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The opaque 1% -Lucas Chancel & Thomas Piketty
-The Indian Express

More transparency is needed for Indian society to have an informed debate about rising inequality

In a recent study titled ‘Indian income inequality dynamics (1922-2014): From British Raj to Billionaire Raj?’ published on WID.world, we presented new estimates of the distribution of national income in India, from 1922, when the income tax was introduced, up to 2014. In this study, we systematically combine the best available data at hand and document a sharp rise in the level of inequality. According to our benchmark scenario, the share of national income accruing to the top 1 per cent Indians went up from 6 per cent in the early Eighties to nearly 22 per cent today, a level comparable to the 20th-century inequality peak observed in the 1930s, during the British Raj.

This paper has generated a fair amount of discussion in the media and in the research community. While several researchers pointed out that the new inequality estimates are consistent with other recent research findings, a few columnists questioned our results. We should stress at the onset that our conclusions on the extreme levels of income inequality reported in India, and on its rise since the early 1980s, remain unchanged. The new WID.world estimates appear as the most reliable source of historical income inequality data to date. At the same time, it is clear that much work still needs to be done by researchers, official statistical institutions and policymakers to better measure income and consumption inequality in India.

Official data to measure economic inequality in India and many other countries relies essentially on household surveys. This source of information has well-known limitations when it comes to measuring economic inequality: Surveys do not provide an accurate representation of income levels among the richest. This is particularly problematic since the dynamics of inequality were largely driven by the explosion of top incomes over the past decades, as is shown in many countries covered in the WID.world database (the most extensive historical database on income and wealth inequality).

Contrary to household survey data, tax data makes it possible to observe such evolutions with a much higher degree of precision. The reason is simple: Tax data covers all taxpayers at the very top of the income distribution, whereas household surveys generally do not cover at all the richest individuals. In addition, when asked for their income levels by survey interviewers, interviewees have no incentives to report their true income level. It was actually shown that the richest tend to largely underreport their incomes in surveys. On the contrary, tax data leads to more precise answers — at least, there is some degree of sanction against fraud. Indeed, non-compliance and tax evasion is a reality in India and other countries. This means that tax data should be treated as a lower bound to inequality levels, rather than an upper bound.

In a country like India, tax data covers only a small portion of individuals (the richest 7 per cent adults in 2013-14). To track inequality among the entire population (that is not only the top 1 per cent but also the bottom 50 per cent or the middle 40 per cent), it is thus necessary to cautiously combine tax data and household surveys. This is what we do in our recent paper and more generally in the WID.world project, which regroups more than a hundred economists over all continents. We seek to ensure that inequality estimates are consistent with national accounts, meaning that income growth rates for different groups of the population are consistent with average income growth rates discussed in public debates and comparable across countries.

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