Inequality in India may be returning to levels last seen during British Rule. To understand this, it is necessary to put India’s 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 “U” shape or what has been called the “Inverted Kuznets Curve.” 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’s (2014) Capital in the 21st Century. My new and revised paper (Kumar, 2017b) puts the rich at the center of India’s 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’s population and has been home to many of the richest people on the planet through most of known history. Understanding India’s 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 made the cover of Time Magazine 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 – on occasion voluntarily, otherwise by threat of military action. To be sure, the constitution protected private property but it also promised egalitarianism – 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 ‘being clearly rich’ 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’s 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 Banerjee & Piketty, 2005). 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’s explanatory ‘machine’ – when income growth is slow then wealth from the past dominates. The political logic is rooted in the theory of ‘conscription of wealth’ (a class based justice where the rich pay their share), proposed by Scheve and Stasavage (2016). 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 – 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 ‘billionaire wealth’ 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 (Gandhi & Walton 2012). 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 world’s richest man 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’s billionaires owned almost the equivalent of 20% of GDP – 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 (Kumar, 2017a EPW) 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.

Income cutoff Salaries Property Income Business Long term capital gains Short term capital gains Interest income 150K 35.03% 1.88% 39.48% 0.35% 0.24% 2.14% 1000K 3.80% 0.12% 0.97% 0.11% 0.03% 0.18% 10000K 0.06000% 0.00258% 0.03010% 0.01367% 0.00153% 0.00623% 100000K 0.00065% 0.00002% 0.00106% 0.00115% 0.00003% 0.00011%

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’s quasi-socialist experiment are unparalleled in comparative terms. The legacy of the term “Tata-Birla” 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 – 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’s top wealth-holders now comprise self-made or inherited yet growing wealth.

To understand India’s 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

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