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Illustration: Shyamal Banerjee/Mint
Illustration: Shyamal Banerjee/Mint

Growth is the way to development

Richer Indian states have fared better in achieving development goals

The United Nations (UN) last week released a report gauging India’s progress towards achieving the millennium development goals (MDGs) set for the end of 2015. India had signed the millennium declaration adopting commitment to these goals at the UN General Assembly in the year 2000.

The report, entitled India and the MDGs: Towards a sustainable future for all, finds that India has either achieved or come close to achieving the targets set for reducing the number of poor, maternal mortality, the spread of deadly diseases and the number of people without access to clean drinking water. The country, however, lags behind in other indicators such as universal primary school enrolment, empowerment of women, access to proper sanitation and reduction of child and infant mortality.

On the whole, however, India has done fairly well in achieving important development indicators. But beyond the general findings, the reason the report attributes to the better performance of certain Indian states as compared to others could provide important lessons for policy in the years ahead.

Whether it is growth fuelled by pro-market reforms or development based on redistribution that ought to drive India’s economic policy has remained a heated, if somewhat spurious, question for years now. Prior to 1991, income redistribution was seen as the major ingredient to achieving development. But the way India and China pulled millions out of extreme poverty after just partial liberalization of their respective economies brought about a sea change in thinking and added greater validity to the importance of high growth.

But, if anything, growth and development need not be seen as mutually exclusive goals that can come only at the cost of the other. Higher income resulting from growth has proven to be the best medicine to treat poverty all through history. Last year, this newspaper made the case for high growth, pointing out to the strong link between prosperity and high income (mintne.ws/1lJqvlG). The findings of the latest UN report, regarding the varied performance of different Indian states, add further support to this fact.

Based on a study of state level performance, the report identifies rapid economic growth that is broad based with the participation from all sections of the population to be a crucial factor in achieving progress towards MDGs. This is seen most prominently through the positive relationship between per capita net state domestic product (NSDP) and performance in the MDG index—with richer states such as Tamil Nadu and Gujarat faring better than poorer ones such as Uttar Pradesh. Difference in growth amongst states has led poverty and other social ills to become concentrated in poorer states.

During the high growth period from 2004-05 to 2009-10, poverty across the country dropped from 41.6% to 32.7% according to international estimates. In the national poverty estimates, the correlation between growth and poverty reduction is robust with growth elasticity of poverty (percentage reduction in poverty for a one percent increase in growth) at 0.8. The reason for such rapid progress should be clear: high growth derived through structural reforms can help in employment generation and higher incomes.

Despite its positive effect on income and employment generation, the UN considers growth not to be a “sufficient" condition to bring about a desirable level of development. Even then, it admits rapid growth to be an “essential" condition to achieve development. This is since it is only growth that can help governments boost their revenue collections required to spend on social programmes. The report points to the high growth period in mid-2000s when per capita tax collection increased substantially—and helped fund programmes such as the Mahatma Gandhi National Rural Employment Guarantee Scheme. The effects of such programmes are, of course, doubtful if not downright pernicious. Poverty reduction programmes dependent on budgetary allocations have little to do with ending poverty on a sustainable basis.

The fact is that India still has a large number of citizens under poverty. The aim in the coming years should be to enact reforms to achieve high growth that can increase economic opportunities available to the poor and see India rise into the group of middle-income countries.

Should Indian policymakers resort to growth or redistribution? Tell us at views@livemint.com

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