Development and inequality

Development and inequality

There is one thing that Rahul Gandhi does not tire of repeating ad nauseum: There are two Indias— one for the rich and another for the poor. The 2010 Human Development Report (HDR), released by the United Nations Development Programme, shows that the heir apparent to the Congress leadership is not alone in his philosophy.

The issue of inequality features heavily in the HDR, with its new Inequality-adjusted Human Development Index (HDI). In placing India 119th out of 169 nations, it shows how inequality has widened in the country even though per capita gross national income has increased impressively. Hence, 55% of Indians suffer from widespread deprivations, and 421 million live in multidimensional poverty (another new measure indicating lack of access to healthcare, education and standard living conditions) across eight states— more than all the people in the 26 poorest African countries.

Inasmuch as there are trade-offs between growth and social equity, such evidence, compelling though it is, presents a policy conundrum for a developing country such as India. As Abhijit Banerjee and Esther Duflo point out in Inequality and Growth: What Can the Data Say?, inequality leads to redistribution in the standard political economy model. The slew of social sector schemes launched in India in recent years is indicative of the policy tilt in this case. Yet not all have helped target populations prosper. Some, such as MGNREGA, have arguably had unintended consequences on inflation, and have come at the expense of fiscal discipline.

In the debate over inequality, it is informative to turn to an established economic paradigm. In 1955, economist Simon Kuznets hypothesized that income inequality increases as a country grows initially, but decreases once a certain development mark is reached. The wisdom of the Kuznets Curve is relevant for a country like India that needs to grow consistently if it is to fulfil its political and economic potential.

This is not to say that HDI is irrelevant. It is indeed important for states to create an enabling environment for long, healthy and creative lives for its citizens. But the continuing Indian experiment with populism holds considerable space for scepticism. As Banerjee and Duflo suggest, such measures may even harm growth prospects. Instead, India would do well to invest in better educational and healthcare infrastructure; undertake labour market reforms and progressive industrialization that can help create jobs; and deepen credit-delivery and savings mechanisms to encourage entrepreneurship. These would not only add to the growth initiative, but would also spread the benefits of that growth more equitably.

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