Growth versus redistribution | Himanshu5 min read . Updated: 19 Jul 2013, 09:35 AM IST
What matters is not growth but the nature of growth and, more importantly, the beneficiaries of this growth
While summing up his well-argued article on the Bhagwati-Sen debate, Niranjan Rajadhyaksha of Mint poses the following question: “Should India aim for growth that will lift incomes or should it first address social issues such as inequality and malnutrition that will eventually hinder growth?"
The question is not new, nor is the debate. For most people who followed the Bhagwati-Sen debate, this question is probably the right question. But, in this case, the problem is not the question itself but the way it is posed. It will be difficult for anybody to disagree with the assertion that growth is Hobson’s choice.
But then this is so only if growth does lift incomes, not just of those who are privileged, but also those who are usually excluded. This is especially relevant in a context when addressing inequality and malnutrition is seen as eventually hindering growth.
The assumptions behind both statements are not necessarily true and this has been the crux of arguments between the two sides. To be fair, even those who seek greater social sector expenditure do not argue against growth, nor are those who argue for growth against redistributive transfer.
The problem with those who argue for growth is that they see this as the end in itself, while, for those who argue for greater redistributive transfer, growth is only a means of achieving a larger objective. Growth in itself is a meaningless objective if it is not accompanied by improvements in incomes for the majority.
Nobody in his/her right mind would object to growth if the process of growth is also accompanied by redistribution of resources among classes of households. This is a necessary outcome, but all forms of growth do not lead to improvements in incomes across all households. If that were the case, then the entire debate on inequality would be meaningless because growth would necessarily be accompanied by a reduction in poverty and inequality. The fact that sustained growth of more than 6% in the last two decades has led to increasing inequality in all dimensions also implies that the rich have benefited more from growth than the poor.
A simple indicator of growth that improves everybody’s incomes is the quantity and quality of employment created, but how can a growth of more than 8% per year be seen as increasing incomes for everybody if the total employment created during 2004-05 to 2009-10 is only a million, as against roughly 12 million new entrants in the labour force every year? Forget the number of jobs created, even the quality of existing jobs deteriorated with the percentage of workers in the informal sector increasing. Strangely, this was also the case in the organized sector, where quality of work is, in general, better. In the last 10 years alone, the percentage of contract workers without social security increased from 19% to 32% in the organized industrial sector. So, if those who are participating in growth, as workers, are not benefiting, who is?
This may not be difficult to answer. Crony capitalism is not a new phrase in the Indian lexicon. The fact that a lot of growth was achieved through crony capitalism, using the same business-politics nexus that the reforms sought to dismantle, is evidence enough of the failure of growth to improve the incomes of everybody.
So what if the money was ill-gotten as long it is used to fund social sector programmes? That is the essential argument of those who accord primacy to growth. But even this is not true for India. Not only is our tax-GDP ratio among the lowest in the world, it remains at this level, in fact marginally lower than what it was in the 1990s, despite the growth rate accelerating from 6% to more than 8% in the last decade. During the same time, the wealth of Indian billionaires increased from less than 4% of GDP in the early 1990s to 23% of GDP by 2009. Of these, a significant majority were in rent-intensive sectors such as metals, minerals and real estate. Clearly, what matters is not growth but the nature of growth and, more importantly, the beneficiaries of this growth.
Evidence of growth bypassing the poor and the excluded is increasing by the day. Be it nutrition, sanitation, educational enrolment, learning achievements, or status of women, we continue to remain at the bottom of world rankings. It is precisely this dissatisfaction with the process of growth (and not growth per se) that has led to demands that basic services become a right, not a trickle-down effect of growth. Had growth delivered, nobody would have demanded these rights.
This belief seems to cut across political parties. A good example is the National Food Security Bill (NFSB). Despite all the suggestions that this expenditure will hinder growth, many states have gone beyond what the central NFSB proposes. Why do state governments do it irrespective of political affiliation if this is bad economics and bad politics? Because it is not only good economics, but also good politics. It is the least-cost solution to political stability, essential for growth.
Let me end with some numbers.
Poverty did decline faster during 2004-05 to 2009-10 and for many it would have appeared to be the beneficial result of growth. So we broke down the poverty reduction between 2004-05 and 2009-10 and tried to estimate the contribution of social sector interventions such as public distribution system (PDS) vis-à-vis growth. Research shows that less than half of the poverty reduction (48%) can be attributed to growth, with the rest arising from the benefits delivered by PDS.
And even the 48% reduction attributed to growth includes the benefits of various social transfers such as pensions and subsidies and growth in incomes due to employment guarantee act.
What was the cost of PDS? It was less than 1% of GDP and has remained so during the last decade. But, if a leaky and inefficient PDS with less than 1% of GDP expenditure can deliver more than growth of 8% per year in GDP did, can there be a question on what the priority should be?
Himanshu is an assistant professor at Jawaharlal Nehru University and visiting fellow at Centre de Sciences Humaines, New Delhi.