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Making Inclusive Growth Not Elusive

Ihssane Loudiyi's picture

By Dr. Jayanta Roy

India’s economic performance in the last decade has been stellar. The average GDP growth has been about 9% in the last five years, with the same trend foreseen despite the major global economic upheaval. Inflation is stable, with a slight hiccup of rising food prices. Balance of payments is under control with burgeoning foreign exchange reserves. In IT and ITes, India is a recognized world leader. Most economists and institutional investors are projecting China and India to be the super economic powers by the end of the century, surpassing USA. Some economists are predicting that India will even outpace China in this marathon. There is no doubt that India has arrived.

The downside risk of India’s growth momentum is slim, or non-existent. The successive governments since the launch of the reform have steadfastly followed the development strategy, with innovative mid-course corrections when needed. The IMF has applauded the strong rebound of the Indian economy well ahead of other countries from the recent global financial crisis. Although, a few second generation economic reforms need to be implemented, Indian economy is on cruise control mode for high sustained growth. It makes little sense to play with small differences—9% versus 10%—as GDP growth targets. Economists have convincingly argued that high GDP growth in India will be sustained. But it is the quality of growth which is in question.

India’s performance may make some of us believe that we have just a few years to go before India becomes a developed country. In fact, a few of my retired colleagues of the World Bank released a book entitled: INDIA 2039: An Affluent Society in One Generation. They tend to forget that India’s per capita income is just $ 950, compared to $ 13,750 in Malaysia, and $ 46040 in USA, and that in spite of some success in poverty eradication, India has over 250 million people living below the poverty line—the highest in the world. The impact of growth on poverty has been somewhat muted. Poverty has declined from 36% in 1993-1994 to about an estimated 25%, a record, in terms of reduction in poverty rate, worse than in Bangladesh and Nepal. There are clearly two sides of the Indian miracle.

The purpose of this paper is not to belittle India’s progress, nor to be critical of the policies that have been followed. Overall, the success in breaking the logjam of 3% growth and reaching near double-digit growth has been nothing short of a miracle. What we need to focus more now is to make growth more inclusive. So far inclusive growth has just remained a slogan.

Public debate in India should focus on two interrelated issues—whether Indian growth is inclusive, and to squarely address the issue whether Indian economy is secure—Economic Security of India. This paper will flush out these issues, and arrive at the critical mass of India’s economic problems, alleviation of which need to be carefully monitored.

Inclusive Growth

Low per capita income and high poverty levels are the first indicators that Indian growth is not yet inclusive. There is marked disparity in growth among regions indicating that only a handful of states account for bulk of the growth. Growth obviously has not generated stable earnings for households to stay out of poverty. Growth has had less impact on females, tribal populations and religious minorities. India fares very poorly in social indicators with adult literacy rate of 61%, 50% only for females, average life expectancy of 63 years, and infant mortality rate at a very high 58 for 1000 live births. About 60% of the workforce in India is still employed in agriculture whose share has dwindled to about 19% of GDP. These disparities, to some extent, have resulted in the recent upsurge in Maoist violence, as well as increase of suicidal deaths among farmers.

The regional disparities in per capita income are vividly described in Figure 1 below:
 

Figure 1: State Per Capita Income-Difference with National Average


Source: RBI Handbook of Statistics

 

The Northern, Southern and the Western states have prospered most in this rapid growth era which has by and large eluded the Central, Eastern, and the North Eastern states. The Chinese regional disparities do not exhibit negative per capita income growth as witnessed in the lagging states in India. Seven poorest states—Bihar, Chattisgarh, Jharkhand, Madhya Pradesh, Orissa, Rajasthan, and Uttar Pradesh—are home to more than half the poor. Inclusive growth will be elusive unless there is convergence to these regional disparities. Underlying all this is public services earmarked for the poor are weakest in the poorer states.

A pressing issue is that the tribal population is concentrated in some of the poorest but mineral and forest rich areas. But they are not yet in a position to take advantage of these assets. In this context, the recent establishment of the Assam Investment Advisory Board by Chief Minister Gogoi is an important step to channelize investments from the top private sector CEOs. Large pledges of investment from the corporate sector confirm a clear support of the private sector for the excluded groups.

The way out of exclusion is total literacy (education should be a fundamental right), skill development, increase in agriculture productivity, and better governance. As the discussions in the next section will elaborate, these are also required to assure one that there is Economic Security in India.

India’s Economic Security

Major economic powers regularly monitor their economic security. It is high time India begins to do so. In today’s globalized world, economic security is best defined by the state’s ability to meet, on a sustained basis, the material aspirations of its citizens. This depends to a considerable extent on the state’s institutional capacity to cushion its people from domestic and global threats. Seen thus, the country’s economic security is related to every aspect of production, distribution and consumption of goods and services. Thus, the agenda for economic security includes almost every aspect of government and business policy. But in order to determine how secure the Indian economy is, I had narrowed the definition, in a paper I prepared for the new CII Council on Economic Security, to three concepts: resources security, institutional security and strategic security.

Resources Security: this encompasses two broad areas of natural resource security that includes efficient and sustainable access to water, energy and other natural resources; and human resource security that requires a workforce with adequate skills to ensure global competitiveness. India does not measure up too well on these counts. In spite of a large endowment of arable land (second largest cultivable land area in the world after USA), it has low agricultural productivity in comparison with the developed and other large emerging economies as Figure 2 below shows:
 

Figure 2: Average cereal yields, Kg per hectare (2005)


Source: World Development Indicators (World Bank) and author’s calculations

 

The underlying reasons are poor rural infrastructure and agriculture logistics, neglect of the food-processing sector and policy inadequacies in the organized retail sector that make it difficult to optimize supply chains for agriculture products. Agriculture has remained a neglected sector in India.

India has the lowest renewable water resources among major global economies. Industrial and urban demand for water is fortunately low by international norms, but demand might increase hugely, “crowding out” water for agriculture.

Separately, India needs to prepare a plan for sustainable energy security, given its heavy dependence on imported oil & gas. India also loses about a quarter of the electricity it generates to transmission and distribution losses.
Like China, India is well placed in terms of human resource endowment as Table 1 shows:
 

Table 1: Tertiary Students in Millions and as a % of Population below 15


Source: UNESCO, World Development Indicators and author’s calculations

 

India can compete with other developing countries in labor intensive sectors and with OECD economies in knowledge intensive sectors. But larger social investment is essential to sustain this edge. About 340 million Indians below 15 years of age will require education, health and nutrition. But India is clearly lagging behind the rest of the world in human capital investments. This could have an adverse impact on overall competitiveness.

It has often been politically expedient for India’s political and bureaucratic leadership to simply increase spending on social sectors including subsidies and employment plans for the economically depressed as a response to India’s significant quality of life challenge. However, despite a large number of such well meaning plans for social sector improvement being undertaken, rural development, sustained employment or substantive development in social dimension have not taken place.

The policy leadership in India has to realize that throwing more money is not the solution to the problem, especially since it has been well documented that a large part of the spending by government does not reach the intended beneficiaries. Institutional inefficiencies, corruption, lack of accountability and the general lack of awareness of citizenship rights of the common people of India all combine to create an extremely poor government services delivery system in India.

Institutional security: this refers to governance. It is not enough having resources and investing them. A key aspect of national competitiveness is the institutional environment that informs the process of utilization of such resources. If the institutional environment is one that leads to efficiency in utilization (i.e. production, distribution and investment), economic security is enhanced. If the institutional environment leads to inefficiency, economic security is reduced. An economy with high transaction costs is neither efficient nor competitive. This may not just be a production issue, but a distributional issue as well. India’s record of policy interventions in poverty reduction and social development is unimpressive. Doing business in India is still not smooth. India fares poorly on simple indicators such as cargo dwell time, days to enforce a contract or register a property, and power and transport costs.

Strategic security: this relates to economic diplomacy, police, intelligence and military aspects of economic security. India scores well on economic diplomacy, the Indo-US nuclear deal being a shining example. It encompasses energy security and a strategic partnership with the US that could change the global dynamics of the 21st century.

India also needs to maintain its defense expenditure to safeguard its citizens from internal and external threats. Sustained high growth is enough to generate the funds needed to meet geostrategic objectives.

Conclusion:

It is unfortunate, however, that we don’t have a vibrant economic security or inclusive growth debate in India right now. The country needs an aggregate index of economic security and inclusiveness that includes the issues highlighted here under Inclusive Growth, Resources Security, Institutional Security, and Strategic Security. A broad based Economic Security and Inclusive Growth Council should be created with representatives of central and state governments, industry, academia, and media to monitor the progress of this index. A nation of one billion plus people cannot afford to let its guard down on economic security and inclusive growth. Having jump started this work on economic security in India; CII should take the initiative to push this work forward with full support of the central and state governments. This effort will be considerably strengthened if the Council is housed in the Planning Commission that probably needs to revise its archaic mandate and focus exclusively on carrying out this work as its new high priority task. It will be most appropriate if the initiative of this institutional arrangement is pushed by the private sector. After all, the Indian private sector should take its due credit in transforming India from a Hindu rate of growth path to a high sustained growth trajectory. The successive governments since 1991 provided the enabling economic and business environment, the private sector did the rest. The architect of the 1991 reform is at the helm today. Perhaps this is the opportune time to begin the process of making growth inclusive, and the economy secure.

 

Dr. Jayanta Roy is the Former Principal Adviser of the Confederation of Indian Industry (CII). He is a Macro Economist and International Trade Specialist with over 30 years post-PhD experience in development economics and policy working for the World Bank and the Government of India. His special expertise is in the area of trade policy, including WTO policies, export development and trade facilitation. He held senior policy making positions in the Government of India, where he was a key member of the team that designed and implemented economic and structural reforms to open up the Indian economy. He has also written extensively on trade policies and institutions and taught at the World Bank Institute, Cornell University, the University of California at Santa Cruz., the University of Warwick, UK, and the Indian Institute of Management at Calcutta. Dr Roy holds a PhD in Economics from the University of California at Berkeley.