January 22, 2016 12:32:10 am
How do you see India in the theoretical framework that you have elaborated in your book?
What’s new in my research is that I have tried to put together 200 years of historical data on inequality from 20 countries. The main lesson for India is probably that excessive inequality of the kind that we see in India today is bad for growth in the long run. And probably the main lesson for the Indian elite is that they should, I mean, I hope that the Indian elite will do better than the Western elite.
The West had to go through some major political and social shocks — in some cases very violent shocks during the 20th century — in order to accept the kind of social and fiscal reforms that were finally put in place after World Wars I and II and which were very important to reduce inequality and to invest in growth in the post-war decades in Europe and also in America. These reforms are, to a large extent, yet to take place in India.
You know, in India right now, the level of taxation and the level of public funding into girls education, infrastructure is very insufficient and is more comparable to 19th century Europe or early 20th century Europe than to what we see in rich countries today. So I think that at some point the Indian elite will have to pay more tax and invest more into reforms like girls education, etc.
Advancements in robotics and artificial intelligence are being seen as the fourth industrial revolution. What are the prospects for a country like India, which has surplus labour?
Well, I think this can potentially lead to a decline in the labour’s share and this is potentially a deep concern for India and a lot of other countries. I think there are different ways to respond to it, though.
The primary way is through investments in skills and education. This is the most important response. As I pointed out in my book, the most powerful way to reduce inequality is diffusion of education and knowledge. This is what has allowed for the reduction of inequality historically as well, both within countries and as well as between countries. A lot of the convergence that has been happening in the world in the recent decades is through this route. Now, for this to happen within a country like India, the education system has to be properly funded, the admission system should be such that it favours access, and is inclusive. So, investment in education is the number one policy solution.
The second policy solution is through the taxation system. In the long run, if you really get to a situation where robotics makes capital a lot more productive relative to labour, then you probably have to rebalance the tax system away from labour and towards capital. So you want to tax labour and wage income less and tax wealth and capital more. And this is something that can be very relevant for India, where currently wealth taxation is very limited, there is no taxation of inherited wealth, and annual taxation of property and wealth is relatively small by international standards.
So, should India tax more and redistribute better, or tax less and let entrepreneurial energies take over the economy? The UPA government seemed to favour a rights-based approach towards education or health or basic employment, but the current regime has taken steps away from investing in these areas. How do you see this?
I think there is no example of a country that has become rich with such a low level of taxation as what we have in India today. This is simply the evidence. When you have a tax to GDP ratio (as low as) 11 per cent in India, then (calls for lesser taxation are) completely ideological (and, as such, not justified). I think it should be gradually increased to about 15 to 20 per cent. Gradually. If you have a growth rate of 8 per cent per year you can certainly put one more per cent into the government (account) every year, and during the next 10 years you get from 10 to 20 per cent (tax to GDP ratio). I think that is perfectly reasonable.
Not only is this not going to kill the Indian growth or the entrepreneurial spirit, but I think it is going to reinforce it. This (kind of investment in education and skills) will lead to higher growth in India 10 years from now and in the decades to come.
If India wants to grow — not just in the coming year but also in the coming 20, 30, 40 years — then it is important to gather more public resources to invest in education than anything else. The level of education that the bottom 60 or 70 per cent of this country has access to is insufficient and will not allow India to grow for the coming decades.
One example is the budget expenditure on health in India is just 1 per cent of GDP. In China it is 3 per cent of GDP. Now, there is no way you can get the same with one-third the allocation. So, of course, you want to fight corruption, you want a more efficient government, but if you don’t pay well you simply cannot afford all the nurses and other such infrastructure.
This (higher taxation) must come about with more transparency about government spending and government taxation. For example, in India it is not easy to know how the income tax operates. There is no publication. You cannot get data about the number of income tax payers, by income tax brackets, the amounts of the income, how much of it is wage income, how much is non-wage income, etc. This lack of transparency is a very big negative because if we want to have a public discussion on how to make this change, it is impossible to do it without proper information and greater transparency. I think gradually, taxation should increase for the higher, more privileged economic groups in India. And to begin with, the government needs to bring more transparency. Publish income tax statistics so that we know who is benefitting from Indian growth.
And what if we go the other way — reduce taxes and hope that businesses will flourish?
The risk is that the level of deprivation that we see in India will lead to more political and social unrest. To me, the main danger with extreme inequality is that if you don’t solve this through peaceful and democratic institutions then it will be solved in other ways. Sometimes, you know, some politicians will try to exploit public unrest, blame particular groups — you know, I can see that in my country, France, where the extreme right is trying to blame foreign workers. So in India, (politicians) blaming particular parts of the country, or a particular lot among the poor, and that’s extremely frightening.
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