Should India Target Growth or Inclusive Development?

Posted in Finance Articles, Total Reads: 945 , Published on 06 April 2015
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“Housing is a human right. There can be no fairness or justice in a society in which some live in homelessness, or in the shadow of that risk, while others cannot even imagine it.”

– Jordan Flaherty


The debate between the famous Gujarat vs Kerala Model of growth stirred a political storm in India during an interview where Bhagwati and Panagariya appreciated Narendra Modi for his economic policies in Gujarat. Kerala is the leading state based on social indicators with literacy rate at 93% (2011), life expectancy at 77 years, and consumption based HDI at 0.7 (2007-08). However, Bhagwati-Panagariya argue that this success has less to do with the Kerala model and more to with the growth oriented policies.


So, how has India performed in the past few years? The answer really depends on whom you ask.

 


On one hand, rapid GDP growth has resulted in rising per capita income with a CAGR of 5% in real terms between 1990-01 and 2009-10, leading to improved standards of living among the middle-class. On the other hand, one could tell an equally critical story of India’s past performance, where the growth in standards of living for the small minority has improved drastically but for the common (wo)man, this has been dreadfully slow.


Among the world’s 16 poorest countries outside Sub-Saharan Africa, India ranks 9th in Life expectancy at birth, 10th in Infant mortality and 13th in access to improved sanitation, (2010-2011) and is still nowhere close to competing with the other BRIC nations when it comes to these social indicators. Similarly, on the scale of 1 to 6, 1 being the top, India ranks 5th in improved sanitation, 6th in child immunization and 5th in the proportion of underweight children in South Asia. Looking at the last 20 years, India has grown much richer than Bangladesh, where our per capita income was estimated to be 98% higher than that of Bangladesh in 2010. But at the same time, Bangladesh has overtaken India in terms of wide range of basic social indicators including life expectancy, child survival, immunization rates etc.


Growth indeed can be inclusive. As many economists argue that the economy will enjoy the trickle down effects giving power to those who are at the bottom of the pyramid. This however, requires active public policies and effective growth of social services like healthcare and education.


India ranked 137th in the world as far as Human Development Index (HDI) was concerned. In rural areas, the Gini-coefficient, that is published by the World Bank to highlight the inequality in income among the population, rose to 0.28 in 2011-12 from 0.26 in 2004-05 and to an all-time high of 0.37 from 0.35 in urban areas. This came as a surprise to many economists as the government had expanded welfare schemes during the same period. Clearly, focusing just on growth isn’t the right path for India. For years now, we have been listening to the hypocritical talk of inclusive growth while financing schemes that do not reach the people that they are meant for in the first place. The high wastage and procurement costs of the food security bill and the unsustainability of NREGA are all evidence of the same. All Indian parties swear by inclusive growth, but their definition itself, in terms of greater subsidies and reservations in jobs and education, is flawed. Inclusive growth means not only creating opportunities for oneself but spreading these opportunities to all economic agents of the society.


‘The World Bank ranks India 134th out of 183 countries in ease of doing business; 166th in ease of starting a business; 179th in getting a construction permit; and 182nd in enforcement of contract.’ These are barriers that should be confronted for inclusive growth and yet, our political discourse hardly touches on these issues.


It is therefore a mistake to just sit back and target economic growth to transform the living conditions of the unprivileged without paying attention to how it is shared among the rest of the society. Investment led growth without a social consideration is bound to create instability in the economy and anomie among the economic agents.


Not all states however, show such a gloomy picture. States which have grasped this idea and its fundamentals correctly, have and are doing well. While Kerala has a long history of comprehensive social policies, universalization of elementary education is the cornerstone of Kerala’s success. 99% Literacy rate, with literacy rate among women being one of the highest in all of Asia, 96% of the population having access to toilet facilities, 0.8% of slum population to Urban population, all highlight the success that this state enjoys. It recorded a growth of 8.2% for 2012-13 financial year against the national rate of 5%.


Similarly, while social policies in Tamil Nadu were once derided, they have now become a model for India’s way ahead on the course of development. It was the first state to introduce and successfully implement mid-day schemes in primary schools. The states innovative efforts in the field of child and health care, helping people who are really in need, is the prime reason for the state’s development and growth.


Looking at the current scenario however, with increased pressure on public debt and government deficit, some argue that it is growth, that would pull the people above poverty line and infact generate revenues which can then be used to undertake redistribution. This has worked in 1991 where reforms in India not only led to higher economic growth, but also pulled many above the poverty line; and this has worked in Gujarat. Creating just Human Capital with lack of opportunities would be twice as wasteful. And therefore, economic growth preceding social development should be the way forward.


On the other hand, refuting the argument above, many also argue that it is inclusive growth that would lead to further growth. In simple words, if there are more people getting jobs, they are going to demand more goods and services, suppliers would enter the market to provide those in the most efficient way, leading to greater innovation through increased investment, which should ideally lead to more job creation, hence, completing the cycle. Choosing either one is neither possible nor sustainable. More than economic growth, the country requires decentralization of entrepreneurship, better infrastructure, financial inclusion for agriculture and other SMEs, greater emphasis on environment sustainability, reduced bureaucracy and corruption; for the policies to really be effective. Using cash transfers to improve the purchasing power of the poor will be far more effective in achieving inclusive growth instead of subsidies and tax concessions. Similarly policies such as ‘Make it India’ are brought about in an hope that India’s Manufacturing sector gets a boost, making the basic fundamentals of India’s growth strong and rigid, from the initial unstable and shaky. So, while India is still struggling with a slow growth rate compared to what it enjoyed in 2008-09, policies such as these would ensure that inclusive growth is achieved, which is the need of the hour to really get to the root of the issue and achieve sustainable growth.


This article has been authored by Shefali Bhatia from Great Lakes Institute of Management 


References:

1. http://deshgujarat.com/2012/07/10/gujarat-has-least-unemployment-rate-among-all-states-says-latest-report-released-by-government-of-india/, accessed on Jan 25th, 2015.

2. http://www.indiaspend.com/sectors/how-gujaratis-love-gujarat-and-other-migration-stories-49968, accessed on Jan 25th, 2015.

3. http://planningcommission.nic.in/aboutus/history/spe_strong1402.doc, accessed on Jan 25th, 2015

4. http://www.theindiaeconomyreview.org/Article.aspx?aid=76&mid=4, acceseed on Jan 25th, 2015

5. http://www.internationalseminar.org/XIV_AIS/TS%203/11.%20Yogeshwar%20Shukla.pdf, accessed on Jan 25th, 2015



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