Ensuring growth for all Indians
Pulling the neglected millions out of poverty will require massive investments in human capital
India’s recent economic growth, which has averaged over seven per cent despite the major global economic upheaval, is very impressive. Inflation is stable, though there is the hiccup of rising food prices. Balance of payments is under control with burgeoning foreign exchange reserves. Most economists and institutional investors project India to be the super economic power by the end of the century, surpassing the United States. Some predict that India will even outpace China. There is no doubt that India has arrived.
The downside risk for India is slim, or non-existent. Successive governments since the launch of reforms have steadfastly followed the same development strategy, though shying away from the second generation economic reforms that need to be implemented to put India firmly on the path of a major global player, and the Indian economy in cruise control mode for high sustained growth. Most surprisingly, the present government — which has a clear majority — is happy with an incremental approach to economic reforms, and has put the necessary 21st century trade reforms on the back burner. Economists have convincingly argued that high GDP growth in India will be sustained. But it is the quality of growth which is in question.
India’s performance may make some of us believe that we have just a few years to go before India becomes a developed country from its recent elevation to a Low Middle Income country. They tend to forget that India’s per capita GDP is only $1,570, compared to $11,120 in Malaysia, and $55,230 in the US, and over 250 million people live below the poverty line — the highest in the world. We are also a large distance away from becoming even a High Middle Income country, let alone a developed country. India remains a very poor country, with its GDP per capita at only three per cent of the US GDP per capita. This puts India at the bottom of the heap, closer to a Bangladesh (two per cent) than a Thailand or China (10 to 15 per cent). At this rate India would have to grow at eight per cent annually for the next 21 years just to reach the level of Thailand relative to the US (i.e. per capita incomes at 10 per cent of US levels, if we assume the US will grow by about 1.5 per cent a year).
Overall, the success in breaking the logjam of three per cent growth and reaching near-doubledigit growth has been nothing short of a miracle. What we need to focus more on now is making growth more inclusive. So far inclusive growth has just remained a slogan.
Low per capita income and high poverty levels are the first indicators that Indian growth is not yet inclusive. Marked disparity in growth among regions indicates that only a handful of states account for the bulk of growth. Growth obviously has not generated stable earnings for households to stay out of poverty. Growth has had less impact on females, tribal populations and religious minorities. India fares very poorly in social indicators with an adult literacy rate of 79 per cent (only 59 per cent for females), average life expectancy of 68 years, and infant mortality rate at a high 38 per 1,000 live births. About 60 per cent of the workforce is still employed in agriculture, whose share has dwindled to about 17.4 per cent of GDP. These disparities, to some extent, have resulted in the recent upsurge in Maoist violence, as well as an increase in suicides among farmers.
The northern, southern and western states have prospered most in this era of rapid growth, which has largely eluded the central, eastern, and northeastern states. Chinese regional disparities do not exhibit negative per capita income growth as witnessed in the lagging states in India. The seven poorest states — Bihar, Chhattisgarh, Jharkhand, Madhya Pradesh, Orissa, Rajasthan, Uttar Pradesh — are home to more than half the poor. Inclusive growth will prove elusive unless these regional disparities are eliminated. Underlying all this, public services earmarked for the poor are weakest in the poorer states.
The tribal population is concentrated in some of the poorest but mineral- and forest-rich areas. But they are not yet in a position to take advantage of these assets. In this context, the recent government thrust to develop the northeastern states is a most welcome initiative. The way out of exclusion is total literacy (education should be a fundamental right), skill development, increase in agriculture productivity, and better governance.
India can compete with other developing countries in labour-intensive sectors and with OECD economies in knowledge-intensive sectors. But larger social investment is essential to sustain this edge. About 340 million Indians below 15 years of age will require education, health and nutrition. But India is lagging behind the rest of the world in human capital investments. This could have an adverse impact on overall competitiveness.
It has often been politically expedient for India’s political and bureaucratic leadership to simply increase spending on social sectors, including subsidies and employment plans for the economically depressed, as a response to India’s significant quality-of-life challenge. However, despite a large number of such well-meaning plans for social sector improvement being undertaken, rural development, sustained employment or substantive development in the social dimension have not taken place.
India’s policy leadership has to realise that throwing more money at the problem is not the solution, especially since it has been well-documented that a large part of government spending does not reach the intended beneficiaries. Institutional inefficiencies, corruption, lack of accountability and the general lack of awareness of the common people’s citizenship rights all combine to create an extremely poor government services delivery system in India.
It is not enough having resources and investing them. A key aspect of national competitiveness is the institutional environment that informs the process of utilisation of such resources. If the institutional environment is one that leads to efficiency in utilisation (i.e. production, distribution and investment), inclusiveness is enhanced. If the institutional environment leads to inefficiency, inclusiveness is reduced. An economy with high transaction costs is neither efficient nor competitive. This may not just be a production issue, but a distributional issue as well. India’s record of policy interventions in poverty reduction and social development has not been impressive. Doing business in India is still not smooth. India fares poorly on simple indicators such as cargo dwell time, days to enforce a contract or register a property, and power and transport costs.
It is unfortunate that there isn’t a vibrant inclusive growth debate in India right now. The country needs an aggregate index of inclusiveness that embraces the issues highlighted here. A broadbased Inclusive Growth Council should be created with representatives of central and state governments, industry, academia and media to monitor the progress of the index. This effort will be considerably strengthened if the Council is housed in the NITI Aayog, which should focus exclusively on carrying out this work as its new high priority task. This is in line with the PM’s recent directive to make the NITI Aayog the driving force for transforming the Indian economy.
Growth has not generated stable-enough earnings to lift households out of poverty. Women, tribals and religious minorities have fared the worst