Inequality and growth in India4 min read . Updated: 29 Nov 2009, 09:57 PM IST
Inequality and growth in India
Inequality and growth in India
Managing economic recovery and exiting the expansionary credit policy may be the immediate challenges facing the Indian economy. However, an analysis of economic growth patterns from two decades of economic reforms raises important questions on the sustainability of India’s long-term economic growth.
Conventional wisdom would have it that infrastructure bottlenecks are the critical roadblock in achieving double-digit growth rates. But it is arguable that while infrastructure investments may get us to double-digit rates, sustaining them would require more broad-based growth, which means aggressively addressing the poverty challenge and human capital deficiencies.
In this context, two recent World Bank working papers, one by Martin Ravallion and another co-authored with Gaurav Datt, explored the trends in post-reform economic growth and poverty reduction outcomes. The first paper compares China, India and Brazil and finds that India has been the poorest in achieving poverty reduction. Further, unlike China, there is little conclusive evidence that higher growth rates of the post-reform era have contributed to a comparable reduction in poverty.
Ravallion attributes India’s failures with poverty reduction outcomes to its inability to address its antecedent and widening inequalities—the Gini coefficient that measures extent of inequality rose from 0.303 to 0.325 in the 1993-94 to 2004-05 period—especially in human capital endowments. This retards the pace of poverty reduction by both preventing the poor from “participating more fully in the opportunities unleashed" through economic growth and by excluding them through capture of even ongoing social policies by the non-poor groups.
Economists such as Simon Kuznets have observed that countries generally experience increasing inequality in their initial stages of development, mainly due to the increases in skill premiums. But there is evidence that India’s widening inequality may be a result of the inability of a large section of population to access the opportunities presented by economic growth—due to geographic poverty traps, patterns of social exclusion, lack of access to credit and insurance, and so on.
This assumes greater significance in view of the fact that the dominant share of the population is still rural (around 70%) and the human capital deficiency is severest among the rural poor (who form 72% of all the poor). And sustaining high rates of growth envisages suctioning in of massive quantities of physical capital inputs—most critically, semi-skilled and skilled human resources —mainly from the rural areas.
Incidentally, an International Monetary Fund working paper by Petia Topalova on inequality compared the economic and social policies of different Indian states and found that, among other things, states with “higher average education experienced greater relative gains for the poor and also raised the ability of the poor to gain from the growth process".
It is, therefore, but imperative that we focus on policies that increase access to and improve quality of basic education, healthcare and other social services; ease bottlenecks for participation of the poor in economic activities; and remove potential sources of institutionalized obstacles to opportunities. Further, we could emulate Brazil’s achievement in directly addressing widening inequality and poverty through more effective social policies such as its hugely successful conditional cash transfer programmes.
In the second paper, Ravallion and Datt examined household survey-based poverty measures for 1951-2006 and found that in the post-reform era, urban economic growth had emerged as not only the engine of economic growth, but also the driving force behind overall poverty reduction. This is contrary to earlier studies which found that “the main driving force for overall poverty reduction was rural economic growth" and that urban economic growth brought “little or no benefit to rural poor". They find strong evidence of a feedback effect—through trade, migration and transfers—from urban economic growth to rural poverty reduction and distributional effects from urban growth benefiting the country’s rural poor in the post-reform period. The rural poor migrating to urban areas reduces rural poverty by sending remittances back home, reducing the demand and hence competition for rural jobs, and maintaining an upward pressure on rural wages. This, coupled with the compositional effect of migration to cities and the consequent decrease of the poor from rural areas, flatters rural growth statistics and deceives the urban figures. In fact, the increased importance that urban economic growth plays in rural poverty reduction (and its consequent translation into rural economic growth) may substantially explain the higher rural growth rate (annually 7.3%, against 5.4% in urban centres) over the past decade. In other words, the high rural growth rates, the focus of much recent attention, may be a result of higher urban growth than any disproportionate increase in the vibrancy of the rural economy.
The positive externalities and overall economic multiplier associated with urban economic growth once again underline the importance of cities to India’s economic prospects. However, there is an imminent danger that, in the absence of adequate investments in urban infrastructure, urbanization and migration from rural areas will impose costs that could overburden and ultimately derail the urban growth engine. Looking ahead, bridging inequality, especially on the human capital and endowment front, will be critical in ensuring that the benefits of faster economic growth and increasing urbanization and urban economic growth are shared by the poor. The way ahead for India would be, as Ravallion writes, to combine “China’s growth-promoting policies with Brazil’s social policies".
Gulzar Natarajan is a civil servant. These are his personal views. Comments are welcome at firstname.lastname@example.org