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Rise of billionaires: Threat to growth?

Arvind Panagariya

                  India has now unseated Japan as the country with the  largest number of billionaires in Asia. The latest list of 40 richest Indian  citizens, annually published by Forbes magazine, had to exclude 14  billionaires who fell below the $1.6 billion cutoff point. As recently as  2001, the number of billionaires in India had been in the single digit.

                  Admittedly, a significant part of the wealth of the  billionaires in India has resulted from the unprecedented boom in the stock  market in the last two years. For example, according to Forbes, Mukesh  Ambani saw his net worth jump up by $30.5 billion to $49 billion within the  last year and Anil Ambani by $30.2 billion to $45 billion. An eventual  correction in the stock market is likely to wipe out substantial chunks of  these increases in the wealth.

                  This qualification notwithstanding, the real wealth at the  top has risen sufficiently to cause a significant increase in wealth  inequality recently. This is in contrast to the consumption inequality,  which, according to the latest large National Sample Survey, has remained  approximately unchanged. As this writer noted in 'Viewpoint' last month (ET,  Oct 29) , the consumption-based Gini coefficient, a commonly used measure of  inequality, was approximately the same in 2004-05 as in 1983 and 1993-94.

                  What implications does the increased wealth inequality  have for future economic growth and policy? In a recent article in the  Financial Times (November 1, 2007), the newspaper's India correspondent Jo  Johnson forcefully asserted that rising inequality threatens India's growth.  Others in and outside India have written in a similar vein. Are they right?

                  Mr Johnson's assertion was partially prompted by a protest  march by 25,000 landless workers, indigenous tribespeople and untouchables  to New Delhi to demand a better tomorrow for themselves. Without supporting  evidence, he went on to link the march to "the growing divide between haves  and have-nots." Chastising the Press for its preoccupation with the stock  market and the prime minister for choosing the visiting heads of states over  the protesters, he also issued the warning: "It is a fair bet that when the  ruling elite of a poor developing country ignores a non-violent protest by  25,000 desperate citizens, it will soon face a violent one."

                  No one disagrees that the government could and should do  more to improve the lot of the poor than it has done to date. Many state  governments that have the primary responsibility for agricultural reforms,  rural electrification and rural road construction have been dragging their  feet. The central government, which tirelessly displays its commitment to  the farmers, has also failed to do its bit.

                  Yet it is not clear how one connects the protest march to  growing inequality and sees the signs of impending violent protests in it,  as Mr Johnson did in his article. For one thing, marches such as this one  have been a part of India's landscape for decades: government efforts to  launch the Green Revolution alone had led to more than a thousand  demonstrations around India in 1966 and 1967.

                  But more importantly, the march is better explained as the  outcome of the revolution of rising expectations triggered by accelerated  growth and poverty reduction. That revolution has replaced fatalism on the  part of the poor by hope. Consequently, they see greater payoff to the  demands for rapid and direct action by New Delhi.

                  Causally (and casually) linking such marches to rising  inequalities and issuing warnings of impending bloody protests places India's  entire growth process at risk. Those familiar with India's past would know  that the well-meaning efforts to curb the concentration of wealth in the  1960s and 1970s led India to adopt policies that deprived entire generations  of Indians (including mine) of economic opportunity and left the poor  without hope.

                  Tightening of investment and import licensing; exclusion  of big business houses from all but a handful of "core" sectors;  nationalisation of banks, oil companies and mines; and ever-expanding  small-scale industries reservation, which stifled India's growth and left  the country in a poverty trap, were all aimed at checking the concentration  of wealth.

                  Even the case for levelling the billionaires - the most  visible symbols of wealth inequality - to promote equity is not as obvious  as it may seem. Thus, consider just three points. First, replacing a  billionaire by 1,000 millionaires may reduce wealth inequality but it is  almost sure to increase conspicuous consumption that is regarded as socially  repulsive.

                  The thousand millionaires are likely to have much greater  propensity and time to spend their money on fancy cars, homes and gadgets  than one billionaire. As Azim Premji, who still drives a Toyota Corolla,  flies economy class and lives on the Wipro campus in Bangalore, puts it, "At  the end of the day there is only x-amount you can consume, frankly, so that  itself becomes a limitation."

                  Second, when it comes to poverty alleviation, the  ownership of wealth matters far less than how it is invested and spent. And  on that count, a billionaire is far more likely to invest his billion  productively and use it for philanthropy than a thousand millionaires. If  the policy regime is right, he will invest the bulk of his wealth in  labour-intensive industries, generating well-paid jobs for the poor.

                  Finally, the presence of a few billionaires is a powerful  inspiration to other entrepreneurs. When a Narayana Murthy, Nandan Nilekani  or Tulsi Tanti becomes billionaire entirely on his own, it gives confidence  to other Indians that they can do the same.

                  Not too long ago, young Indians watched the richest man in  the world, Bill Gates of the United States, as an object of awe rather than  emulation. But no more! Once again, Premji puts the matter in perspective,  "With the attention I got on my wealth, I thought I would have become a  source of resentment, but it is just the other way around - it just  generates that much more ambition in many people." Amen.

(The author is professor at Columbia University and  Non-resident Senior Fellow at the Brookings Institution)

Economic Times November 29 2007

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