High Street Phoenix mall at Lower Parel in Mumbai, offers a global shopping experience. Step outside the expansive mall and all you see is a giant flyover that literally doubles up as a ‘wall’ separating the rich and poor. Bang opposite the mall are tiny local residences jostling for space, income and livelihood itself. This isn’t an isolated setting as India remains an unequal economy and such stark locales exist throughout. As for poverty, much leaves to be desired. Some 300 million are below the poverty line, or roughly 33 per cent of the world’s largest poor concentration is (no, not China) in India.
Seventy years after Independence, 25 years after the big bang economic reforms and successive years of robust GDP growth, governments are yet to discover the success recipe for shared prosperity or how to achieve growth with equity. Should we go after growth that lifts income or address poverty? Should we invest in social infrastructure, or generate resources to fund welfare schemes? There are no easy answers.
In the past, we have seen two celebrated economists—Amartya Sen and Jagdish Bhagwati—locking horns on this contentios subject in the run up to 2014 elections. With GDP slowing down for six consecutive quarters even as historic reforms are being rolled out (GST, land reforms, bankruptcy code) and amid the approaching election year, the growth vs development debate is back on the comment pages and studio sofas.
Theortically, growth, poverty and income inequality are deeply associated. Globally, a one per cent income growth reduces poverty by about 2.4 per cent. But growth in itself is meaningless if it doesn’t improve income. In other words, what matters is not growth, but the nature of growth, its beneficiaries and the political will to deliver.Prior to 90s, government controlled transport, agriculture and construction sectors, commodity prices were regulated and there were trade barriers. This excessive control and reliance on socialist policies took us to the brink of economic ruin in 1991. What followed was big bang reforms by the PV Narasimha Rao-led Congress government followed by the NDA rule in 1998 that over turned India’s economic fortunes.
A 2009 World Bank study, using the consumption-based poverty measure for 50 years, including a 15-year period after the 1991 reforms, found that GDP growth was much higher in the post-reform period, poverty fell by 1.36 per cent per annum compared to 0.44 per cent prior to 1991. Sadly, reforms also paved way for inequality.
Pranab Bardhan of Berkeley University in his research too found that as per NSS data, growth elasticity of poverty reduction was slower due to unequal distribution of resources. For instance, the Gini coefficient of land distribution in rural India was a lowly 0.74 in 2003. He cited evidence showing inequality shot up during the post-reform period, which was arguably ‘urban-biased.’ The Gini coefficient (consumption-based) for rural India increased marginally from 0.29 in FY94 to 0.31 in FY12, but shot up in urban areas from 0.34 to 0.39. If once uses income-based Gini coefficient, or non-income indicators like health and education, inequality was much higher.
The broader impact of income inequality on growth and poverty has been on the discussion boards for long, but it’s only recently that the narrative is changing. Publishing its first clear evidence of the link between inequality and growth, OECD in 2015, proposed higher taxes on the rich and policies aimed at improving the bottom 40 per cent population. It urged governments to rejig tax systems (scrapping benefits for the wealthiest) to make sure the rich pay their fair share. OECD data shows that rising inequality is estimated to have knocked more than 10 per cent off growth in Mexico and New Zealand, nearly 9 per cent in the UK, Finland and Norway and between 6 and 7 per cent in the US, Italy and Sweden. On the other hand, greater equality prior to the 2008 crisis helped increase GDP per capita in Spain, France and Ireland.
IMF, the lender of last resort to bankrupt countries, too believes inequality should be the cornerstone for policymakers. As per IMF data, a one per cent increase in the income share of the top 20 per cent will drag down growth by 0.08 per cent over five years, while a rise in the income share of the bottom 20 per cent boosts growth.Wealth concentration in India seems to have followed a U shape, now recognized as the inverted Kuznets curve. For example, in 1966, the top 0.1 per cent accounted for 16 per cent of GDP or almost two months worth national output.
By 1986, this was less than 5 per cent. But then, thanks to reforms, the income-wealth divided came back. Currently, India’s billionaires club is worth nearly 20 per cent of national income.
India’s tax-GDP ratio is among the lowest in the world, but Indian billionaires’ wealth rose from less than 4 per cent of GDP in the early 1990s to 23 per cent of GDP by 2009. French economist Thomas Piketty’s latest report, ‘1922-2014 from British Raj to Billionaire Raj,’ co-authored by Lucas Chancel, too reveals that the top 1 per cent income earners now have the highest share in national income since Income Tax was introduced in 1922. The top 1 per cent received a higher share of total growth than the middle 40 per cent, suggesting that much needs to be done to promote inclusive growth.
Wealth grows faster than economic output, meaning those having capital will continually receive a larger share leading to unequal wealth distribution. A progressive tax system should function to narrow income gaps between the affluent and everyone else.And unless policymakers attend to lower incomes, and not just official poverty, economies won’t succeed. Those excluded from opportunities to raise income – from markets, from social and economic assets – need to be included to maximize growth and development. For instance, growth in Uganda between 1992 and 2003 was high at over 3 per cent per person per year. But over the same period, inequality rose. Had inequality remained unchanged in Uganda, an extra 2 million Ugandans would have been lifted out of poverty.
Some believe growth alone isn’t enough to reduce poverty. For instance, if wages don’t rise in commensurate with inflation, it increases household debt. Socialist and welfare policies that support free basic education and healthcare thus give the poor a chance of better life. Whether it’s trickle-up or trickle-down, growth or welfare policies, the following are essential: a stable macro economy, low inflation (high inflation hits the poorest hardest), conducive environment for the private sector, favourable investment climate, job creation, building educational and skill levels, technology innovation, improving productivity, raising agricultural productivity, and improving trade.
Growth is critical for revenue generation to finance health, education and employment programmes. None would object, if growth is accompanied by redistribution of resources. Equitable growth is much broader and the government is channelizing efforts in agriculture, manufacturing and services through increasing rural non-farm employment, Make in India, Mudra, and financial inclusion.The new generation wants equality of opportunity rather than redistribution. Simply put, we all want the same thing: a decent job to work with dignity, income to meet basic needs and create a better life. A growing economy provides everyone with a job or at least the chance of one. For, as John Galbraith warned, ‘when reforms from the top became impossible, the revolution from the bottom became inevitable.’
The debate
In the run up to 2014 elections, the growth vs development debate took centre stage with two leading economists—Nobel Laureate Dr Amartya Sen and Dr Jagdish Bhagwati—locking horns. While Sen favoured the Kerala development model, where investment in social sectors takes precedence, Bhagwati batted for the Gujarat model that emphasises on investment in physical infrastructure to create a conducive environment for businesses, anticipating social development to follow suit. Bhagwati argued growth was fundamental for raising living standards, while Sen is a votary of growth, but prefers socialist policies to reduce poverty and enhance standard of living.
Growth impact
OECD data shows that rising inequality is estimated to have knocked more than 10 per cent off growth in Mexico and New Zealand, nearly 9 per cent in the UK, Finland and Norway and between 6 and 7 per cent in the US, Italy and Sweden.