An absorbing paper from Abhijit Banerjee and Thomas Piketty (Piketty in turn has co-authored many papers with Emmanuel Saez on incomes in other countries).
We are discussing so much about rising top incomes in developed world, how does India fare?
Our results suggest that the gradual liberalization of the Indian did make it possible for the rich (the top 1%) to substantially increase their share of total income. However, while in the 1980s the gains were shared by everyone in the top percentile, in the 1990s it was only those in the top 0.1% who big gains. The 1990s was also the period when the economy was opened. This suggests the possibility that the ultra-rich were able to corner most of the income gains in the 90s because they alone were in a position to sell what the world markets wanted.
It would interesting to see whether in the coming years, as more and more people position themselves to benefit from the world markets, the share of the rich and the ultra-rich stops growing and even shrinks. For this and other reasons, we hope that this study would launch a trend towards more research (and better data) that focuses on the rich.
This paper was written in early 2000s and we need updates on the same with incomes rising manifold in recent years. The number of Indian billionaires have also increased in recent times.
How does it compare to west?
a tentative piece of evidence suggesting that what happened in India over this entire period was not simply a reflection of forces that were affecting countries all over the world. Figures 5, 6 and 7 compares what happened in India to the patterns obtained using similar data from France and the United States. During the 1950s-1960s, India was less egalitarian than either of these countries (they were actually quite similar at that time), in the sense that the top 0.01% earned a substantially higher share of total income in India.
Subsequently however, top income shares declined continuously in India during 1960s- 1970s and fell below the Western levels during the early 1980s. The fact that the fall of top income shares occurred mostly during the 1950s-1970s in India (rather than during the interwar and World War 2) seems consistent with the interpretation posited by Piketty (2003) and Piketty and Saez (2003) to explain the French and U.S. trajectories. The shocks induced by the Great Depression of the 1930s and World War 2 were less severe in India, while tax progressivity was extremely high in India during the 1950s-1970s, which might have induced a very large impact on capital concentration and pre-tax income inequality.
Top income shares then went back up in India, following a pattern similar to the United States but not France, where the top shares remained fairly flat during the 1980s-1990s (the pattern in most other European countries is quite similar). The share of the very rich in Indian incomes is currently much higher than in Europe. As we show below, the rise of top Indian incomes during the recent period was not due to the revival of top capital incomes (the rise of top wages did play a key role, like in the U.S.).
What led to the rise in 1990s?
As we show below, the rise of top Indian incomes during the recent period was not due to the revival of top capital
incomes (the rise of top wages did play a key role, like in the U.S.). Although our data does not allow us to identify precisely the causal channels at work, and in particular to isolate the impact of globalization, we note that the fact that the rise in income inequality was so much concentrated within top incomes seems more consistent with a theory based on rents and market frictions (see e.g. Banerjee and Newman (2003)) than with a theory based solely on skills and technological complementarity (i.e. inequality rises in the South because low-skill southern workers are too low-skill to benefit from globalization; see e.g. Kremer and Maskin (2003))
Interesting. Not much seems to have changed as Ruchir Sharma has been telling us.
Fascinating research on India. Much more useful than just the hyped growth papers. For lack of time not in a position to write more on this…