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Draft Paper

Inequality in India: A Marxist Perspective 1 Subhanil Chowdhury

Assistant Professor, Economics

Institute of Development Studies Kolkata (IDSK) subhanilc@gmail.com

“[...] in different stages of society, the proportions of the whole produce [...] which will be allocated to each of these classes [rentiers, capitalists and labour], under the name of rent, profits and wages, will be essentially different. [...] To determine the laws which regulate this distribution is the principal problem in Political Economy.”—David Ricardo2

I. Introduction

Inequality of income and wealth has received renewed interest from academia as well as media and concerned public, particularly since the global financial crisis of 2007-08. With the rise of popular movements like the “Occupy Wall Street”, in the USA and other advanced capitalist countries the stark contrast between the 1% top income earners and the remaining 99% has come under political as well as academic scrutiny. 3

In case of India, income inequality has not figured much in the discussion mainly because of data related issues. As is well known, the household surveys in India, conducted by the National Sample Survey Organisation collects data on household consumption rather than income. As a result, researchers have generally used the consumption data to arrive at some notion of inequality in India. However, with the publication of tax data by Indian authorities, it has become possible to 4 estimate income inequality in India. Banerjee and Piketty (2005) first estimated income shares of top 1% and top 10% of the population in India, upto the year 2000. Subsequently, Chancel and Piketty (2017) updated this data and came out with some striking numbers (see figure 1).

Prolonged discussions with Mr. Zico Dasgupta have greatly enriched my understanding about the macroeconomics of

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inequality. Errors, which remain are however mine.

Quoted from Palma (2011)

2

A significant literature has evolved in economics which specifically deals with this rising inequality, in the recent

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period. For example, see Stiglitz (2013) for an analysis of this inequality and its link with the precipitation of the global financial crisis. Also, the works of Piketty (2014) and Milanovic (2016) look at the evolution of income inequality and rise to dominance of the very rich at the global level.

See Pal and Ghosh (2007), Sen and Himanshu (2004), Mazumdar, Sarkar, and Mehta (2017) for a treatment of

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inequality on the basis of NSS data in India.

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Figure 1: Top 1% Income Share in India: 1922-2014

Source: Reproduced from Chancel and Piketty (2017)

At least three empirical observations are immediately evident from figure 1. Firstly, as per Chancel and Piketty (2017) estimate, the income share of the top 1% in India is currently higher than it was during the British rule; it is in fact highest ever, within the period considered by the authors. In 1922-23, the top 1% income share was 13%, which increased to 20.7% in 1939-40, declined to 6.2% in 1982-83 and then subsequently increased to 21.7% in 2013-14. Secondly, during the 5 period of planning and dirigisme in India, the inequality remained stable and declined to a historic low in 1982-83. Thirdly, the period of rapid increase in inequality, as captured by the top 1%

income share, coincides with the period of economic reforms and globalisation in India. Post 2000, this increase in inequality also coincides with the period when India witnessed highest rates of growth in its history. While Piketty and Chancel (2017) do not put forward any theory or hypothesis to account for the changes in the top 1% income share, the congruence of these changes with various growth phases of the Indian economy, is not coincidental. Rather, one can account for these changes within the changing political economy of India. One of the main purposes of this paper is to theoretically link up these changes in political economy with the changes in inequality.

While looking at the top 1% income share gives us an idea about the changing nature of income inequality in India, from a Marxist perspective, this is rather incomplete. Marx and Marxists in general emphasise on the categories of class. According to this Marxist conception, capitalism is a

It must be pointed out, as has been done by Chancel and Piketty (2017) themselves, the estimate of the top 1% income

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share has been arrived at under certain assumptions and methodologies, which can be questioned. However, the basic trend of increasing inequality, as captured by Piketty and Chancel (2017), seems to hold, as captured by other datasets, a point to which we will return in due course.

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It then dramatically decreased to 10.3% in 1949-50 and further decreased from the late 1960s to the early 1980s.

Figure 6 - Top 1% income share in India, 1922-2014

Source: Authors' computations using tax and survey data and national accounts.

As expected, the top 0.1% income share dynamics exhibit a similar pattern in our benchmark scenario (see Figure 7). Top 0.1% earners captured 8.6% of total income in 2013-2014. This only slightly below its pre-independence peak of 1939-40 (8.9%). The top 0.1% then saw a strong drop during World War II (down to 5.5% in 1944-45), followed by a continued reduction up to 1982-83 (when it reached 1.7%).

From 1983-84 onwards, the share of national income accruing to the top 0.1% rose almost continuously.

Figure 7 - Top 0.1% income share in India, 1922-2014

510152025% Total income

1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

Year

Per adult pretax national income. Systematic combination of tax, survey and national accounts data. Benchmark scenario displayed (A0B1C1D1).

Top 1 % income share in India : 1922 - 2014

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fundamentally unequal system with a propertied capitalist class owning the means of production, or capital, while the property-less workers can only sell their labour power as a commodity to survive.

In such a system, with the tendencies of centralisation and concentration of capital, it is obvious that wealth inequalities are intrinsic to the system. Income, can be thought of as a flow derived from the stock of wealth. If there exists massive wealth inequalities, income inequalities, within individuals will also exist. But from the perspective of classes, what is important is to look at the shares of income received by various classes and their trends. 6

Mainstream economics, particularly during the post-war years posited that the share of labour in national income is constant. But, contrary to this belief, empirical evidence shows that there has been a decline in the share of labour in national income over the last few decades, not only in India, but across the world. A huge literature exists on explaining this declining trend. The current paper seeks to engage with the literature and posit certain factors driving the falling wage share in the case of India.

Issues of distribution and economic growth are related to each other, across various schools of thought in economics. The positing of an inverted U-shaped relationship between growth and inequality has been theoretically and empirically explained relying on models akin to neo-classical economics which assume full-employment and that full-employment savings are automatically invested. As opposed to this, the heterodox tradition, deriving insights from the works of Marx- Keynes-Kalecki, also try to explain the relationship between distribution and growth. In the light of the Indian experience, the paper will try to shed some light on the nature of this relationship.

The rest of the paper is arranged as follows. Section II looks at the global empirical evidence on rising inequality and provides some theoretical insights through which this can be understood.

Section III specifically looks at the case of India, particularly in the light of Chancel and Piketty (2017) paper and argues for an interpretation of the data in Marxist light. It also discusses the issues related to the share of labour in national income, and provides some empirical evidence towards explaining the trend in India. Section IV provides a critical look at the literature on growth and inequality and argues for a more nuanced approach going beyond the arguments of mainstream economics. Section V concludes.

II. Global Income Inequality: Some Issues

The seriousness of the issue of global income inequality can be gauged from the following observation in an International Monetary Fund (IMF) Staff Discussion Note:

“Widening income inequality is the defining challenge of our time. In advanced economies, the gap between the rich and poor is at its highest level in decades. Inequality trends have been more mixed in emerging markets and developing countries (EMDCs), with some countries experiencing declining inequality, but pervasive inequities in access to education,

See Patnaik (2015)

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health care, and finance remain. Not surprisingly then, the extent of inequality, its drivers, and what to do about it have become some of the most hotly debated issues by policymakers and researchers alike.” 7

Figure 2 shows the extent of this inequality at the global level. It is seen from figure 2 that the upper decile classes of every region have increased their income at a much faster rate as compared with the lower deciles. What is also noteworthy from figure 2 is that growth in per capita income for all deciles and particularly the top decile is highest in the case of the Emerging Market Economies, during the period 1988 to 2008. It other words, during the last 2-3 decades, when globalisation has become the defining economic phenomenon, the rich classes have only become richer.

Figure 2: Growth of Real Per-capita Income by Income Percentile, 1988-2008

Source: IMF Fiscal Monitor, Tackling Inequality, October 2017

In addition to the higher increase in the real income of the upper decile, there has been a global decline in the share of labour in national income. As per IMF reports, the decline in the income share of labour has happened both in the advanced as well as the emerging market economies. The IMF reports that,

Causes and Consequences of Income Inequality: A Global Perspective, IMF Staff Discussion Note, June 2015, page: 4

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“Between 1991 and 2014, the labor share declined in 29 of the largest 50 economies; those 29 economies accounted for about two-thirds of world GDP in 2014…..The global labor share of income began a downward trend in the 1980s, declining 5 percentage points to its trough in 2006. It has since then trended up by about 1.3 percentage points.” 8

With the fall in the labour share of income, there also has been a significant increase in the surplus, since real wages have not kept pace with labour productivity. This gives rise to two sets of 9 problems. Firstly, with the productivity, real wage gap increasing, across the globe, there is a growing tendency for inequality to increase. Secondly, if this surplus is not realised a global tendency towards stagnation sets in. 10

Now, in the period of globalisation, this tendency towards stagnation gets further exaggerated due to the fact that government expenditure does not rise, adhering to the policies of fiscal conservatism, where the fiscal deficit is kept under check. Secondly, for the world economy as a whole, there is no way to get out of this realisation problem through higher exports. Hence, stagnationary tendency tends to dominate. In order to overcome these tendencies, one route that governments across the capitalist world have taken is to build up another asset price bubble, based on which consumption of the elites can increase, which can then generate more investment and growth. The policies of austerity, keeping interest low, going for further financialisation are all aimed at this. However, the 11 responses do vary and have political ramifications. For example, in the USA, the new President has ushered in protectionist policies, with the aim of raising growth. While in China, the government has undertaken massive infrastructure investment within the country to tide over the global recession. Both these policies cannot be pursued by every country at the global level. If every country becomes protectionist and puts curbs on imports by others, then economic activity across the globe will come down. Secondly, in the age of international finance capital, it is not possible for every country to go for state led infrastructure development oriented growth process, since this will adversely affect investors’ confidence and outflow of finance from the country. Thus, there is no easy way available for global capitalism to come out of this stagnationary tendency. But before we enter into the debate on rising inequality and growth, we first need to ascertain the reasons behind the rise of global inequality, particularly the fall in global labour share of income.

Explaining Falling Global Labour Share of Income

It has been argued in the literature that the fall in the global labour share of income is linked with technology and globalisation in two ways. Firstly, it has been argued that capital goods have become cheaper due to technological progress and therefore labour is substituted by capital even in sectors, which were thought to be traditionally labour intensive. Secondly, it is also suggested that

Chapter 3, World Economic Outlook, April 2017, IMF

8

Causes and Consequences of Income Inequality: A Global Perspective, IMF Staff Discussion Note, June 2015

9

See Patnaik (2015) for details.

10

On the relationship between rising inequality and the global financial crisis, see Rohit (2013), Patnaik (2008),

11

Patnaik (2015)

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with globalisation, the wage share in the trade-able sectors have fallen because of heightened competition in the international market. Both these explanations are however partial. There have 12 been major political economic changes in the world, which has brought about the fall in the share of labour. Let us look at these issues.

While we talk about global capitalism today, we usually forget that till three decades ago the writ of capital did not run over large swathes of the world. The socialist countries, comprising around one- third of humanity were outside the fold of global capitalism. Secondly, a continental country like India was also not fully under the sway of global capital because of its policies of planning. All this started changing since 1980s and with the collapse of the Soviet Union, almost the entire world became the arena of capitalist accumulation. This essentially entailed that a very significant number of workers, who were outside the regime of global capital accumulation came under its purview.

According to Freeman (2006), “if China, India, and the ex-Soviet bloc had remained outside of the global economy, there would be about 1.46 billion workers in the global economy in 2000. Because those countries joined the rest of the world, there were 2.93 billion workers in the global economy in 2000.” In other words, according to this estimate, the global labour supply doubled with the entry of India, China and ex-Soviet bloc into the global economy. The IMF estimates that the effective global labour force has increased four times in the past two decades. 13

The huge increase of global labour supply has put a downward pressure on global wages based on the simple logic of demand and supply. However, there is a dichotomy between the labour in the developing countries and those in the advanced capitalist countries. Historically, the wages of the developing countries hovers around a subsistence wage rate, because of the existence of massive labour reserves in these economies. Earlier, global capitalism maintained a segregation between the labour in advanced economies and those in the developing economies. One way of doing so was to restrict labour from entering into the advanced capitalist countries, the second was a reluctance on the part of global capital to invest in developing countries. With globalisation however this has changed, since the global movement of capital towards low wage countries makes this division irrelevant. Thus, a significant literature has evolved which looks into the issue of declining wage rate/wage shares in advanced capitalist countries and the processes of deindustrialisation in them, due to capital flight to the developing countries. But such a movement of capital towards low wage countries has not resulted in any increase in the wage share even in these countries. This is because, the rate of technological progress or labour productivity in these countries is much higher than their growth rate, which thereby perpetuates labour reserves and keeps the wage rate tethered to a subsistence level. 14

Chapter 3, World Economic Outlook, April 2017, IMF

12

Chapter 5, World Economic Outlook, April 2007, IMF

13

See Patnaik (2010) for.a detailed exposition of this argument.

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Additionally, however, two points needs to be mentioned, which are not adequately represented in the economics literature. Firstly, globalisation in the present period essentially entails globalisation of finance. With the demise of the Bretton Woods institution, finance has become truly global and fluid. The free flow of international finance across the borders have become the norm, and policies are devised to ensure that such free flow is not hampered. In the process however, the balance tilts in favour of capital. With free flow of international finance capital, capital can flow out from a country which is faced with stringent labour norms or strong trade union movements. Thus, with the threat of exit, bargaining power of labour is greatly curtailed under globalisation. Jaydev (2007) establishes this empirically when he shows that there is a robust negative correlation between the degree of capital account openness and labour share, controlling for other factors.

Secondly, the political climate at the global level has decidedly shifted against labour. Starting with the regimes of Reagan and Thatcher actively attacking trade unions to the current policies of austerity and attack on social sector spending, the advent of globalisation has essentially entailed an economic as well as political weakening of labour. This is manifested by a decline in trade union membership across the globe. The Economist reports, “From a peak of 20m members in 1979 they fell to 14.5m in 2013 in America and from 12m to 6.5m in Britain, according to the OECD, a club of mostly rich countries”. This decline in membership with near stagnant real wages (in most 15 countries), the rise of anti-working class regimes across the globe, all imply that at the global level, the balance of class forces have tilted towards capital, both economically as well as politically. This is an important development which has theoretical and empirical implications for the problem of inequality. India is not exception to this global trend, as we discuss the country in details in the subsequent sections.

III. Debating Income Inequality in India

In Figure 1, it is clear that the share of income in India going to the top 1% has reached historic levels, even higher than the level witnessed during British rule. Thus over time, inequality in India has increased steadily. It is also the case that this inequality is increasing at a much faster rate, as compared with many other economies in the world, as seen in Figure 3.

https://www.economist.com/blogs/economist-explains/2015/09/economist-explains-19

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Figure 3: Top 10% Income Share Across the World

Source: Reproduced from World Inequality Report 2018, World Inequality Lab

From figure 3, it is seen that there has been an increase in the income share going to the top 10% in all the selected countries. However, what is striking is that rate of increase of this share in the case of India is the highest and currently the income share of the top 10% is highest in India. This finding is not an isolated one. The wealth share of the top 1% in India is much higher compared with the world average (Figure 4).

Figure 4: Wealth Share of the top 1%

Source: Rukmini (2017)

There are exceptions to the general pattern. in the middle east, sub-saharan africa, and brazil, income inequality has remained relatively stable, at extremely high levels (Figure E2b). Having never gone through the postwar egalitarian regime, these regions set the world “inequality frontier.”

The diversity of trends observed across countries since 1980 shows that income inequality dynamics are shaped by a variety of national, institutional and political contexts.

This is illustrated by the different trajec- tories followed by the former communist or highly regulated countries, China, India, and russia (Figure E2a and b). The rise in inequality was particularly abrupt in russia, moderate in China, and relatively gradual in India, reflecting different types of deregula- tion and opening-up policies pursued over the past decades in these countries.

The divergence in inequality levels has been particularly extreme between Western europe

and the united states, which had similar levels of inequality in 1980 but today are in radically different situations. While the top 1% income share was close to 10% in both regions in 1980, it rose only slightly to 12% in 2016 in Western europe while it shot up to 20% in the united states. meanwhile, in the united states, the bottom 50% income share decreased from more than 20% in 1980 to 13% in 2016 (Figure E3).

The income-inequality trajectory observed in the United States is largely due to massive educational inequalities, combined with a tax system that grew less progressive despite a surge in top labor compensation since the 1980s, and in top capital incomes in the 2000s. continental europe meanwhile saw a lesser decline in its tax progressivity, while wage inequality was also moderated by educational and wage-setting policies that were relatively more favorable to low- and middle-income groups. In both regions, income inequality between men and women has declined but remains particularly strong at the top of the distribution.

In 2016, 47% of national income was received by the top 10% in US-Canada, compared to 34% in 1980.

Source: WID.world (2017). See wir2018.wid.world for data series and notes.

Russia China India US-Canada

Europe

Share of national income (%)

20%

30%

40%

50%

60%

2015 2010

2005 2000

1995 1990

1985 1980

Figure E2a

Top 10% income shares across the world, 1980–2016: Rising inequality almost everywhere, but at different speeds

ExEcuTIvE SummaRy

World inequaliTy rePorT 2018 6

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It is not only the case that income share of the top income earners have drastically increased in India. It is also the case that there has been significant increase in wealth inequality in the country, as has been shown by Anand and Thampi (2016) based on All India Debt and Investment Survey data collected by the NSSO. Even in terms of consumption expenditure, Mazumdar, Sarkar and Mehta (2017) show that there has been a significant increase in the real consumption expenditure of the top quintile classes as compared with the lower ones, particularly in the post-reform period in India. In other words, while there can be debates about the exact methodology on the basis of which Chancel and Piketty (2017) have arrived at their numbers, the basic trend of rising inequality in India is indisputable, since it is reflected in other data and methodologies.

However, more than the data what lies at the centre of the debate is how to interpret the Chancel and Piketty (2017) results. Ghatak (2017) believes that the entire evolution of the inequality, as represented by Chancel and Piketty (2017) can be explained by the Kuznets curve. He writes,

“In the early stages of development, those who are richer are better poised to take advantage of the new opportunities while an excess of supply of unskilled labour keeps average wages down.”

Therefore, in the initial years, the per-capita income in India was low, hence inequality was low. But with liberalisation as ‘new opportunities’ started coming in with an excess supply of unskilled labour, inequality has risen. But with capital accumulation taking place at a rapid pace, demand for labour will increase, which in turn will increase the real wage rate and result in decline in the inequality. Thus, Ghatak (2017) argues “growth is not the enemy”, rather focus should be on providing education and health to the masses to help them gain skill and catch up with the structural transformation in the economy.

Kuznets curve was first proposed by Simon Kuznets in a seminal paper (Kuznets, 1955). The essential argument basically posits an inverted U-shaped curve with respect to income inequality and growth. Thus it implies that in the initial periods of growth, income inequality will increase and then as growth progresses it will decline. A huge literature has been generated by this one single paper with sophisticated methodologies applied to test whether such a hypothesis holds empirically or not. We will come back to the theoretical issues related to the Kuznets curve, but first let us try 16 to make sense of the relationship between income inequality and growth in India.

See Aghion, Caroli and Penalosa (1999) for a systematic treatment of the issue covering a large literature grounded in

16

mainstream economics. See Piketty (2006) for a critique of the concept of Kuznets curve.

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Figure 5:

Source: World Income Inequality Lab

Figure 5 shows the relationship between real per-capita GDP and income share of the top 1%. The figure suggests a U-shaped curve, rather than an inverted U one. However, Ghatak (2017) argues that instead of negating Kuznets curve Chancel and Piketty (2017) findings actually supports it, since at lower levels of growth, inequality was low and then it increased with increase inequality.

Which is a lower or higher level of growth depends on the starting and end time point. It must be remembered that Chancel and Piketty (2017) provide data since the British period, when the growth rate of income was close to zero. With independence, the growth rate increased substantially. In 17 fact, estimates suggest that after independence in 1947, the per capita growth rate in India increased 5 times. But the Chancel and Piketty (2017) study, as seen in figure 1, suggests that in spite of 18 such a huge increase in growth, inequality in India did not witness any secular increase, immediately after independence. Those who defend the Kuznets curve (like Ghatak (2017)) would argue that per-capita income was too low for any increase in inequality. However, what is important from the point of view of Kuznets is to look at the growth rates of per-capita income and inequality,

Habib (2017) writes, “per capita income of India between 1900 and 1947 rose only by 0.2% per annum, a minuscule

17

amount.” (page: 14) Habib (2017)

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not the level. Secondly, India was not an egalitarian paradise even in 1950s. It was marked by huge inequalities in land and wealth. Still, an increase in growth did not materialise into an excessive increase in inequality, maybe because of the fact that planning ensured that capital is kept under some kind of control. Moreover, public investment was increased, the economy was oriented towards a growth trajectory which was predominantly state led. In such an economy, rising inequality would have jeopardised the legitimacy of a state-led growth path. Hence, it was kept under control. 19

This is not to argue that the dirigisme regime in India was an ideal egalitarian system. Neither is this to argue for going back towards license raj like system. However, the point is that a simple relationship that Ghatak (2017) expects between income inequality and growth does not hold.

Rather, a complex set of factors, which to some extent are exogenous to the economic regime , 20 might determine the exact relationship. For example, planning in India was not disbanded and liberalisation ushered in due to the fact that inequality was low, or that growth rate did not increase. Planning was disbanded as a result of the internationalisation of finance capital and the 21 incapacity of the Indian state to reign in the capitalists and maintain a fiscal balance aimed at higher public investment. Additionally, Indian agriculture posed a problem for the planners right from the 22 early days of planning. Unable to undertake large scale land reforms, the planning process faced a wage good constraint, which was purportedly removed through the policies of green revolution, which in turn gave rise to regional imbalance and an increase in inequality in the countryside. 23 Thus, the relationship between growth and inequality is not merely an economic relationship. But to a large extent it is determined by political economy and class processes.

With the opening up of the economy and a more business oriented policy making, inequality in India has increased quite dramatically. An analysis of the organised manufacturing sector in India sheds further light on the issue of increasing inequality in the country. Basu and Das (2018) show that there has been an increase in the rate of profit, which has been mostly driven by a rise in the profit share, or a redistribution of income from the workers to the capitalists. During the period of study (1982-83 to 2012-13), the capacity utilisation (or demand factors) did not change much. There was increase in labour productivity but not real wage. In other words, the increase in productivity was mainly appropriated by capital. According to various versions of neoclassical theory, real wages equals productivity. But clearly, this has not happened in India. The authors conclude that

“regressive income redistribution and not technological progress has kept profitability rising over

See Chakravarty (1987) for a detailed discussion of the Indian planning experience.

19

We will return to this point later.

20

Chakravarty (1987) shows that the growth rate of GDP was much higher during 1980-81 to 1983-84, as compared to

21

1950-51 to 1959-60.

See Patnaik (1998)

22

See Chakravarty (1987) for details.

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the long run in India’s manufacturing sector.” Now, most of the arguments explaining rising 24 inequality has been based on the assumption of technological progress, which to begin with favours those who have higher eduction and capital. But Basu and Das (2018) show that technology had very little role to play in increasing the profit rate in India. In fact, the output-capital ration actually declined. Rather there has been an increase in labour productivity (propelled by a rise in capital- labour ratio) but real wages has declined, or at best remained stagnant.

Now, the share of labour in income can be expressed as w/x, where w=real wage rate and x = labour productivity. The trend of the share of labour in organised manufacturing sector is shown in figure 6.

Figure 6: Share of labour in Net Value Added in Organised Manufacturing

Source: Annual Survey of Industries, various issues

This fall in the wage share is obviously the mirror opposite of a very significant increase in the profit share in India, which the Basu and Das (2018) paper allude to. The question is what explains the fall in the wage share in India? While a detailed answer to this question is a subject matter of a separate paper in itself, certain important points can be made with the help of some preliminary empirical observations.

Basu and Das (2018)

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0 0.065 0.13 0.195 0.26

1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15

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Firstly, there has been a huge increase in the proportion of contractual workers in the organised sector in India (see figure 7). The wage rate of the contractual workers are less than those of the permanent workers. Therefore, with the increase in proportion of contractual workers, the average 25 real wage in the organised industry have come down. The reasons for the increase in the contractual workers however is a question that needs to be answered. With the opening up of the economy, Indian manufacturers are facing competition both in the international as well as domestic market.

Cost cutting therefore is imperative in the competition to survive. Particularly, Indian exports have increased significantly during this period, which is again regarded by many as the stimulus through which growth rate in the economy has increased.

Figure 7: Share of Contractual Workers in Organised Manufacturing Sector

Source: Same as figure 6

Now, price competitiveness in the international market can be written according to the equation, , 26

where ! is the index of international price competitiveness,

v is the the rate of exchange of domestic currency per unit of foreign currency,

is the price level of finished goods in foreign currency of the trade rivals which is assumed constant,

p is the domestic as well as export price level of finished goods.

θ = (vpf)/p

θ pf

“Trade Unions and Collective Bargaining in Urban Labour Markets: The Case of West Bengal”, research report

25

submitted to ICSSR

This equation is taken from Bhaduri and Marglin (1990)

26

0.0 9.0 18.0 27.0 36.0

1996 - 1997 1997 - 1998 1998 - 1999 1999 - 2000 2000 - 2001 2001 - 2002 2002 - 2003 2003 - 2004 2004 - 2005 2005 - 2006 2006 - 2007 2007 - 2008 2008 - 2009 2009 - 2010 2010 - 2011 2011 - 2012 2012 - 2013

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Therefore, ! ————-(i)

Thus, according to equation (i), price competitiveness will increase if devaluation in proportional terms is greater than the domestic level of price increase. Now, there are limits upto which devaluation can be orchestrated by an economy open to international finance capital. Moreover, the import content of Indian exports has increased significantly. Therefore, assuming import of raw materials, devaluation will increase the import cost and push prices up.

Let us assume that only labour and raw materials are used as variable factors of production.

According to the Kaleckian pricing theory, price can be written as,

!

where, m is the degree of monopoly, assumed to be constant in the short run

l is the reciprocal of labour productivity, or ! , L is the total employment and Y is output.

w is the money wage rate.

a is the production coefficient of raw materials, ! is the price of raw materials in foreign currency.

In order to maintain lower price level, either the profit margin (m) has to be reduced or the price of raw materials, or the wage rate. Now, the capitalists have no incentive to reduce profit margin. If most of the raw material is imported, then the domestic price becomes a rising function of the exchange rate and devaluation becomes ineffective in attaining price competitiveness in the international market. Thus, in order to maintain price competitiveness in the international market,

! should be kept low. This can be done with policies of flexibility and contactualisation of labour.

The preponderance of labour reserves in countries like India pushes the wage rate down. Both, in turn reduces the wage share in organised manufacturing.

In order to check whether exporting in the world market exerts a downward pressure on the wage share, we conduct a simple empirical exercise. We use the Prowess database provided by the 27 Centre for Monitoring the Indian Economy (CMIE). For each firm in the manufacturing sector, we calculate the wage share and the share of exports in total sales. Then, for every year for which we have data we do a simple OLS regression and report the value of the coefficients in Figure 8.

/θ = (dv/v)−(dp/p)

p = (wl+a.Paf.v)(1 +m)

l =L/Y paf

wl

This exercise has been done by my student Mr. Siddhartha Mitra, who is doing his MPhil at IDSK

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Figure 8: Relation Between Export/Sales and Wages/Sales Ratio

Source: Prowess, CMIE

Note: We report only coefficients for those years where the coefficients are statistically significant What is important is that during the period 2000-2004, when India started its journey towards higher exports, the wage share actually declined. Subsequently, the coefficients became insignificant. Again, in 2008-09, the sign changed to positive. But this was the period when export share itself declined. However, when exports were increasing there was a clear negative relationship with wage share. We can corroborate this with figure 9, which shows that the proportion of contract workers in industries which are export oriented are much higher than the average for the manufacturing sector. Thus, with the opening up of the economy and higher exports, there has been a downward pressure on real wages and the share of labour in net value added of organised manufacturing industries.

Coefficient Estimates

-0.8 -0.6 -0.4 -0.2 0 0.2

Year

2000 2001 2002 2003 2004 2008 2009

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Figure 9: Share of Contract Workers in Organised Industry and Export Driven Industry 28

!

Source: Annual Survey of Industries, various issues

NB: Export industries are those industries at the 2 digit level whose export growth rate is greater than the export growth of manufacturing sector as a whole

There is an additional point with regard to the issue of falling labour share of income which needs to be mentioned here. Kalecki (1971) in a paper argued that the mark up over unit prime cost in an oligopolistic market depends on trade union strength or class struggle. If the trade unions are powerful and successfully bargain for a higher wage, then oligopolistic firms in order to maintain price competition in the market reduces the mark-up rather than increasing prices due to the rise in wage. The mark-up is also known as the degree of monopoly. Firms having higher degree of monopoly might not reduce the mark-up and pass on the increased wage claims on to the consumers, using their monopoly power. However, if the trade union movement is weak, as is the case currently in India, firms can increase the mark up and put a downward pressure on wages.

Thus, we can deduce a link between the degree of monopoly and the wage share based on Kalecki’s argument. 29

If, ! ,

Then the share of wages can be written as, ! . Thus if mark up or the concentration increases in the industry, then the share of wages must fall. We try to test this hypothesis on the basis of a very preliminary empirical exercise.

For the period 2000-2015, we run a bivariate time series regression between the wage share and concentration ratios of various industries within the manufacturing sector. The result is shown in Table 1.

20.0 27.5 35.0 42.5 50.0

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

Contract in Export Contract in Total Export in Total Contract

p =wl(1 +m)

ws= 1 (1 +m)

I am grateful to Mr. Zico Dasgupta, JNU, for providing me with this data, based on his PhD thesis.

28

For an alternative interpretation of the same relationship see Autor et al. (2017)

29

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Table 1: Wage Share and Concentration Ratio (CR4) in Indian Manufacturing Sector 30

Source: Prowess, CMIE

It is observed that indeed there is a negative relationship between concentration and wage share in Indian manufacturing industries (except Metals). The concentration ratios have increased over the years, suggesting that the Indian manufacturing sector is being increasingly dominated by monopolistic large firms. This increased concentration puts a further downward pressure on the wage share in India.

Till now we have shown the various facets of rising inequality in India. However, an important question that needs to be dealt with is the relationship between inequality and capital accumulation.

We turn towards that discussion in the next section.

IV. Theories of Distribution and Accumulation: A Critical Reading Based on Indian Experience

The discussion so far has mainly looked into the economic processes and its relationship with inequality or income distribution. However, the economy operates within the larger structures of power and politics, which needs to be taken into account to have a clear idea about the dynamics between growth and inequality. In this regard, the economics literature provide some insights which are discussed below before we turn towards the particular case of India.

We have already discussed the issue of the Kuznets curve which argues that in the initial phases of growth or accumulation, the inequality remains low but it increases as growth progresses and then declines, at higher levels of growth. Theoretically, most of the literature dealing with this approach relies on neoclassical economics, where an autonomous investment function does not exist and full employment is assumed. In such models, the attempt is to endogenise the inequality parameter within the growth process itself.

This exercise has been done by my student Mr. Siddhartha Mitra, who is doing his MPhil at IDSK

30

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There however exists a vast literature which treats the issue of distribution as being determined from outside the purely economic system, mainly through class struggle. Sraffa (1960) is one of the pioneers of this understanding. In Sraffa’s system, distribution is the “key factor which determines relative prices, subject to given technical relations and the uniformity of the wage rate and the profit rate”. However, this “key factor” of distribution is “not endogenously generated through 31 production relations”. Rather, it is taken as an exogenously given constant. This distribution 32 33 parameters (the wage or the profit rate) can be assumed to be determined by bargaining between the two classes or class struggle, in Marxist terms.

Inspired from the works of Keynes , Kalecki and Marx a huge literature has developed on the issue 34 of growth and distribution which can be termed as the heterodox tradition in economics. In this literature, what is generally looked at is the impact of a change in the distribution parameter, profit share or wage share on the growth rate of the economy. For example, in one of the most cited papers in this literature, Bhaduri and Marglin (1990) look at exogenous variation in the real wage affect investment and growth. In this model, which has generated a huge literature, the response of investment to a change in the real wage rate or profit ratio, determines whether the growth is wage led or profit led. If the investment increases as a result of increase in profit ratio, then it is a profit- led growth, otherwise it is wage-led. In these models, the distribution parameter and its 35 relationship with investment determines the characterisation of the regime. 36

There is however another stream of literature which is inspired from the celebrated Goodwin (1967) model. In this model, which is derived from the Marxian idea of capital accumulation, with increase in accumulation, employment increases, which results in increase in real wage rate. This increase in real wage rate is because of an increased demand for labour as well as increased capacity of trade unions to ensure wage rise, based on tightness in the labour market. Now, with increase in real wage rate, the profit rate declines, which negatively affects accumulation. So, the economy moves around in growth cycles, where the interactions between the rate of accumulation and rate of employment results in the growth path. In this model therefore, distribution (in terms of real wage or profit rate) is endogenous to the growth process and results in growth cycles.

Bharadwaj (1963)

31

ibid

32

In the Sraffa system, either the real wage rate or the profit rate is given from outside to solve the system of price

33

equations.

It must be pointed out that distribution parameter is not exogenously determined in Keynes. Rather, the real wage

34

rate is endogenous in Keynes. But still we have mentioned Keynes because of his contribution of an investment function autonomous to savings.

Also see Dutt (2017) for an extensive survey of the heterodox literature on distribution and growth.

35

The exogeneity of the distribution parameters have been questioned by Skott (2016).

36

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In recent versions of the original Goodwin model, a distribution schedule and a demand schedule 37 is drawn in the capacity utilisation and wage share space. The intersection of the two lines determines the equilibrium distribution parameter and utilisation ratio. Kiefer and Rada (2014) through an econometric exercise ascertain that this equilibrium has moved South-West in the post- crisis period for OECD countries. In other words, the economy in the post-crisis situation has settled at a lower wage share and lower capacity utilisation path. The authors interpret this being a result of ‘race to the bottom’ where the countries are engaged in a competitive cutting of unit labour cost. Such a result however is not merely endogenous to the economic processes. Workers, or working class can have a subjective intervention in resisting such cuts in wage costs through unionisation. But with the policies of globalisation, trade unions have come under attack which has blunted the strength of working class to resist such a downward shift in wages.

What the forgoing discussion points out is that the distribution parameters under capitalism is not merely determined by the accumulation process within the system. Rather, authors have pointed out the exogeneity of the distribution parameters, which may be determined by the operation of class struggle, at the political realm. As Bhaduri (1969) argues,

“For an academic economist, Marx left open the question of how the rate of exploitation is determined. He viewed it himself in terms of the balance of class-forces and, significantly enough, did not try to provide a " theory " of distribution…..The theory of distribution therefore continues to be a matter of political economy….”

Let us relook at the Indian experience of inequality in the light of political economy, with an emphasis on distribution parameters getting determined in terms of the balance of class forces.

Re-looking at Indian Inequality

In the paper by Chancel and Piketty (2017), there is another striking observation that the authors make. According to them,

“The wealth of the richest Indians reported in Forbes' India Rich List, amounted to less than 2% of National income in the 1990s, but increased substantially throughout the 2000s, reaching 10% in 2015 and with a peak of 27% before the 2008-9 financial crisis.”

This huge increase in the wealth of the dollar billionaires in India is concomitant with the increase in the share of the top 1% in income. Now, an argument can be made that this huge increase in income and wealth of the rich is not something to worry about. Rather, it can be argued that they have talent to innovate and the income/wealth that they have accumulated is a return to that innovativeness. This is the basic argument of capitalism for high inequality.

For a modern and empirically grounded illustration of models based on Goodwin’s initial idea, see Kiefer and Rada

37

(2015) and Nikiforos and Foley (2012)

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In the case of India, however, this argument is false. In a paper looking at the wealth of dollar billionaires in India, Gandhi and Walton (2012) report that 15% of the total wealth accumulated by the billionaires are self-made, rest of the wealth can be categorised as inherited and inherited and growing. Now, even within capitalist logic, if we grant that the amassing of this huge wealth is a result of innovativeness, their progenies should not get the wealth in inheritance (since they too must earn their wealth), but prove their talent. This however is not happening in India. In the absence of a wealth tax, wealth flows to the next generation automatically and perpetuates wealth and income inequality. The non-existence of the wealth tax is not due to capitalist logic. Rather, it exists because the power structure in the country is such that the rich families can protect their wealth not only for themselves but also for their progenies.

The second important observation of the Gandhi and Walton (2012) paper is that around 60% of the wealth of the billionaires are coming from the ‘rent thick’ sectors. These are not the sectors which are undertaking innovations in the economy. But these sectors are essentially resource based sectors like real estate, petrochemicals, spectrums etc, which are directly dependent on the government for getting licenses to run their companies. In each of these sectors, there are cases of corruption where government land, or spectrum or oil fields have been given to private corporate companies for a song. This granting of public wealth or natural resources to the capitalists, constitute a case of primitive accumulation of capital, where the capitalists gain the resource or wealth gratis from the state. This has hugely increased the wealth of the capitalists in India. In other words, the balance 38 was tilted in favour of the capitalists not because of any inherent logic of the growth process. Rather it was tilted through government policy, exogenous to the growth process. This point is most evident if we look at the issue of tax concessions provided to the corporate sector in India. It has been estimated that the total amount of tax revenue forgone as a result of giving tax concessions to the corporate sector, between 2005-06 to 2014-15, was more than Rs 6 lakh crore. 39

The aforementioned discussion needs to be read jointly with the issue of falling labour income share in India. In spite of the fact that contractualisation has increased at a rapid pace in the country, the constant clamour for labour market flexibility shows that trade union activities, rights of workers are under serious threat. The proportion of workers who report to be members of trade unions in 40 India is declining as per NSSO data. The falling number of strikes in India show that the capacity of the working class to put up a fight has declined. The contractualisation of workers, as well as 41 overt and covert impediments towards trade union activities are tilting the balance in favour of capital.

A simple illustration can explain the matter. If the 2G spectrum was auctioned according to market principles, Rs

38

1.76 lakh crore of money would have been gained by the government exchequer. This money, although termed notional loss, went into the pocket of the capitalists due to a change in rules.

Sainath (2015)

39

See Papola and Pais (2007),

40

http://www.livemint.com/Politics/tjP4DiG7Uro95iNCiebrAO/Industrial-strikes-and-lockouts-see-steep-decline-in-

41

India.html

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Till now, we have mainly looked at capital-labour relationship and discussed the issue of income shares of classes based on an isolated capitalist economy. But Patnaik (2015) points out, the capitalist sector does not operate in isolation but is surrounded by pre-capitalist settings. With the tendencies of primitive accumulation of capital infringing on the pre-capitalist sector, petty producers in the latter gets dispossessed. But not all can be accommodated into the capitalist sector as wage earners. Thus the average income of the petty producers decline with primitive accumulation. This gives rise to inequality in the system, taking the capitalist and the pre-capitalist sectors together. The primitive accumulation of capital enlarges the labour reserves, which in turn has a downward pressure on wages in the capitalist sector. Thus, with primitive accumulation of capital the tendency of inequality in the system goes up. Bhaduri (2018) shows how, in India, a more favourable climate for private investment was created through various policies including massive transfer of land and related natural resources to capitalists at highly subsidised prices.

Those who were displaced from such land grab could not be accommodated within the corporate sector because of its high labour productivity. This in turn has fuelled the informal sector, which puts downward pressure on wages, even in the formal sector. Such change in the policy environment and state’s incentives towards capitalists are difficult to sustain in an electoral democracy. But policy convergence within the parties is a major bulwark of sustaining such a policy regime. This in turn is a result of correlation of class forces favouring the rich within a matrix of power in India dominated by the nexus of corporates, politicians and the bureaucracy.

Within this milieu of domination by capital across the economic and political spectrum, the promise of capital to the poor working people is the promise of equality of opportunity. The promise is that anybody with talent can move out of poverty or underdevelopment in India, irrespective of hierarchies. This is however not happening in India. Iversen, Krishna and Sen (2017) show that occupational mobility in India, particularly for lower end occupations is very low. They find that the odds ratio of a labourer’s son remaining a labourer rather than becoming a professional (as compared to a professional’s son becoming a labourer rather than remaining a professional) was 55.

What is even more worrying is that there exists much higher risks of downward mobility among different sections of the population. For example, while only 4.3% of sons of forward caste professionals became manual labourers, compared to 9.4% of OBC professionals’ sons, for SC and ST the numbers are 21.9% and 24.2% respectively. In short, caste still plays a significant role in India in deterring occupational mobility and is therefore an important marker of inequality.

The discussion in this section points towards an important aspect of Indian political economy. The capitalism that we have in India has resulted in inequality in the system. This inequality however has two dimensions to it. On the surface, researchers have tried to explain this inequality based on the workings of the economy itself. In other words, they have tried to endogenise the distribution parameters. It is indeed the case that the workings of the market economy generates certain inequalising trends endogenously. However, the overall outlook of the state determines to a great extent the evolving dynamics of inequality, as is evident from the above discussion. Since, state policy to a large extent determines the locus within which the distribution parameters vary within an

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abstract market economy, inequality trends become a matter of politics. Class struggle and politics therefore can change the distribution parameter in favour of the workers.

V. Conclusion

In this paper we have looked at the problem of inequality in India from various aspects. Essentially however we have tried to locate the problem within a framework of political economy, where the distribution parameter is determined exogenous to the economy, in the realm of class struggle.

However, the mode of such determination also modifies the working of the economy. For example, the fact that India has gone for financial liberalisation and opened itself up to free flow of international finance capital, while is a result of politics, the fact of it doing so has impacts on the economy.

Marx’s Capital was written to show that capitalism is an exploitative system. But while capital has its own inherent logic, outside the domain of human will or volition, its limits are set by societal forces of class struggle. In other words, capitalism faces humanity not as an immutable economic system, but as a system which can be changed or transcended by subjective interventions of the working class. In India today, living under massive unemployment, poverty, inequality, which have only become worse, Marx’s relevance after 150 years is the lesson that this system can be changed for the better, transcended, with collective human intervention. The job of politics is not to be mystified by economics but strive for an articulation which can galvanise forces for such a collective intervention.

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