BackLiving with inequality
Living with inequality
PremiumThe current morass that India finds itself in is the result of confused choices. Photo: Ankit Agrawal/Mint
To say that India is a land of marked economic contrasts is to repeat a cliché. The country witnessed 9% growth some years ago and the number of poor has also declined substantially—notwithstanding the controversies about defining who is poor. It is the latter aspect of the Indian economic situation that leads to heated debates. Very often, it masks the actual issue: the rising inequality in the country. The tug of war in redrawing the poverty line reflects these concerns.
Data on monthly per capita expenditure of households (MPCE), released earlier this month by the National Sample Survey Office (NSSO) has kept this debate alive.
The other bit of the NSSO data is about the relative shares of the various segments of the rural and urban population. It is this information that is disquieting for many analysts. For example, in 2011-12 (the period covered by the 68th round of the consumption expenditure survey) the ratio between MPCE of the top 10% to the bottom 10% of the rural population is 6.87. For the urban population, this figure is starker: the ratio is close to 10.9 or, in simpler terms, a person who is among the top 10% of consumers in urban areas consumes, on an average, 10.9 times more than someone in the bottom 10% of the pile.
Morally, of course, the situation is disquieting. But what is more worrisome is the translation of this moral unease into misguided and confused policymaking. The current morass that India finds itself in is the result of these confused choices. This has, effectively, shaved off growth by close to 2-2.5 percentage points (assuming that India’s potential growth is 7%). That is not all. Due to the long-term effects associated with such choices, even potential growth has been reduced from 8% to the now widely accepted figure of around 7%. It is this possibility, of lower growth in the medium run (say the next four-six years), that spells trouble for India.
How did this happen? For the moralist (in contrast with the economist), the simplest solution to this problem is to simply redistribute income from the top deciles to the bottom ones. If that sort of expropriation is not possible—for the rich are politically powerful—the government should borrow and spend.
Thus, the story can be looked at in two phases: the past three years and the coming three-four years. The former tale is well known: the government did indeed borrow and spend and the increase in rural MPCE, substantially, owes to this effect. It is another matter that the combined effect of fiscal deficit and unmanageable inflation is a mild stagflation.
It is the other story—the possibility of slow growth in the years ahead—that is interesting and gloomy.
One of the key ingredients of strong growth is a high level of savings. Converting those savings into investment is the other side of that coin. In India, for the first time, gross domestic savings (as a percentage of gross domestic product) crossed the psychologically and economically important 30% barrier sometime in 2004. This was not achieved by waving a magic wand. Historically, there is an important link between trustworthiness and savings. Trustworthiness on part of investors that governments will not expropriate them and trustworthiness on part of two business partners that they will not cheat each other for immediate, short-term, gains. In effect this requires having a measure of patience and foregoing current consumption for future consumption. (In economists’ jargon having a lower discount rate). It has been speculated that in India, discount rates declined sometime in the 1990s, leading to higher savings rates in the next decade.
The obverse of this is “here and now" consumption, as if there will be no tomorrow. Savings needed for growth in the years ahead are on no one’s radar. The policy interventions of recent years fall in this class. If anything, the increase in rural MPCE seen in the 68th NSSO round is illusory: all that has been done is to convert government’s dis-savings into immediate consumption in rural areas. No assets have been created (an asset is here considered to yield some future returns); the link between savings and investment has been broken; and the level of savings has come down.
Some contemporary events show this very clearly. The government’s impatience to lay its hands on more resources—the Vodafone tax case and the possible tax rate increases are good examples. The popularity of populist politics is another manifestation of this change. These are dangerous portents for India’s growth in the years ahead.
Siddharth Singh is Editor (Views) at Mint. Reluctant Duelist will take stock of matters economic, political and strategic—in India and elsewhere—every fortnight.
Comments are welcome at www.livemint.com/reluctantduelist.htm
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