight, a decline in inequality of consumption in India in the decade before the economic reforms of 1991 can be attributed to regulatory distortions and state interference that suppressed incentives for individual effort and innovation, leading to low levels of inequality but with high poverty incidence. Regardless of what the authors think, it is doubtful if those Indians who have emerged from poverty in recent decades would prefer to go back to their pre-1991 living standards.

Nine, it is a popular idea that redistribution is the solution to raising living standards at scale, alleviating poverty and inequality in one stroke. This approach has two major problems. Firstly, the infeasibility of taxing wealth is widely discussed in academic literature; for example, in ‘Taxing our wealth,’ Working Paper No. 28150, National Bureau of Economic Research, by Scheuer and Slemrod (2020), and in ‘Not So Fast: The Hidden Difficulties of Taxing Wealth’ by Fleischer (2017). Like many European countries , India did away with its wealth tax (in 2015), in line with Chelliah Committee (1993) and Kelkar Committee (2002) recommendations, while increasing income tax surcharges for top earners.

Ten, several authors have pointed out many incorrect claims made in Thomas Piketty’s work. In ‘Challenging the Empirical Contribution of Thomas Piketty’s Capital in the 21st Century’ (2014), for example, Magness and Murphy wrote, “We find evidence of pervasive errors of historical fact, opaque methodological choices, and the cherry-picking of sources to construct favourable patterns from ambiguous data."

In a recent paper (alturl.com/83236), ‘Income Inequality in the United States: Using Tax Data to Measure Long-Term Trends’ (Journal of Political Economy, No. 3, Volume 134, 2024), Auten and Splinter wrote that using US tax data correctly showed lower income shares for the top 1%, and that after-tax top income shares have changed little. This is in contrast with Piketty’s findings on inequality in the US.

Further, in ‘How Pronounced is the U-Curve? Revisiting Income Inequality in the United States, 1917–60’ (March 2022), Geloso, Magness, Moore and Schlosser wrote that Piketty and Saez overstated inequality in the period between 1917 and 1980 in their 2003 paper.

Finally, in fairness to Piketty and his co-authors, we acknowledge a confession they made, even though they have tucked it away in a footnote (No. 36 to be precise). It reads: “Our results are tentative given we do not observe both income and wealth for the same set of individuals and instead draw inferences based on the full distributions of income and wealth we estimate." That is a QED moment. Now, if only they had put it right up front, we could have spared ourselves the tedium of ploughing through some 85 pages.

These are the authors’ personal views. Deep Narayan Mukherjee and Karan Bhasin contributed to this article.