The first anniversary of the second United Progressive Alliance government has brought forth a stream of commentary about its hits and misses in national security, foreign policy and economic management.
In his first domestic press conference after the Congress-led alliance came back to power in May 2009, Manmohan Singh reiterated his commitment to inclusive growth in the opening remarks. It is a mistake to believe that Manmohan Singh has discovered the poor only recently. He has mentioned them in most of his important speeches through the years, though there have been subtle yet important differences in what he thought was a good way to help them beat poverty. This is as good a time as any to examine how the very concept of inclusive growth has evolved over the past two decades and what this has meant in terms of public policy.
The Manmohan Singh who was the finance minister in the Narasimha Rao government seemed to project a very different idea of inclusive growth than the man who now runs the government does. In the course of his stunning budget speech in 1991 that basically announced an end to many decades of statist mismanagement of the economy, Manmohan Singh had said: “A vast number of people in our country live on the edges of a subsistence economy. We need credible programmes of direct government intervention focusing on the needs of these people. We have the responsibility to provide them with quality social services such as education, health, safe drinking water and roads.”
And then had carried on in the same vein in his 1992 budget speech: “Our longer-term objective is to evolve a pattern of production which is labour-intensive and generates larger employment opportunities in productive, high-income jobs, and reduces the disparities in income and wealth between rural and urban areas.”
The main lesson from these statements is that the government should create conditions whereby the poor can participate in economic growth by having access to public goods and employment opportunities in industry and services. The long-term task that Manmohan Singh clearly outlined in his 1992 budget speech was to create conditions that would allow the poor to move out of low-productivity jobs and into high-productivity jobs. The latter is most likely to be achieved when less stringent labour laws allow firms to hire and let go of workers, which is why labour market reforms were such an important part of the early reforms wish list, though they were later abandoned.
This early vision of inclusive growth is clearly at odds with the one embraced by the ruling alliance. It is no longer about creating public goods and productive jobs; the focus now is on entitlements. Income redistribution through public spending has its attractions and the politically attractive programmes to guarantee people jobs, food and education act as useful safety nets for the poor.
The question of how a fiscally responsible state can fund these programmes on a narrow tax base has never been adequately answered. Even the fiscal correction that was announced in the latest budget has left the revenue deficit at an unsustainably high level, a brute fact that finance minister Pranab Mukherjee coyly did not mention in his budget speech.
But the more troubling question is whether the current entitlement schemes will come in the way of the essential transition of millions of poor Indians from dead-end farm work to jobs in the more productive parts of the economy. Interventions such as the Mahatma Gandhi National Rural Employment Guarantee Scheme will put a floor under wages that is unrelated to productivity and hence inevitably distort labour markets.
The experience across Asia is that heavy investments in physical and human capital, as well as job creation in labour-intensive manufacturing and services, are the surest ways to beat mass poverty. Look at Taiwan, South Korea, Thailand and now China, for example.
An explicit policy to make growth inclusive is essential. The Commission on Growth and Development headed by Nobel laureate economist Michael Spence—and with Planning Commission deputy chairman Montek Singh Ahluwalia as a member—has argued in its 2008 report that inclusiveness has several facets such as equity, equality of opportunity and “protection in market and employment transitions”. Governments thus have to be sensitive to both market outcomes and access to opportunities.
A strategy of inclusive growth is needed to manage this transition, but the better way to do so is through job creation rather than income redistribution. Finance minister Manmohan Singh seemed more focused on the former, while Prime Minister Manmohan Singh seems to bank more on the latter. India would do better if he resurrects some of his old views.
Niranjan Rajadhyaksha is managing editor of Mint. Your comments are welcome at firstname.lastname@example.org