The Palgrave Encyclopedia of Imperialism and Anti-Imperialism

Living Edition
| Editors: Immanuel Ness, Zak Cope

India, Liberal Economic Development, Inequality and Imperialism

  • Subhanil ChowdhuryEmail author
Living reference work entry
DOI: https://doi.org/10.1007/978-3-319-91206-6_128-1

Introduction

Lenin had written his famous book Imperialism: The Highest Stage of Capitalism at a time when the World War I was looming large, the entire third world was divided into areas of domination by the nation-state backed finance capital of the colonizers. The colonialism imposed on countries like India resulted in a situation where the potentialities of capitalist development in these countries were severely retarded, primarily because the economic surplus of these countries was siphoned off to the colonizing power. Since this happened across the third world, a division of the word into two clear segments, with the advanced capitalist countries oppressing the third world colonized ones, was clearly visible. Theories of imperialism starting from Rosa Luxemburg to Lenin have emphasized on imperialism as being a structure whereby the advanced capitalist countries oppress the poorer third world countries.

It can be argued that this entire process of subjugation of the third world countries by the advanced capitalist countries seems to be irrelevant in the present conjuncture due to two sets of reasons (for a fuller discussion on these issues, see Chowdhury (2018)). First, the erstwhile colonies are now independent nations with the process of decolonization. Today’s developing countries or the erstwhile colonies are politically independent. Lenin was talking about a time when the capitalist countries in aid of their respective nation-state based monopoly capital were marking out territories for exploitation. This entire architecture, at least at the political level, does not exist anymore. This marks an important departure from the world conjuncture in Lenin’s time. Second, it has been generally argued within the literature that imperialism retards capitalist development in the colonies or the developing countries. However, contrary to this analysis, the world is witnessing significant capitalist development in the developing countries like China, India, etc. China currently is the second largest economy in the world having the highest share in world exports. India has witnessed significant increase in its growth rates since the early 2000s. According to the billionaire list brought out by Forbes, China has 373 dollar billionaires in 2018 (increase of 54 since 2017), with a net worth of $1123 billion. In 2018, India had 115 dollar billionaires, increase of 18 since 2017 (Forbes, available at https://www.forbes.com/billionaires/#156677ce251c). Just two decades back, hardly any Indian businessman found an entry into this list of the richest people on earth. But now India ranks third in the number of dollar billionaires in the world.

But what has been the reason behind this increase in the capitalist accumulation in India? What are the processes that are driving the accumulation? Has this increase in growth and capital accumulation resulted in a betterment of lives for the people at large? What has happened to the issue of inequality in the country? These issues will be discussed in the remaining part of the paper primarily focusing on the post-reform period in India and linking up the developments in India with global capitalism and imperialism.

Genesis of the Liberal Economic Development Path in India

India was a British colony for two centuries. The loot and plunder of the economy orchestrated by the British resulted in a situation where massive deindustrialization, pauperization of the peasantry, mass poverty, hunger, and unemployment became the defining features of the country. The Indian freedom struggle therefore not only argued to overthrow British rule but also articulated demands for the amelioration of the conditions of the people. It was felt by the policy makers that colonialism was imposed and implemented in India under the slogan of “free trade” with the British virtually making India an open field for global capital to exploit. Moreover, as a result of colonialism, the Indian capitalist class, on the eve of independence was lacking both in terms of resources as well as establishing its political hegemony over the state structure in the country. Two consequences immediately followed from this – First, the state envisaged a planned development trajectory for solving the problems of underdevelopment; second, the bourgeoisie had to strike a compromise with the landlords and big farmers in the rural areas to tighten its hold over the country, which was predominantly rural in nature.

The planning process therefore suffered from a number of contradictions. On the one hand it had to maintain a high rate of investment in the heavy industries sector. Simultaneously, it had to ensure that there was adequate surplus food output available at a reasonable price from the agriculture sector to feed the workers in the industrial sector. Two problems immediately arose. First was the problem of employment. Since the focus of the initial planning strategy was to invest in heavy industries, it could not generate adequate employment for the people because of it being more capital-intensive. It was envisaged that the small scale sector, which was labor-intensive, would take care of the employment problem.

Second was the problem of ensuring an adequate and growing surplus of food from the agriculture sector to feed the non-agriculture workers. The production condition in Indian agriculture did not permit such increase in production and surplus due to a multiplicity of reasons. First, the prevalence of landlordism in the countryside sucked out resources through the imposition of absolute ground rent, which left the farmers with very little to improve investment and production. Second, the prevalence of money-lenders and usurious rates of interest further eroded the income of the farmers. Third, as a result of the compromise that the Indian bourgeoisie stuck with the landlords and peasants, the terms of trade tilted in favor of agriculture, relative to manufacturing products (Mitra 2004). This was achieved through the policy of increasing the Minimum Support Price for the farmers. Since the production of crops was dominated by large farmers, the increase in the minimum support price greatly benefited them. But the increased income that they received was not spent on mass consumption goods belonging to the small-scale industry. Rather, they spent it on luxury and imported items which had very little impact on employment in the country.

The tilting of the terms of trade against manufacturing and in favor of industries had other serious consequences. Manufacturing uses agricultural products as raw materials. If the prices of agricultural products increase relatively more than manufacturing products then the real price of raw materials will increase which will escalate the cost of production in the manufacturing sector. This increase in the cost of production in the manufacturing sector can be passed on to the final consumers by increasing the price of the manufacturing products. But because of an increase in terms of trade in favor of agriculture, the price of food witnessed a steep increase. Now, at a given money wage, this implies that less money would be available for the workers to buy industrial commodities, assuming that the workers maintain a stable food intake. Therefore, the demand for industrial products from the general masses will decline. On the other hand, faced with an all-round inflationary situation, if the working class organizes to demand higher wages, industrial disputes, strikes, and intensification of conflict between labor and capital will rise. This is precisely what happened in India during the 1960s–1970s, where huge inflation of essential items were accompanied by industrial stagnation, food shortage, and rising working class action against these conditions.

It became a very volatile situation. Contrary to the promises of the development planning policy, growth rate stagnated, unemployment increased, and the economy witnessed very high rates of inflation. Politically, the rising working class movement, the unrest within the middle class and sections of the peasantry, compelled the state to take some drastic measure. As a result, Emergency was imposed on the country in 1975. Democratic rights were withdrawn, the opposition was put behind bars and the freedom of press was severely curtailed.

The Emergency marked a break from the earlier policy of development planning. After recovering from the electoral losses immediately after imposing Emergency, Indira Gandhi came back to power in 1980. After her come back, the government’s policy moved away from statist policy of planning towards a more pro-business policy approach (Kohli 2007). There were essentially three components of this new model of development – first, the state prioritized economic growth as its goal, second, to achieve this goal, big business was supported, and third, this shift towards big business also necessitated a taming of labor (Kohli 2007). With the coming to power of the Rajiv Gandhi government, in 1984, the policy towards supporting big business was followed more intensely. Most of the controls imposed on private corporate business, like licenses, were abolished; Indian economy was opened up towards the world economy.

The planners, contrary to the above-mentioned analysis, construed the Indian state to be a supra-class entity. In order to maintain the policy of development, adequate public investment had to be undertaken. The only way to mobilize resources for such high public expenditure was to impose taxes on the rich. The planners assumed that the state would be able to extract the resources from the capitalists. But for this to happen, the capitalist class had to be disciplined and compelled to make the necessary tax payments. However, this did not happen since the capitalists found various means to evade taxation (Patnaik and Chandrasekhar 2010). Even during the 1980s, when the public expenditure-GDP ratio increased, resources were primarily mobilized through indirect taxes, with capitalists and rich being given tax concessions (Kohli 2007). Thus, the state was continually moving towards a fiscal crisis with its commitment towards public expenditure to maintain the development plan being not met by adequate taxes. Second, the demand for mass consumption goods did not improve, because the size of the home market was limited due to absence of land reforms in the rural areas. Third, in spite of import restrictions, with the capitalists trying to emulate the lifestyles of the rich in the advanced capitalist countries, there was always a latent demand for commodities produced in the developed countries (Patnaik and Chandrasekhar 2010). This led to import leakages (through smuggling) hurting India’s balance of payments position. When the rich and the capitalists gained significant economic and political power, they demanded liberalization of trade to avail these commodities. This continued pressures led to the policies of reforms being adopted since 1991 in India.

The discussion above shows that crisis was looming large in the Indian economy on many counts. First, the fiscal position of the state was getting worsened because of its inability to collect taxes. Second, employment did not improve, nor did production in mass consumption industries. Third, the current account deficit had a tendency of moving towards a crisis. All this culminated in the balance of payments crisis of 1991, following which the Indian government opted for a policy of (neo) liberal economic development trajectory, practically abandoning the policies of development planning.

Characteristics of Liberal Economic Development in India

Our analysis of the transition of the Indian economy from development planning to liberal economic model showed that this change was a result of changes in the economic parameters as well as the class nature of the economic processes. The Indian capitalists, as it were, shred two constraints from the initial days of planning to the current period of reforms – first, there was dissociation from the rural rich and landlords, who were there prime allies immediately after independence. This was done not through an overthrow of landlordism or a redistribution of land. Rather, Indian capitalism accommodated the rural landlords and big farmers politically but curtailed their economic strengths considerably. Demographic factors, changes in the nature of capitalist penetration in the rural areas, and other developments played their parts in this process. Basu and Das (2013) point towards a decline of landed property as the prime source of political, economic, or social power in today’s India. Mitra (2004) argued that the MSP was used as a weapon by the landlords and big farmers to tilt the terms of trade towards agriculture. But in today’s India, we are witnessing huge farmer rallies demanding a rise in MSP, which is supported by all major political parties including the communists. The persistence of an acute agrarian crisis has led to this situation.

Second, with time the Indian capitalists gained in economic and political strength and did not want the state to dictate terms to them. As a result, the policies of licenses and other kinds of restrictions were abolished. “State intervention” was argued to be the root cause of most of the problems afflicting the economy. It was suggested that the state or the government should not be involved in business. Therefore, privatization of public sector units and public utilities became a very important part of the liberal economic policy framework.

This so-called “withdrawal of the state” was not merely limited to privatization. The policy framework also entailed a cut back on the fiscal space of the state. This entailed both a cutback on public expenditure as well as the fiscal deficit. The false theory of public investment crowding out private investment was argued within the policy establishment to cut back on fiscal deficit, a theory which was proved to be wrong by Keynes way back in 1936 (Patnaik 2017). This cut back on public expenditure or the fiscal deficit had got nothing to do with crowding out private investment. This policy of curtailing public expenditure pointed towards another very crucial political–economic change in India, viz., the embrace of global finance capital.

One of the crucial aspects of the pre-reform period economic policy making was that it was relatively autonomous to global capital. The experience of the colonial period was one of exploitation by global capital which pauperized India. Therefore, economic policy making immediately after independence was envisaged as being relatively autonomous to global capital and imperialism. That is why the planners put controls on the movement of capital and commodities and modeled India as a closed economy. This policy was helped by the global situation where India remained non-aligned to both the socialist camp led by the USSR as well as the imperialist camp led by the USA. In doing so, India could bargain with both and gained technology and capital, while maintaining relative autonomy from both. But with the weakening of the East European and Soviet socialist countries and their final demise, the world situation completely changed in favor of the USA and global capital. The domestic class dynamics within India as well as the crucial change in the world conjuncture pushed the country towards embracing policies of liberal economic reforms and opening up to global finance capital.

The global finance capital also underwent significant changes as compared with the period when Lenin was theorizing imperialism. The character of the current finance capital is different from that of Lenin’s conception in three fundamental ways. First, while Lenin had emphasized on finance capital as capital “controlled by banks and employed in industry,” the new finance capital is not necessarily tied to industry in any special sense. Rather, it moves around the world in the quest for quick, speculative gains. Secondly, finance capital in Lenin’s time had its base within a particular nation, and its international operations were linked to the expansion of national “economic territory.” But the finance capital of today, though of course it has its origins in particular nations, is not necessarily tied to any national interests. The distinctions between national finance capitals have become meaningless today and we can talk of an international finance capital. This international finance capital is detached from any particular national interests and has the world as its arena of operations. Thirdly, in order to ensure such uninhibited global operation, the world should not be split up into separate blocs or into economic territories that are the preserves of particular nations and out of bounds for others.

A number of conclusions follow from the above. Firstly, since finance capital has turned into international finance capital which is highly mobile, the autonomy of the nation-state in policy-making has been reduced. If it is profitable for international finance capital to move freely from one place to another without hindrance then the role of any nation-state in controlling this flow of capital is curtailed. Precisely, this has been sought to be achieved with the introduction of the policies of neoliberal globalization across the globe which essentially is nothing but a policy of allowing free movement of finance capital. Finance capital opposes government intervention which is not beneficial for itself. As a result, states across the globe have cut back on their expenditures, particularly earmarked for development. Secondly, since finance capital needs the entire globe for its operations and does not want the world to be split up into separate blocs, intra-imperialist rivalry remains muted. Thirdly, speculative activities take the center stage of global economy rather than industrial activities because the role of the international finance capital is essentially to reap rapid speculative profits from one part of the world to another (Chowdhury 2018).

India, once being brought into the vortex of global finance capital, has to play by its dynamics, as enumerated above. The privatization of public sector assets, the reduction in fiscal deficit, and government expenditure were first implemented in India in accordance with the Structural Adjustment Program advocated by the IMF and then it became state policy. Secondly, the government has to continuously ensure that it remains attractive to international finance capital. Since international finance capital is globally mobile, any policy which is not appreciated by them will result in a massive outflow of capital from the country causing severe problems in the external sector. Therefore, countries like India have to appease global finance capital. Since finance capital does not like fiscal deficits, it should be curbed, and since labor militancy is abhorred by finance, labor needs to be tamed, so on and so forth. Thus, India from a position of maintaining relative autonomy vis-a-vis global capital was sucked into the vortex of international global capital with the implementation of liberal economic policy model.

This change in the relationship of domestic capital with international capital also meant a change in the nature of the Indian bourgeoisie. As has been already argued, earlier it was believed that imperialism thwarts the capitalist development in the third world countries. But the current conjuncture has witnessed that the big bourgeoisie of countries like India and China have become major players in the international market. As has been already noted, within the richest bourgeoisie in the world, China and India have a very high number. These companies have global ambitions and are operating across the globe both in the financial as well as the industrial sector. For example, a company like the Tata Motors from India has bought off the Jaguar Company, one of the leading automobile companies in the world, located in the UK. (TATA buys Jaguar in 1.15 billion pounds deal, BBC News, 26th March, 2008, http://news.bbc.co.uk/2/hi/business/7313380.stm (Accessed on 8th July, 2016)) The Indian company Reliance has a worldwide reach and is engaged in oil and gas exploration all across the globe. There are even reports that Indian companies are buying huge tracts of land in African countries like Ethiopia for business purposes. (Anuradha Mittal, “Indian land grabs in Ethiopia show dark side of South-South co-operation,” The Guardian, 25th February, 2013, http://www.theguardian.com/global-development/poverty-matters/2013/feb/25/indian-land-grabs-ethiopia (Accessed on 8th July 2016)).

Thus the adoption of the policies of liberal economic development marked the ascendancy of the Indian capitalist class both in the domestic as well as the international economy. It also marks a decline in the fiscal space of the government in the economy. But that does not necessarily mean a withdrawal of the state from the economy. Rather, as we will see presently, it marks a change in the nature of state intervention, where the state favors capital at the expense of the working people. How have these developments impacted on inequality in India? We now turn to answer this question.

Inequality in India

As is well known, the household surveys in India, conducted by the National Sample Survey Organization, collect 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 (Pal and Ghosh (2007), Sen and Himanshu (2004), Mazumdar et al. (2017)). However, with the publication of tax data by Indian authorities, it has become possible to estimate income inequality in India. Banerjee and Piketty (2005) first estimated income shares of top 1% and top 10% of the population in India, up to the year 2000. Subsequently, Chancel and Piketty (2017) updated this data and came out with some striking numbers (see Fig. 1).
Fig. 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 Fig. 1. Firstly, as per Chancel and Piketty’s (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 1922–1923, the top 1% income share was 13%, which increased to 20.7% in 1939–1940, declined to 6.2% in 1982–1983 and then subsequently increased to 21.7% in 2013–2014. Secondly, during the period of planning in India, the inequality remained stable and declined to a historic low in 1982–1983. Thirdly, the period of rapid increase in inequality, as captured by the top 1% income share, coincides with the period of economic reforms and globalization in India. Post 2000, this increase in inequality also coincides with the period when India witnessed highest rates of growth in its history. While Chancel and Piketty (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.

In Fig. 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 Fig. 2.
Fig. 2

Top 10% income share across the World. (Source: Reproduced from World Inequality Report 2018, World Inequality Lab)

From Fig. 2, 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, among the selected countries.

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. The top 10% owned around 51% of the total wealth in the economy in 1991, which has subsequently increased to 63% in 2012. Similarly, the share of the top 1% in terms of wealth has increased from around 16% to 31% during the same period (Table 1).
Table 1

Top wealth share (Net Wealth)

Year

Top 10 (%)

Top 1 (%)

1991

50.5

16.1

2002

55.6

24.4

2012

62.8

30.7

Source: World Inequality Database, https://wid.world/data/

Even in terms of consumption expenditure, Mazumdar et al. (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. They identify two patterns of growth of real consumption expenditure in the post-reform period. Initially, between 1993–1994 and 2004–2005, only the top quintile experienced above than average growth rate in real consumption expenditure. But the growth of the lowest quintile was higher than the middle ones during this period. However, in the subsequent period, 2004–2005 to 2011–2012, while the topmost quintile witnessed higher than average growth in real consumption, all descending quintiles had a lower growth than the preceding quintile. It must be remembered that this was the period when India witnessed the highest rate of growth of GDP, but still the lower quintile could not increase their real consumption expenditure.

The preceding discussion showed that there has been a significant increase in inequality in India, particularly during the post-reform period. The increase in inequality has happened in terms of income, wealth, as well as consumption. In other words, while there can be debates about the exact methodology on the basis of which various authors have arrived at their numbers, the basic trend of rising inequality in India is indisputable.

Explaining Rising Inequality: A Debate

More than the data what lies at the center of the debate is how to interpret the Chancel and Piketty (2017) and other results showing a rise in inequality. 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 liberalization as “new opportunities” started coming in with an excess supply of unskilled labor, inequality has risen. But with capital accumulation taking place at a rapid pace, demand for labor 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. Ghatak (2017) argues that instead of negating Kuznets curve, Chancel and Piketty’s (2017) findings actually support 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) provides data since the British period, when the growth rate of income was close to zero (Habib 2017). With independence, the growth rate increased substantially. In fact, estimates suggest that after independence in 1947, the per capita growth rate in India increased five times. But the Chancel and Piketty’s (2017) study, as seen in Fig. 1, suggests that in spite of 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, 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 materialize 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 jeopardized the legitimacy of a state-led growth path. Hence, it was kept under control.

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 determine the exact relationship. For example, planning in India was not disbanded and liberalization ushered in due to the fact that inequality was low, or that growth rate did not increase. In fact Chakravarty (1987) shows that the growth rate of GDP was much higher during 1980–1981 to 1983–1984 as compared to 1950–1951 to 1959–1960. Planning was disbanded as a result of the internationalization of finance capital and the incapacity of the Indian state to reign in the capitalists and maintain a fiscal balance aimed at higher public investment, as has been already mentioned above.

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 organized 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 (1982–1983 to 2012–2013), the capacity utilization (or demand factors) did not change much. There was increase in labor productivity but not real wage. In other words, the increase in productivity was mainly appropriated by capital. Basu and Das (2018) conclude that “regressive income redistribution and not technological progress has kept profitability rising over the long run in India’s manufacturing sector.” Now, most of the arguments explaining rising inequality have been based on the assumption of technological progress, which to begin with favors those who have higher education and capital. But Basu and Das (2018) showed that technology had very little role to play in increasing the profit rate in India. In fact, the output-capital ratio actually declined. Rather there has been an increase in labor productivity (propelled by a rise in capital-labor ratio) but real wages has declined or at best remained stagnant.

Now, the share of labor in income can be expressed as w/x, where w=real wage rate and x = labor productivity. The trend of the share of labor in organized manufacturing sector is shown in Fig. 3.
Fig. 3

Share of labor in net value added in organized 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 beyond the scope of this entry, certain important points can be made with the help of some preliminary empirical observations.

Firstly, there has been a huge increase in the proportion of contractual workers in the organized sector in India (see Fig. 4). The wage rates of the contractual workers are less than those of the permanent workers. Therefore, with the increase in proportion of contractual workers, the average real wage in the organized industry have come down. The reason 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. Moreover, changing nature of technology and capital has brought in flexible technologies which promote casualization and contractualization of labor. Lastly, with vast masses of informal and underemployed labor in the country, workers’ bargaining power has declined, which has retarded their capacity to increase the real wage or resist contractualization. As a result, the share of contract workers in India has increased, even with high growth and thereby reducing the wage share in Net Value Added.
Fig. 4

Share of contractual workers in organized manufacturing sector. (Source: Same as Fig. 3)

The secular decline in the wage share points towards two important issues. First, it shows that the Ghatak (2017) argument is wrong. With increase in growth rate, as compared to the pre-reform period, real wages should have increased, according to this argument. But that has not happened. Second, this shows another crucial manifestation of the rising inequality in terms of the growing gap between profit earners or capitalists and the wage earners or the workers. The earlier discussion of rising inequality mainly pertained to an inter-personal comparison of inequality. But the falling wage share points towards the growing inequality between the two classes.

Indian Growth Process and Inequality

As has been already pointed out, the policies of reform in India increased the growth rate of GDP, as compared with the pre-reform period, particularly since 2003. This increase in growth rate of output has not resulted in an increase in growth rate of employment. Rather, with an increase in growth rate of output, there has been a decline in the growth rate of employment and an increase in the growth rate of labor productivity. While the growth rate of output increased from 4.7% during 1981–1982 to 1991–1992 to 6.2% during 1992–1993 to 2015–2016, the growth rate of employment actually declined during this period from 2% to 1.3% (Table 2). Thus, the post-reform growth experience of the Indian economy can be characterized by three stylized facts – (1) increase in growth rate, (2) increase in inequality, and (3) reduction in the growth rate of employment. Chowdhury (2014) argues that these three stylized facts are not disjoint. Rather, they constitute a totality of the growth process that India has witnessed. In other words, these three features are linked.
Table 2

Average growth rate of employment, output (value added), and labor productivity

 

1981–1982 to 1991–1992

1992–1993 to 2015–2016

Growth rate ef Employment

2.0

1.3

Growth rate of value added

4.7

6.2

Growth rate of labor productivity

3.1

5.7

Source: KLEM Database, Reserve Bank of India

Essentially, the growth rate of employment is the difference between the growth rate of output and the growth rate of labor productivity. Table 2 shows that there has been an increase in labor productivity in the post-reform period as compared with the pre-reform period. This has resulted in a decrease in the growth rate of employment. The question is what has caused the growth rate of labor productivity to increase.

Chowdhury (2014) argues that the increase in the growth rate of productivity is a result of the growth process that India has witnessed. The main stimulus of growth for the Indian economy during this phase has come from exports and an increase in consumption of the rich. In order to export in the international market, there has to be technological progress to compete with other players. As a result, an economy transiting towards an export-led path must have significant increase in technological progress and labor productivity. Moreover, as already argued before, cost cutting through increased employment of contractual workers are also resorted to. This results in a stagnant real wage and employment in the economy. But the growth process also results in huge capital accumulation and profits for the corporate sector. These two contrasting phenomenon of stagnant real wage and increasing profit immediately gives rise to inequality. Therefore, it can be argued that the phenomenon of rising inequality is embedded within the growth process itself. However, even if the economic processes in the country can tend to increase inequality, the state can try and reduce the income inequality by taking redistributive policies. In other words, there exists a relation between the state policy and inequality in the economy. We now turn to a discussion of these issues.

State and Inequality in India

In the paper by Chancel and Piketty (2017), there is a 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.

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 only 15% of the total wealth accumulated by the billionaires are self-made, rest of the wealth can be categorized as 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 nonexistence 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 constitutes 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 was tilted in favor 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 2005–2006 and 2014–2015, was more than Rs 6 trillion. In the recent period, the share of corporate tax concessions to GDP has increased from 1.7% in 2013–2014 to 2.8% in 2017–2018 (calculated from Government of India budget figures).

The aforementioned discussion needs to be read jointly with the issue of falling labor income share in India. In spite of the fact that contractualization has increased at a rapid pace in the country, the constant clamor for labor 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 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 contractualization of workers and overt and covert impediments towards trade union activities are tilting the balance in favor of capital.

Till now, we have mainly looked at capital-labor relationship and discussed the issue of income shares of classes based on a model capitalist economy. But Patnaik (2015) points out that the capitalist sector does not operate in isolation but is surrounded by precapitalist settings. With the tendencies of primitive accumulation of capital infringing on the precapitalist 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 declines with primitive accumulation. This gives rise to inequality in the system, taking the capitalist and the precapitalist sectors together. The primitive accumulation of capital enlarges the labor 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 favorable climate for private investment was created through various policies including massive transfer of land and related natural resources to capitalists at highly subsidized prices. Those who were displaced from such land grab could not be accommodated within the corporate sector because of its high labor productivity. This in turn has fueled 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 favoring 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 et al. (2017) show that occupational mobility in India, particularly for lower-end occupations, is very low. They find that the odds ratio of a laborer’s son remaining a laborer rather than becoming a professional (as compared to a professional’s son becoming a laborer rather than remaining a professional) was 55. What is even more worrying is that there exist 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 laborers, 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.

This discussion 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 endogenize the distribution parameters. It is indeed the case that the working of the market economy generates certain inequalizing 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 abstract market economy, inequality trends become a matter of politics. Class struggle and politics therefore can change the distribution parameter in favor of the workers.

Conclusion

The transition of India from a planned economic development model towards neoliberalism is a result of developments both within the boundaries of India and outside. Within India, the contradictions of planning, the rising to dominance of the bourgeoisie, and the downward influence of the landed elites, not through land reforms but through an accommodation within the capitalist growth process, ushered in the policies of neoliberal capitalism. On the external front, the rise of international finance capital and policies of globalization meant that the Indian ruling class felt that its interests lay in allying with metropolitan capital rather than opposing it. This had its benefits for the capitalists and the rich, their wealth reached unprecedented proportion. But this was at the cost of the workers and the poor. On the one hand, the share of wages in Net Value Added declined, and on the other hand, the share of income going to the top 1% of the population increased phenomenally.

This increase in inequality, we have argued, is tied with the economic processes unleashed in India. However, this provided an incomplete picture of the dynamics of inequality in India. The state, even though it propagates the policy of “withdrawal” has played a decisive role in shifting the income distribution towards the rich. What we are witnessing, therefore, in India is a very high degree of inequality, which the state is not recognizing. Rather, there is an implicit promotion of this inequality through various concessions that are provided to the corporates and the rich.

The state has evolved a twofold policy in this regard. First, domestically, there is no discussion about redistributive policies, apart from certain schemes which provide some basic relief to the poor. Second, at the international level, with the rise of the Indian bourgeoisie; they are demanding a seat in the high table of power. As a result, in some cases the interests of the Indian bourgeoisie comes into conflict with that of metropolitan capital. Nonetheless, this conflict is not oriented towards devising a policy autonomous to imperialism or metropolitan capital. Rather, this conflict only signifies the growing aspiration of the Indian bourgeoisie for a slice of world power. In the meantime, the condition of the poor remains abysmal with massive unemployment and underemployment and a huge increase in inequality. The struggle for an egalitarian India therefore should be primarily aimed at the Indian bourgeoisie and the state. While this struggle will be long drawn, the growing inequality and its various manifestations are becoming increasingly evident. One can only hope that the Indian masses would be able to follow an alternative path of development, whereby such glaring inequality can be reduced.

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© The Author(s), under exclusive licence to Springer Nature Switzerland AG 2019

Authors and Affiliations

  1. 1.Institute of Development Studies KolkataKolkataIndia