Thursday, October 27, 2016

Rishabh Kumar: What we know about the wealthy, Business Standard, 27 Oct 2016

The first modern book in economics was called Wealth of Nations because its writer, Adam Smith, understood (and transmuted the idea) that the key to prosperity and growth was the generation and distribution of wealth — not just the flow of income. Recent interest in economics has started to return to this question, especially in the context of today’s rich countries. The academic attention on the metamorphosis and concentration of wealth has so far excluded poor countries. In fact, the study of the wealth of poor nations should be a core question in development economics (over income growth) because wealth tends to cumulate all past prosperity or disparity.

I found it notable that despite the detailed historical analysis in Thomas Piketty’s book Capital in the 21st Century, there was no mention of Indian wealth (although Mr Piketty is responsible for a top Indian income series: Banerjee and Piketty, 2005). To an extent this is understandable because personal wealth data on India is so limited and unreliable that documenting it would require a book in itself. Till date, the Reserve Bank of India (RBI) does not follow the tradition of publishing regular household and private-sector balance sheets at market value, to assess accumulation and asset prices. And yet due to its sheer size and importance, India presents a unique challenge to the notion of prosperity — it is simultaneously home to some of the wealthiest and poorest global citizens. In the past, the question of India’s colonial subservience was related to the drain of wealth, rather than income — the British enriched themselves at the cost of their prized colony. What happened once India became independent?

Creating a time series

In recent research, I try to answer this question for a particular historical phase in Indian history. The term “Hindu rate of growth” is not really religious — it meant a country made up mostly of Hindus that did not grow at the levels seen in other Asian countries undergoing development at the time. Given that people’s assets are disclosed to tax authorities at the time of death for the purpose of inheritance and because India had an estate tax in place until 1985, I was able to develop a series of top wealth-holders and a model called the Estate Multiplier Technique (Lampman, 1962). Due to the exemption limits, it turns out that the series could only start from top 0.1 per cent; this in itself is an indicator of how concentrated wealth was. Unfortunately, comparison with the wealth of the nation as a whole could not be made, because such aggregate series are not available. Sometimes the National Sample Survey Organisation (NSSO) conducts an assets and liabilities survey, but it is decennial at best and as with most surveys, underestimates the wealthy. To “normalise” values, I estimate the wealth of these top groups as a ratio of national income — in a sense capturing how many months’ or years’ worth of gross domestic product (GDP) could be financed exclusively by the Indian elite.


My findings show sharp trends which seem quite reasonable in historical context. The elite declined in importance relative to national income due to a series of (oil-driven) inflation shocks and targeted anti-elite policies (mostly attributable to Indira Gandhi) such as the abolition of the privy purse1 and nationalisation of private assets in banking and coal. In 1966, the wealthiest 200,000 families could have financed around two months of national income but their decline was so dramatic that the top 0.1 per cent could barely finance a few days of GDP (Gross Domestic Product) by 1986. The composition of portfolios suggests that land related properties (urban and agricultural) lost a lot of their inflation-adjusted values. On the other hand, movable assets such as equities, bonds, gold etc. were able to recover their real values by 1986 consistent with the eventual relaxation of a super aggressive tax policy (Acharya, 2005). All this points to the rise of a new kind of savvy wealthy class amongst the elite themselves, because disparity within the elite themselves began increasing (after a decline until 1972) and the decline of the top 0.1 per cent was mostly due to the decline of the top 0.01 per cent or the super elite. Thus on net, the gainers were the intermediate elite (just below the top 0.01 per cent).

One way to rationalise these results is statistical equilibrium reasoning, which suggests that wealth concentration increases with liberalisation of capital transaction activities. Aggressive control and regulation of capital activity hence plays the opposite role, causing a reduction of sharp disparities in wealth portfolios — as was the case during my period of study.

Amongst other things, my study contrasts the relationship between wealth concentration and economic growth in India against Piketty’s hypothesis for the industrialised world. During low-growth phases in today’s industralised countries, past saving made wealthy incumbents more important relative to the majority of the income-earning population. The opposite was seen for India during my period of study - modest growth and a demise of the assets of the rich and elite. Indian growth during this era was quite low and driven by national capital accumulation for the development objective (Nehruvian Socialism, as it is called), with simultaneous tax scrutiny of the elite. If national capital crowds out personal wealth, then it makes sense that wealthy classes lose their importance.2 At the same time, tax policies aimed at equalising wealth distributions also play a huge role in breaking the endless cycle of inheritance and accumulation which otherwise perpetuates inequality. As more data becomes available, longer time series of top wealth-holders will tell us if these trends have been (as expected) reversed and whether the Indian elite are back again.

 1. The abolition of the privy purse took away a source of handsome payments made to the princely class for their role in Indian integration
2. The accumulation of national capital is perhaps most evident in the publicly financed institutions of higher learning and the investment into State-owned enterprises during this era
Published with permission from (, an economics and policy portal

Vivan Sharan Moderating a Panel with the Indian Telecom Minister, TRAI, and other eminent panelists at CII Big Picture on 26 Oct 2016

Government of India should not Make in India; co-authored column by Vivan Sharan, in Mint, 07 Oct 2016

India is recording historically high investments in technology-oriented industries such as telecom and over the top (OTT) services that ride on telecom networks such as financial technology and e-commerce.
The latest infusion of Rs47,700 crore by UK-based telecom giant Vodafone Plc. into its Indian arm is indicative of the fact that the Indian market remains much coveted despite the headwinds to global growth. Manufacturing investments are also targeting the tech-hungry Indian consumer.
Chinese telecom giant Huawei will begin manufacturing smart phones in India this year, the 40th such manufacturing investment in the country in the past two years alone. With such investments and parliamentary consensus on the GST, one may be tempted to conclude that ‘Make in India’ is on track. This may be premature.
India’s transition from an agricultural economy to a service economy has posed a conceptual challenge for many who see industrialization as the only way to create jobs. Industrialization requires best-in-class infrastructure, cheap energy and a skilled workforce, all impossible prerequisites to fulfil in the short or medium term. But the ‘digital economy’ offers a way out.
While productivity gains from automation and digitisation have driven industrial growth in advanced countries over previous decades, their effects are not fully felt here.
The digital economy can potentially mobilise millions of Indians, constituting the ‘informal workforce’, bringing them within a more productive fold. India’s biggest challenge is also its best opportunity: it has a large, young and untrained workforce that can intuitively understand applied technology, if given early exposure.
In fact, India can extract greater relative gains from the digital economy than its advanced country counterparts. Real income growth in advanced countries requires sustained and fundamental innovation whereas India can harness incremental innovation towards higher rates of growth (mostly owing to a favourable demographic).
But continued innovation support through private sector investments is not inevitable. Many policymakers mistakenly believe that India cannot be ignored as an investment destination. Nothing is inevitable.
Conversely, Make in India’s greatest threat is the ubiquitous government-run enterprise itself. And this is borne out in a number of technology-oriented industries; which is worrying as successive governments have first created favourable conditions for investments and then jeopardised them.
For instance, the telecom industry, often cited as an example of successful liberalization, finds itself at a crossroads. It is dependent on falling voice call revenues despite enough global precedent to show that data revenues are the future. The industry lacks the bandwidth to deliver affordable data.
And there is policy inertia to address this, partly due to the existence of BSNL. Policymakers have hesitated from undertaking comprehensive reforms around key challenges such as Right of Way regulations, hoping that BSNL’s networks will save the day. And BSNL has not delivered the goods: the quality of its Internet infrastructure and service ethic are reminiscent of the pre-liberalisation era.
Instead of harnessing a well-designed ‘ring network’ as was originally conceptualised in ‘BharatNet’, India has to settle for optic fibre cables thrown on electricity poles, barely resilient enough to withstand a windy day.
Another competitive technology industry, broadcasting, is another example. While most advanced countries have public broadcasters, few have created legacy issues as profound as Prasar Bharati has here.
The private broadcasting industry has been haemorrhaging money owing to high cost of ‘carriage’ and regulatory restrictions on deriving more revenues. Prasar Bharati has been on the wrong side of both these issues—not readily relinquishing spectrum to private operators which could help lower carriage costs, and forcing private operators to circumscribe their lifeline advertising revenues by applying Mandatory Sharing regulations on high value content such as sports broadcasts. Policymakers have conflated national interest with consumer choice.
The result is that broadcasting investments have been muted over the past decade despite progressive liberalization of FDI caps. The larger lesson to draw is that governments should not be both regulators and competitors. This is not the easiest pill to swallow, particularly when sentimentality accompanies the notion of government-run enterprise.
The introduction of RuPay cards by the National Payment Corporation of India, which is heavily guided by the Reserve Bank of India, indicates that the government is tempted to enter markets to disrupt perceived monopolies even in the digital economy.
Ironically, India is a party to the US-led dispute with China at the WTO on the Chinese variant of RuPay, called UnionPay. India’s approach therefore is neither consistent nor wise. It is a legacy of the past, wherein the government created markets for ‘old economy’ industries such as energy and infrastructure.
While public enterprises have succeeded, to an extent, in traditional industries, they are not optimized for the new economy which requires constant innovation and high standards of service delivery.
The government should remain a licensor, regulator and adjudicator and let consumer choice select winners in markets where neither capital nor technology are constraints.
Samir Saran is vice-president, Observer Research Foundation, New Delhi; and Vivan Sharan is founding partner at Koan Advisory Group, India.
This article has been produced in collaboration with the World Economic Forum and in line with the programme topics of the India Economic Summit on 6-7 October 2016 in New Delhi under the theme “Fostering an Inclusive India through Digital Transformation.” For more information about the meeting visit

Vivan Sharan speaks on BRICS on India's Public Radio, 04 Oct 2016

Vivan Sharan in discussion on IPR with a delegation of Indian Parliamentarians in Washington DC, 16 Sept 2016