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India

By Samir Saran, Senior Fellow and Vice President, Observer Research Foundation (ORF);

Vivan Sharan, Associate Fellow, Observer Research Foundation (ORF)

India is a study in contrasts. In the post liberalisation era, since 1991, the country has witnessed a rapid GDP growth, secular expansion of its services sector, and a commensurate increase in per capita consumption. As a result, in 2012, the country overtook Japan’s GDP (in purchasing power parity terms), to become the third largest economy in the world. However, at the same time, a recent survey across 100 districts in the country revealed that 42 per cent of India’s children under the age of 5 are underweight and a shocking 59 per cent are stunted in their physical development98. Extrapolating these results to reflect the overall state of socio-economic development, the picture at once becomes stark. This paper will delve into some macro trends

through which it aims to unbundle facets of the country’s distorted growth narrative.

In March 2012, the Planning Commission of the Government of India set the poverty line at INR

28.65 (approximately USD 0.52) for urban areas and INR 22.42 (approximately USD 0.4) for rural areas in terms of per capita expenditure. Using rounded approximations of INR 28 and INR

22 (USD 0.5 and USD 0.4) for urban and rural areas respectively, National Sample Survey data from household surveys conducted in 2009-10 reveal that 22.98 per cent of India’s urban population and 36.58 per cent of its rural population spend less than the approximated poverty line (Table 1). Meanwhile, India’s ‘emerging’ identity, which derives from its significant middle class, is also exposed for what it is. Only about 4 per cent of India’s population earns more than INR 100 a day (approximately USD 1.8 a day in nominal terms). The rural urban divide is also particularly prominent and can be observed throughout this paper.

Table 1. Per Capita Expenditure and Population, 2009-10

Source: NSS, 2009-10 @ ORF India Data Labs

The world is still grappling with the ripples caused by the Global Financial Crisis. While the crisis found its origins in the West, it perhaps has greater absolute implications for the emerging and developing world. India has witnessed a slowdown in growth to around 5 per cent in 2012-

13. The fundamental assumption about GDP growth, echoed by Indian policymakers has been that faster GDP growth is a prerequisite to reducing poverty and concomitantly, enhancing development99. Such views are reflections of a wider international consensus that “there is every reason to believe that economic growth reduces poverty”100. In this case, the converse argument also holds, and every percentage point slowdown in India’s GDP growth impacts the sustenance prospects of millions of rural and urban poor.

There is of course a large volume of academic literature which questions such simplistic correlations. For instance the India Chronic Poverty Report (2011), states that “the issue arising

98 The HUNGaMa Survey Report, Naandi Foundation, 2011

99 http://www.thehindubusinessline.com/industry-and-economy/economy/india-needs-high-gdp-growth-to-reduce- poverty-at-faster-pace/article4153965.ece

100 Roemer, Michael and Gugerty, Mary K., “Does Economic Growth Reduce Poverty?”, Harvard Institute for

International Development, March 1997

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in some developing economies with large populations is not that there is poverty in spite of moderate to high economic growth, but that this poverty is often created by the very nature of economic growth itself’’101. While this view is open to debate, it is sufficiently clear that there has been a consistent rise in inequity between the rich and the poor in India. This is evidenced from the fact that those at the bottom 10 per cent of per capita wealth account for merely 3.6 per cent of total consumption, while the top 10 per cent account for 31.1 per cent102. Additionally, Pal and Ghosh (2007) have observed that “comparable estimates of the 50th (1993-1994) and

55th (1999-2000) rounds of National Sample Survey data reveal that inequality increased both in

rural and urban India”103.

Perhaps the starting point for any meaningful analysis or explanation of India’s unequal society must be an overview of aggregated expenditure profiles for different social groups. From table 2, it is evident that the traditionally disadvantaged groups (scheduled tribes, scheduled castes, and other backward classes), on average fare worse than those that fall  within the category of “others” in terms of per capita expenditure. On an all India level, less than 2 per cent of the disadvantaged groups spend more than the nominal equivalent of USD 2 a day. A majority (at an all India level) are below the approximated urban poverty line expenditure assumed here. It is

safe therefore, to infer strong causality between income classes and social groups104.

Table 2. Per Capita Expenditure and Social Group, 2009-10

Source: NSS, 2009-10 @ ORF India Data Labs

When the multidimensional nature of poverty is taken into account, it is not surprising that self fulfilling spirals can trap millions within a variety of systemic constraints. Table 3 helps to illustrate that while nearly all of those spending more than INR 100 per (approximately USD

1.8) day have access to electricity for domestic consumption, over 35 per cent of those who spend less than INR 28 (USD 0.5) in rural areas, still have no access to electricity.

Table 3. % Population with Electricity for Domestic Use and per Capita Expenditure, 2008-09

Source: NSS, 2008-09 @ ORF India Data Labs

101 India Chronic Poverty Report, Indian Institute of Public Administration, 2011

102 Mehta et. al., “India Chronic Poverty Report”, Indian Institute of Public Administration, 20011

103 Pal, Parthapratim and Ghosh, Jayati, “Inequality in India: A Survey of Recent Trends”, Department of Economic and Social Affairs (DESA) Working Papers, United Nation, 2007

104 Expenditure can be used as a substitute for income, using the established economic relationship that savings =

income – expenditure; and assuming negligible savings at the bottom of the pyramid.

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Peeling through the multiple dimensions of social inequity and concomitant to the above described ‘sociology of the poor’ are issues around access to services and resources. Saran and Sharan (2012) point out that between 30 to 40 per cent of those belonging  to the various disadvantaged  groups still use kerosene for lighting in rural areas105. This is a particularly illustrative statistic on two counts. Firstly, typical kerosene lamps deliver between 1 to 6 lumens

per square metre of useful light compared with typical Western standards of 300 lux for basic tasks such as reading. There is no convergence of living standards for those at the bottom of the pyramid. The second is that those with least access are disadvantaged on multiple fronts.

Access to modern forms of energy is necessary for development. Access to resources such as water is necessary for basics sustenance which underpins development. Wide divergences in the access to drinking water across different income profiles are indicative of a serious structural deficit. This deficit has no doubt helped to perpetuate inter-generational infirmities. Table 3 shows that those with per capita expenditures greater than INR 100 (USD 1.8) a day are around two and a half times as likely to have access to drinking water within their premises as those in the bottom quartile assumed here (expenditure less than INR 28 (approximately USD 0.5) per day). Those at the bottom are much more likely to walk significant distances to access water than those at the top. There are multiple implications of such divergences in access, including on household productivity.

Table  4.  % Population  and  Distance  from  Drinking  Water  Sources  Mapped  to  per  Capita

Expenditure, 2008-09

Source: NSS, 2008-09 @ ORF India Data Labs

Household productivity is also closely linked to the levels of education attainment. Within a rights-based framework for development, the role of education is increasingly emphasised. Tilak (2005),  notes  that  “poverty  is  seen  as  deprivation  of  opportunities  that  enhance  human capabilities  to  lead  a tolerable life” and  importantly that  “education  is  one such important opportunity, deprivation of which in itself represents poverty”106. While it is up for debate

whether primary, middle and secondary education actually offers productivity gains that are commensurate with the contextual imperatives for human capital formation given the scale and nature of poverty; and whether higher education or vocational education should be prioritised; the statistics in table 5 illustrate that there is a clear causality between income and education levels. Indeed, many studies have argued that this causality runs both ways.

105 Saran, Samir, and Sharan, Vivan, “Identity and Energy Access in India: Setting Contexts for Rio+20”, Energy

Security Insight, TERI, Volume 7 (1), January 2012

106 Tilak, Jandhyala B.G., “Post-Elementary Education, Poverty and Development in India”, Working Paper Series

No. 6, Centre of African Studies, University of Edinburgh

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Table 5. Education Levels Mapped to % Population sorted by Per Capita Expenditure, 2009 – 10

Source: NSS, 2009-10 @ ORF India Data Labs

India is rated as having a moderate inequality relative to several other developing countries, with a Gini coefficient of 36.8 in 2004-05107. While the coefficient has likely worsened since then, India is leagues ahead of several other G20 countries, including the United States and China. However, the Gini coefficient cannot capture the nuanced trends of inequity, and the causal relationships that perpetuate it.

Development is a long term, complex process. It is clear from the socio-economic realities which have been outlined in this paper, that India’s development trajectory is steep, and the challenges, stark. Concomitantly, the public policies which have also been highlighted here, have been formulated by policymakers to bridge inequities between various socio-economic identities and promote inclusive  growth.  They aim  to  provide better  access  to  services,  employment  and information; and are certainly enablers of transformation when implemented right. Even so, they are necessary but not sufficient. A number of systemic initiatives are required to create the momentum and maintain the development gains required for a broad based transition to higher levels of prosperity and equity, particularly for those at the bottom of the pyramid. In this context, we suggest there are two fundamental questions that Indian policymakers must pose to themselves, to tailor effective and efficient interventions that can ensure that development in fact leads to growth:

1.   What is the threshold level of inequality for political and social stability?

2.   How can policy interventions resolve the strategic, but not necessarily binary choice between generating employment and increasing productivity?

Two decades have passed since India embarked on a new growth trajectory underpinned by a neoclassical economic framework. Liberalisation led reform has delivered unequally. With over

1.2 billion people and  an extremely heterogeneous socio-economic profile, any attempts to recalibrate policy prescriptions must be fully cognizant of diverse realities and trends that have become firmly embedded. Whether GDP growth has exacerbated inequities, or served as the template for improving living standards is not the most urgent question in the contemporary context. Rather, policymakers and political leaders must focus their energies on understanding the causal influences that have a bearing on socio-economic trends; and accordingly designing a progressive and contextual framework for development and growth. We suggest that such a framework must include and be complemented by the following crucial elements:

107 World Bank Indicators

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                           Nearly 12 million people enter the Indian workforce ever year. A majority lack the skills to gain meaningful employment, and face an abject lack of access to decent work. As a result those at the bottom of the socio-economic pyramid are largely employed in the informal sector, without any form of job security or social security. The availability of productive and remunerative employment is central to enabling equitable growth. The Indian economy must employ a larger proportionate share of its workforce. In turn, minimum wages and domestic labour standards must be enforced universally; and the skills gap must be addressed through strategic emphasis on subsidised and targeted vocational education.

   The Indian economy relies asymmetrically on growth of the tertiary sector, particularly capital and skilled labour intensive sectors such as information technology which have not been  able  to  bridge  the  systemic  employment  gap.  Employment  creation  is  a  policy imperative for enabling equitable outcomes; and the revitalisation and reemphasis on the growth of the secondary sector is a necessary prerequisite for achieving broad based socio economic transformation. The industrialisation process requires a number of enablers, including improved infrastructure and service delivery; and the creation of a workforce with skill sets commensurate with a strategic vision for industrial growth.

   The competitive advantage of the  Indian  economy in  the export  sector  remains  largely untapped. With an export to GDP ratio of 16.5 per cent (in 2012), the Indian export economy has a vast potential. In this regard, high productivity, labour intensive sectors in particular demand a sustained policy focus. Greater integration with regional supply chains and increased leverage of regional trade agreements can provide the necessary momentum for secular growth of such sectors. Monetary policy, fiscal management and financial market depth must complement such growth.

   Policy Emphasis must be placed on facilitating access to markets with strong internal drivers demand. This will help the Indian economy to hedge against global demand volatility perpetuated  by disruptive  business  cycles.  The  Southwards  shift  of  Indian  exports  is  a positive sign in this context. According to the Indian Exim bank, the share of Asia, Africa and LAC regions has increased sharply from 47% in 2001-02 to 62.7% in 2011-12; and the share of Asia has risen from 40% to 52% during this period.

   The equitable growth of the Indian economy will to a large extent be determined by the degree   and   nature   of   private   sector   participation.   The   virtual   stagnation   in   the investment/GDP ratio (of which the private sector is a larger contributor than the public sector), which has grown by a mere 5 per cent since 2005-06 to 37.6 per cent in 2011-12, is indicative of inherent challenges. Greater participation of the Indian private sector can be driven by a better environment for doing business. Policy frameworks must address issues around corporate governance and labour reforms without compromising market competitiveness.

   Long term capital formation through increased participation in the financial markets must be prioritised. This will entail a broad based emphasis on imperatives such as financial literacy, financial inclusion, and investor protection. The nominal proportionate retail participation in the domestic capital markets is a cause of concern. Household savings must be productively and efficiently deployed in order to finance the widening current account deficit. Simultaneously, short term speculative participation must be offset by genuine market opportunities for growth. Commensurate emphasis must be placed on channelling global savings into long term asset creation in the Indian economy, with a supportive policy framework. Increased government emphasis on development of micro, small and medium enterprises as well as industrial clusters must be sustained despite political cycles. Policy disruptions can quickly reverse gains achieved over time, and political risk poses the greatest challenge to unleashing the entrepreneurial potential in the country. A coherent, inclusive and long term political vision must complement policy formulation. Robust legal frameworks must be employed to secure long term growth largely devoid of political risk uncertainties.

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