Thomas Piketty Calls Reducing Inequality Key to India's Growth; Faces Pushback from Indian Economists

In what can be seen as a continuation of one of the most intense economic debates of this year, French economist Thomas Piketty today directly engaged with Indian government economists on the topic of income inequality and its relation with economic growth, at an event in New Delhi.

Speaking at the event jointly organised by the Research and Information System for Developing Countries (RIS) and the Delhi School of Economics, Piketty remarked, “It is pretty clear that India is a very unequal country when compared to other countries. Reducing inequality will not only reduce poverty faster but also improve inclusion and eventually support growth.”

In March, Piketty stirred significant debate with his study, "Income and Wealth Inequality in India, 1922–2023: The Rise of the Billionaire Raj," which claimed that contemporary India exhibits even greater inequality than during the colonial era under British rule. The study was met with significant criticism from Indian economists for its thesis and methodology.

His new remarks, however, come at time when India is facing a slowdown in its growth rate. Between July and September, India’s economy slowed to a seven-quarter low of 5.4 per cent, a stark contrast to the impressive growth rate of 8.2 per cent recorded in the previous financial year.

Economists attribute this slowdown to multiple factors, including weakened consumer demand, years of sluggish private investment, and a reduction in government spending, which had been a key growth driver in recent times.

Reiterating the recommendations from his study, Piketty emphasized the need for policy interventions in India, such as higher taxes on the wealthy and wealth redistribution. "This will place more money in the hands of mass consumers," he argued, highlighting its potential to stimulate economic demand and inclusivity.

However, much like his study, Piketty's suggestions faced pushback from Chief Economic Advisor (CEA) to the Government of India, V. Anantha Nageswaran. “A solution to one problem can’t bring two additional problems,” he argued, dismissing the notion that wealth redistribution through higher taxes on the rich would yield the desired outcomes without unintended consequences.

“It is very much possible that taxing capital less may not lead to more investments, but taxing it more will drive capital away,” said the CEA. He acknowledged the need for billionaires to contribute more but flagged the challenges of implementation, including accurately measuring wealth and effectively redistributing it to achieve meaningful outcomes.

Nageswaran also emphasised that data on issues like income inequality must be considered in context. He pointed out that many of the countries Piketty identified as highly unequal had been colonised, adding, "Geography matters, history matters, and size matters."

Economic Advisor to the Prime Minister of India, Shamika Ravi, also disagreed with Piketty's view, asserting that India has experienced improved consumption patterns, particularly in rural areas.

Ravi argued that the growth, which Piketty suggests has contributed to the rise in inequality, has actually led to positive changes in consumption and living standards, challenging the notion that growth automatically exacerbates inequality. “As a democracy unlike China, India has done pretty well, and whatever we have achieved is due to growth. Now, degrowth would be immoral,” she said.

Piketty, while acknowledging the imperfections of his study due to limited government data, remained resolute in his stance that addressing inequality is crucial for sustaining India's growth momentum going forward. He urged the Indian government to increase the availability of data, which would facilitate more empirical studies and better inform future policy decisions.

Both Nageswaran and Ravi, as economists working closely with policymakers, agreed although indicated a positive trend in the availability of government data in recent years.