12:00 AM, May 21, 2014 / LAST MODIFIED: 01:53 AM, March 08, 2015

Democracy under threat

Democracy under threat

Praful Bidwai

It's a sad comment on much of India's mainstream media that it overplays the rise of the speculative-trader-industrialist Hinduja brothers to the top of Britain's (not India's) billionaire-list, while blacking out the country's persistent poverty and growing income inequalities.
Rising inequalities now occupy the centre of mainstream economic discourse worldwide. A spate of new studies demonstrate that inequalities have widened in most industrialised (Organisation for Economic Cooperation and Development) countries, and emerging economies like China and India.
In 12 developing Asian economies, home to 80 percent of the region's population, inequalities have risen steeply over the past decade.
India's post-1991 record is especially disgraceful. The OECD says: “Inequality in earnings has doubled in India over the last two decades, making it the worst performer on this count of all emerging economies. The top 10 percent of India's wage-earners now make 12 times more than the bottom 10 percent, up from a ratio of six in the early 1990s.”
Even the International Monetary Fund warns of inequality's huge costs. IMF managing director Christine Lagarde says: “In India, the net worth of the billionaire community increased 12-fold in 15 years, enough to eliminate absolute poverty in this country twice over”. India's National Sample Survey figures also tell the same story.
These reports demolish the “trickle-down” theory (read, wishful thinking) that growth will percolate to the poor. This hasn't happened in India during the last two decades, the fastest-growth period ever.
Thomas Piketty's just-published Capital in the Twenty-First Century provides solid theoretical and empirical refutation of such theories. Branko Milanovic, a World Bank research economist, calls it “one of the watershed books in economic thinking.”
Piketty, a Paris School of Economics professor, conducted a comprehensive analysis to conclude that worsening inequality is an inevitable outcome of free-market capitalism.
The rate of return to capital tends to exceed the rate of output growth—because entrepreneurs dominate those who own only their own labour.
Rising inequality reflects market workings as they should. “This has nothing to do with a market imperfection”: the more perfect the market, the higher the rate of return on capital compared to the growth rate.
Piketty says this tendency was countermanded briefly in the period 1914-74. Inequality declined -- not because of capitalism, but because of the two World Wars, the Great Depression, physical destruction of capital, higher taxes to finance the wars, high inflation, Keynesian welfare-state policies and a strong labour movement, which raised wages.
This period saw the emergence of what John Kenneth Galbraith termed “countervailing power” based on a liberal “New Deal”-style policy consensus. This provided strong resistance to the more deeply rooted tendency of growing inequality. But the pattern is unlikely to be repeated.
“Countervailing power” unravelled under the market-fundamentalist Thatcher-Reagan counter-revolution. Since 1980, the return on capital has been rising, so have inequalities. US inequalities in the first decade of this century were higher than pre-World War-I extreme disparities.
Real wages for most US workers have stagnated since the 1970s, but the incomes of the top one percent have risen 165 per cent, and of the top 0.1 percent by 362 percent. The top marginal tax-rate has halved to 35 percent.
This perverse income-distribution has spread worldwide. As Lagarde said: “Seven out of 10 people in the world today live in countries where inequality has increased over the past three decades.” The world's richest 85 people own as much wealth as the bottom half of the population.
Such inequalities demand drastic “confiscatory” taxes. Piketty advocates a global progressive tax on wealth to prevent capital transfer to tax havens, and restrict wealth concentration. Piketty also argues that diffusion of knowledge and skills can mitigate inequality. But this depends on state policies, which are vulnerable to elite capture.
Piketty's wealth-tax prescriptions have been declared “unrealistic”. But they have sparked a serious debate on how to limit the concentration of wealth, which produces an economy of exclusion. This criminally wastes precious human potential. Rising inequalities are socially undesirable, and eventually harm the quality, pace and sustainability of growth.
India, with its obscene inequalities, has much to learn from this debate. The top one-tenth of India's wage-earners make almost five times more than the median one-tenth. Inequalities in India result from a severely skewed distribution of assets, including land and capital, unequal access to education, and painfully slow job creation.
India is becoming an increasingly inequitable, “rich-take-all” society, where an individual's class and caste privileges matter more than his/her effort. This has grave consequences for democracy.
Without inclusiveness and some social cohesion -- at least the prospect of cohesion -- democracy becomes merely procedural, formal and hollow. It's only when all citizens acquire an equal sense of ownership in a collective national project that a healthy democracy flourishes.
If India is to achieve genuine social progress rather than GDP growth, it will have to radically redistribute assets like land, and provide good-quality healthcare, education, food security and social protection to all.
India must raise wages, further tax the rich, and impose ceilings on profits and executive incomes. This means rejecting neoliberal policies.

The writer is an eminent Indian columnist.


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