The path to inclusive growth

The path to inclusive growth
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First Published: Sun, Jun 14 2009. 09 08 PM IST

Illustration: Jayachandran / Mint
Illustration: Jayachandran / Mint
Updated: Sun, Jun 14 2009. 09 08 PM IST
Red herrings teem amid the pronouncements on inclusive growth made by both politicians and pundits alike. Prominent among them are an anxiety about financial possibilities and a predilection to view inclusion as social engineering. Interestingly, much as the expression has been bandied about these past couple of years, there is as yet little agreement on what constitutes inclusive growth.
Illustration: Jayachandran / Mint
It would be useful, therefore, to begin with some criteria by which to judge inclusiveness. Two spring to mind. First, to be considered inclusive, growth must carry the many with it. An indication of this would be widespread employment generation. Second, growth ought to cater to the widest range of our material needs. To see this, consider the situation in which all Indians are employed in a back office to the rest of the world. Surely this would not do for us, even were the first criterion satisfied. For, though trade can bring us most of the things that we will not produce as a nation of back office-wallahs, some of our needs would have to be catered to locally via “public goods” which are not generated by the market.
Public goods in the form of physical and social infrastructure are at least as important to our lives as the private ones supplied by the market. What is significant in the context of devising a strategy for inclusive growth is that they can be crucial to ensuring that the first criterion is satisfied. For not all public goods are consumed for their own sake. They actually enter production either as complementary inputs or by equipping potential workers with human capital.
Our second criterion is seldom encountered in the discussion of inclusive growth, but a moment’s reflection should show us its salience. Growth must be broad-based—cater to the widest range of our material needs—for it to be considered inclusive. Very likely, the reason this perspective does not appear in the public arena is that the absence of public goods, or even their dysfunctional presence, reflects upon the weakness of democracy in India— something we are loathe to admit.
In India today, if a growth impulse is strongly present in agriculture, the resulting economy-wide growth is more likely to be inclusive than growth driven by some other factor, say, exports. There are two reasons for this. First, at least 55% of the country’s labour force is agricultural, and close to 70% of the population is rural. Agricultural growth is more employment-intensive. Second, as the availability of food in the economy is increased, it becomes cheaper. This releases demand for industrial goods, in turn stimulating industrial growth and non-agricultural employment. So, as we can see, there is a double benefit in an agriculture-driven growth strategy.
There is insufficient recognition that the essence of a market economy is not merely that it is relatively uncontrolled, but that its output is determined by the level of aggregate demand. Now, agriculture-driven growth will provide the necessary demand or “market” for the goods produced in India’s non-agricultural sector. While in principle a country has the option of selling its goods to an external market, currently the low human capital of India’s workforce and the dismal condition of our infrastructure—from ports to power—suggest that competing with China in the global market for the sale of low-cost manufactures is not an easy option. However, the internal market, which grows with agriculture, is precisely what India should nurture at a time when the country’s exports have declined seven months in a row.
Social engineering has little to do with any of this. Quite simply, a strategy that encourages agriculture is likely to produce a higher growth rate and has a higher chance of sustaining itself than a strategy that focuses single-mindedly on the external market over which India has no control whatsoever. In any case, the external market is going to take some time to recover after the financial meltdown. In the sequence imagined here, when more people are included in the economy as income earners, they enlarge the market and contribute to the sustenance of the original growth impulse.
But what of finance? While finance is indeed needed, especially for equipping the potential labour force with education and training, the need for it can be exaggerated. Two examples, drawn from the agriculture and education sectors of the economy, should suffice to make the point. Since the second half of the 1990s, real expenditure on irrigation has increased by at least 100%. But the expansion of irrigation has actually slowed. In the absence of evidence that real costs have increased, there is prima facie evidence that the funds are being utilized increasingly poorly. Next, it is perhaps not so widely known that in the education sector, from around the same time, there has been a shift in public expenditure towards primary education. The Sarva Shiksha Abhiyan scheme is the most prominent example of this. Yet, learning outcomes as captured by the non-governmental organization Pratham show a serious education deficit.
These examples give us reason to believe that in the areas of the economy most crucial for inclusive growth, it is governance rather than finance that is the binding constraint. More generally, the possibility of accelerating growth at this point revolves around governance reforms and not the market reforms that have been focused upon for the past decade and a half. As an entity, India is no longer as poor as we like to imagine. In fact, five years of high growth have swelled the khazana (treasury). Ineffective governance is a political challenge. Talk of financial constraints or social engineering is escapist.
Pulapre Balakrishnan is senior fellow, Nehru Memorial Museum and Library, New Delhi. Comment at theirview@livemint.com
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First Published: Sun, Jun 14 2009. 09 08 PM IST