Why India needs the right to economic growth
Both Congress and BJP governments have denied India the ‘right to economic growth’
On Saturday, a headline in this newspaper caught my attention. Inaugurating the 84th plenary session of the All India Congress Committee, its president Rahul Gandhi said India was feeling tired and directionless. He added that only the Congress party could take it forward. He was right on the diagnosis and wrong on the prescription. One of the principal reasons that the country feels tired and directionless is that the Bharatiya Janata Party (BJP) has governed in the same manner as the Congress did between 2004 and 2014. That is why there is a sense of déjà vu about the feeling of tiredness and lack of direction. Both major political parties have failed to rise to meet India’s aspirations. There is no sign that the Congress party has learnt the right lessons from its reign.
The resolution on agriculture, employment and poverty alleviation moved at the plenary session suggests that the party has learnt nothing from its mismanagement of the economy for a decade from 2004, and particularly after 2009. So, while it is true that the BJP did not remove the feeling of fatigue and lack of direction from 2014, the Congress is ready to pick up from where it left off in 2014 so that the nation collapses from fatigue and lack of direction. India should be worried.
The current government has not been imaginative enough to reverse some of its predecessor’s policies and has compounded them with its obsession with economic morality. The recent decision to scrutinize all advances above Rs50 crore and the complicated ban on promoters and related parties from bidding for auctioned assets under the insolvency procedure are but two recent examples. The government is either ignorant of, or indifferent to, the operation of the law of unintended consequences. Uncertainty looms large over India’s economic growth outcomes notwithstanding the fact that the ink on upward revisions to economic growth forecasts for India has barely dried.
Both parties have denied India the “right to economic growth”. The success of the unconditional cash transfer project launched in Madhya Pradesh in 2010 was a reminder of what Indians could do with the right to economic growth.
Given cash without strings, the poor figured out how to spend it. Nutrition levels went up. Choice of food improved. They invested in sanitation, better cooking and lighting energy sources, and enrolled their girls in schools. These were covered by the media and the discussion that followed was on predictable lines. The elite argued for the state to stay with non-cash support that had been abused systematically for decades while the pro-market commentators hailed the success of the pilot. The latter are right, but also wrong for another reason. The issue is not one of choice between conditional and unconditional cash transfers or between cash transfers and non-cash welfare benefits to citizens. An unconditional cash transfer raised their income. It empowered them with choices and they chose well. The experiment highlights the potential of higher incomes to transform people’s lives. Higher income is a consequence of economic growth.
It was in 2002 that David Dollar and Aart Kraay wrote a paper with the catchy title, Growth Is Good For The Poor. It was published in the Journal Of Economic Growth. They showed that average incomes of the poorest quintile rose proportionately with average incomes in a sample of 92 countries spanning four decades. Countries lined up neatly along the positively sloped 45-degree line. Gross domestic product (GDP) growth has often been derided as an inadequate, imperfect and even flawed measure of economic well-being. Gross national happiness may be more interesting for nations that do not need economic growth as much as they used to. For the rest, economic growth still matters for both economic and social well-being.
Recognizing unequal distribution of incomes is an important social and economic problem of the 21st century. Two years ago, Charles Jones and Peter Klenow created an index of economic welfare that included income inequality, leisure and mortality measures. They then checked the correlation of their index with economic growth. Again, the result was similar to what David Dollar had obtained. Economic growth results in improvement to the welfare index. More recently, the International Monetary Fund (IMF) expanded the index to include environmental sustainability factors. The results have been published in a new paper (Welfare Vs Income Convergence And Environmental Externalities). Economic growth is positively related to improvements in the new enhanced and expanded welfare index. The message is that economic growth is the best redistributive policy possible. It is also the best morality play in town.
India’s prime ministers, barring Rajiv Gandhi, P.V. Narasimha Rao and Atal Bihari Vajpayee for brief periods, had not accorded priority to economic growth. Manmohan Singh happened to be the prime minister when the Indian economy grew strongly. As India approaches an election year, leaders of the two national parties owe it to the country to reflect on their economic performance and place before the public the policy lessons they draw from such an exercise for wider debate. Going by the resolutions adopted at the Congress’ plenary session, Rahul Gandhi’s prescription for the problem he has diagnosed is to perpetuate it. He should do better. On his part, Narendra Modi must reflect on why Rahul Gandhi’s diagnosis feels right, even to Modi’s well-wishers.
V. Anantha Nageswaran is an independent consultant based in Singapore. He blogs regularly at Thegoldstandardsite.wordpress.com. Read Anantha’s Mint columns at www.livemint.com/baretalk
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