Opinion | Economic growth is a moral obligation to the poor4 min read . Updated: 18 Mar 2019, 10:57 PM IST
A single percentage point rise in GDP per capita can lift about 3 million Indians out of poverty
Boosting the rate of economic growth is the most important and urgent need in India. This is a simple fact so universally known and universally ignored that it warrants repetition. Unfortunately, policies raising the growth rate has found no room in the country’s current political dialogue, which is entirely focused on pandering to voters and interest groups.
The wretched economic reality imposed on hundreds of millions of Indians because of two centuries of colonial oppression and half a century of socialist oppression started changing in 1991. Since those reforms, a higher rate of GDP growth sustained over the years has lifted over 170 million Indians out of poverty.
But the job is far from complete. About 75 million Indians still live below the $1.90-a-day threshold in what is termed extreme poverty. Using a different figure by the World Bank of $3.20 a day for “lower middle income" countries like India, about one-third of all Indians (450 million) are poor and vulnerable to economic stress that could push them back into extreme poverty. According to a working paper by Pradeep Agarwal for the Institute of Economic Growth, a single percentage point increase in GDP per capita reduces poverty by 0.78%. In other words, a additional 1% increase in the GDP per capita can potentially lift about 3 million Indians out of poverty.
In 2011, the growth rate of GDP per capita was 9%, but it slipped just below 6% last year. In political speeches and on news channels, we see people quibble over data. And the common man is left wondering if a 3 percentage point rise or fall really makes a difference. The reality is that such a difference in GDP per capita is the difference between lifting 9 million out of extreme poverty or leaving them in deprivation. If we had the job of personally telling these 9 million Indians why we choose policies that hurt economic growth and leaves them poor, we would realize the moral imperative of reforms. An additional 3-percentage-point growth in GDP per capita over the current levels can help eliminate extreme poverty in a decade. Boosting economic growth is thus not just a policy imperative, it is a moral obligation. And to choose policies that prevent us from making the poorest Indians better off is unconscionable.
Economic growth has been beneficial in dramatically reducing extreme poverty in India, but it has not pushed these hundreds of millions of Indians into the safety of the middle class. India’s harsh regulatory environment creates an enormous informal sector, leaving those lifted out of extreme poverty trapped in that sector highly vulnerable to economic stress. We got a stark reminder of this during demonetisation, which hurt the informal sector the most, destroying millions of livelihoods overnight. To elevate the vulnerable into the middle class requires a long and sustained period of rapid economic growth, coupled with a thorough streamlining of the labour and manufacturing regulatory system. And the two are neither mutually exclusive nor contradictory. In fact, reforming India’s myriad labour and industrial regulations might boost the pace of the economy’s growth while also bringing the informal sector out of the shadows.
Focussing on faster growth is also crucial for those interested in social welfare programmes and transfers to reduce the vulnerability of the poor, especially in the agrarian and informal sectors. Important ideas like direct and unconditional cash transfers have been successful in targeting the poorest and reducing economic vulnerability. Some version of a universal or quasi-universal basic income is on the agenda of most political parties. But even those interested in welfare transfers need to realize the imperative of growth to support these schemes.
According to the Handbook Of Statistics On Indian Economy 2016-17, since the 1991 reforms, the Union government’s revenue has increased 25 times and state government revenues have increased 28 times in nominal terms, and about 4 times in real terms. Economic growth and the consequent increase in revenue also increases the ability of the government to focus on inequality and deal with sector-specific distress.
A sustained period of high economic growth brought millions of Asians out of poverty in South Korea, Taiwan, and most notably China. Thanks to the liberalization of the Chinese economy and its integration into global trade, China lifted over 800 million out of poverty. Recently, the Modi government declared economic victory over China as Chinese growth slumped and India managed to pass the 7% mark. But the celebration is premature. The Indian economy today is only as large as the Chinese economy was back in 2002. And from 2002 until its recent slowdown, China managed to consistently grow at over 8% a year, even passing the magical 10% figure for many years.
The problem is that both the current government and opposition parties are making an unconscionable moral choice by ignoring economic reforms and pandering to voters with freebies. In the current election, candidates have not even bothered with the usual lip service paid to economic progress. There is silence on reforms, no talk of growth and little being said about aspirations and opportunity. It is down to promises of loan waivers, jobs in government and reservations in educational institutions—in exchange for votes. Across the board, our political leadership has displayed a policy as well as moral bankruptcy that will leave hundreds of millions of Indians impoverished.
Shruti Rajagopalan is an assistant professor of economics at Purchase College, State University of New York.