India’s growth acceleration since the 1990s has reduced poverty substantially. If aggregate growth had been distributed more evenly, poverty would have fallen even further. In the name of “inclusive growth”, the current government has increased direct transfers to the poor and investment in rural areas, where the majority of the poor live. These are both useful policies if implemented effectively. However, these are only two ways by which policies can affect growth and poverty reduction.
Petia Topalova of the International Monetary Fund has recently examined the links between policy and inclusiveness of growth. In particular, she uses variation across states as well as three time periods, spanning 1983 to 2005, to examine these links. Inclusiveness is defined as the difference between the consumption growth rate of the poorest and richest 30% Indians. An initial observation is that simple correlation between inclusiveness and speed of growth is insignificant. This result points the way towards digging deeper into policies that affect the nature of growth. It also indicates that lack of inclusiveness is not a necessary accompaniment of accelerated growth.
The policy results are quite striking. First, higher financial development, measured either by real credit per capita or by a larger initial share of agricultural labourers with loans from formal financial institutions, is significantly associated with more inclusive growth. Second, labour regulations tend to lower the inclusiveness of observed growth. Third, better primary or secondary educational attainment and infrastructure levels promote inclusive growth. Finally, state expenditures on social services such as health and education do not seem to improve the distribution of growth.
Significantly, the results suggest that many policies that accelerate growth also can improve its inclusiveness. This applies to financial development, labour market flexibility, basic educational attainment and infrastructure. This is an important lesson for policy formulation in India, which seems to still be held back by the idea that fostering rapid growth must come at the expense of equity of outcomes. Instead, the required policy thrust is an obvious one, that of enabling market access and participation for the poor.
The analysis also reinforces the widespread concern that government social spending in India is inefficient, and often ineffective. An alternative approach of increasing private participation in delivering credit, jobs, education and infrastructure to a broader cross-section of Indian society must be given more of a chance, if one believes these results. This does not mean an abdication of government’s responsibilities, but instead a recognition of its current limitations. Of course, this does not preclude continued attempts to improve the efficiency and accountability of government, by restructuring its internal and external incentives systems, through measures such as decentralization and civil service reform.
If there is a win-win policy path, then why doesn’t positive change occur more quickly in India? This problem has bedevilled India since the 1960s, when the need for policy reorientation first became apparent. Many politicians and bureaucrats will lose status and material well-being from some of the reforms suggested as being beneficial by a wide range of empirical analyses. It is less clear why some intellectuals cling to empirically untenable positions. I have argued elsewhere that India has been hurt by the failure of new ideas to take hold widely enough with respect to the role of market institutions in economic development. China has been much more pragmatic, with ideology no longer a substitute for identifying what works and implementing it.
This is not to say that India has to imitate China. In fact, India has an opportunity to grow as fast as China, without some of the collateral damage that has come with that country’s incredible growth record. India has a chance to get its environmental policies right, to balance growth across sectors better and to use capital more efficiently than China has done. It would be nice if the government were to turn over more responsibilities to market institutions, implementing policies to make those institutions more accessible to the poor and more efficient. This would allow the government to focus on strategic priorities, such as dealing with climate change, and providing effective safety nets for those who are in no position to rely on the market for livelihoods, or who need temporary assistance.
Recent difficulties on the macroeconomic front have tempered the optimism of a year earlier, when 10% growth seemed to be within India’s grasp. Indeed, monetary tightening to tame inflation may bring down growth below 8% in the immediate future. If this slowdown leads to back-pedalling in economic reform, India may miss its chance to really help its poor.
Nirvikar Singh is professor of economics at the University of California, Santa Cruz. Your comments are welcome at firstname.lastname@example.org