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Inclusion and growth

Talk at YSP5
Indira Gandhi Institute of Development Research
Mumbai
June 24, 2009
by Pulapre Balakrishnan
Senior Fellow
Nehru Memorial Museum and Library
New Delhi

For five years from 2003 India was at the very


top of the league of fast growing economies in
the world today.
China was of course the fastest, but India was
watched by the world at least as keenly.
Politically, India fascinates because it has
endured as a democracy despite conditions that
would predict its withering away.

During the period of its high growth India was the


cynosure of all eyes, partly due to the allure of its
highly visible corporate capability, particularly in
IT, which extends from management to R&D.
From an economic point of view, India continues
to fascinate by being at the cutting edge of
technology and ideas despite a very low average
income.

Consider this:
Aircraft engines need to be put through rigourous tests before they are
sold. What will happen in case of a bird hit, or if a fan blade disengages?
Done physically, each of these tests can cost up to $15 million. And each
test has to be carried out under different conditions. This can burn hundreds
of millions of dollars. General electric, the worlds leading maker of aircraft
engines, carries out all such tests on computers in an industrial estate in
Bangalore at a fraction of the cost and time. As a result, GE hopes to rollout
four or five engines over the next five years. An engine can take up to 20
years to develop. Nobody has ever flooded the market with so many
engines in a span of just five years.
Bhupesh Bhandari, Frugal innovation, Business Standard, June 13/14,
2009

India has grown faster since 1991, suggesting


that the aim of integrating with the global
economy has paid dividends.
However, an increasingly heard criticism is that
the currently high economic growth in India is
not inclusive.

India: Child anaemia


(source: Bose, 2007)
Status

NFHS (2005-06) NFHS (1998-99)

Any

78.9

74.3

Mild

25.7

22.9

Mod.

49.4

45.9

Severe

3.7

5.4

In this talk, I shall:

i. Reflect on the idea of inclusion in the


context of an economy, and

ii. Assess how the current growth in India


measures up to some rudimentary criteria of
inclusiveness that we might consider.

Why inclusive growth?


The genius of a country is not best or most in its
executives or legislatures, nor in its ambassadors or authors
or colleges or churches or parlors, not even in its newspapers
or inventors but always most in the common people.
Leaves of Grass
Walt Whitman, American poet

The very idea of India


To bring freedom and opportunity to the common man, to
the peasants and workers of India; to fight and end poverty
and ignorance and disease: to build up a prosperous,
democratic and progressive nation, and to create social,
economic and political institutions which will ensure justice
and fullness of life to every man and woman.
Jawaharlal Nehru
Address to the Constituent Assembly
August 14-15, 1947

There would be no India without inclusiveness!

The method of the economist


While it is difficult for economists to perform experiments
to test their theories, as a chemist or a physicist might, the
world provides a vast array of natural experiments as dozens
of countries try different strategies.
Joseph Stiglitz, Nobel Laureate
Making Globalization Work, 2006

Its official now!


Inclusive growth has been stated as an
objective in the Approach Paper to the Eleventh
Plan.
It has also been referred to continuosly by the
representatives of the government that has just
assumed office in New Delhi.

However, the Approach Document itself does not


spell out clearly the means to inclusive growth,
or even what it means.
This leaves the task to us.

I shall spend some time considering alternative


ways of viewing inclusive growth, and
consequently potential routes to it.
At the outset, it needs be recognised that there
is no costless formula.
As we are a democratic polity, we need to
generate political will. As we are a market
economy, we would need to commit resources.

It would seem that at least two conditions are to


be satisfied for growth to be considered
inclusive:
i. Growth does not leave behind large numbers.
Note that this is a very mild requirement. In an
adaptation from Rawls, we could have adopted
maximin as the first criterion.

The maximin principle is a justice criterion


for the design of social systems proposed
by the philosopher Rawls.
According to this principle the system
should be designed to maximise the
position of those who will be worst off in it.

ii. Growth is characterised by an evenness


across the economy, such that the widest range
of our material needs are satisfied.
Easily recognised as absent in India where till
recently there was a boom in the IT sector
combined with slowing agricultural growth.
Or, in Kerala, where there has been social
development without development of what Marx
had referred to as the productive forces.

Querying accounts of progress based on


the growth rate alone is a concern
worldwide today.
In 2008 the French president appointed an
Indian adviser to re-define economic
progress bearing in mind the quality of life.

I suggest that, at least for India, we use a


paired criteria by which to judge how
inclusive is growth.
First, growth must carry the many with it.
Secondly, it must satisfy the widest range
of our material needs.

Some features of the growth of the last decade or so:


Growth has accelerated since 1991.
Significant feature is the resurgence of
manufacturing in the very recent past.
Manufacturing is important not only for faster growth,
but also as this growth is in new sectors:
automobiles, high-end consumer durables.

However, by the definition that we have


sketched, growth in the past decade and a half
has not been inclusive.
First, are the emerging opportunities being
distributed equally?
While we cannot be certain, we have reason to
believe that they are not.
But why?

As the demand for labour is what we term


derived demand it is related to the growth of
output.
And we know that not all sectors are growing at
the same rate.
While this is not unusual the world over, there
has occurred a great shift in labour from the slow
growing to the fast growing sectors.

In India such is shift is being thwarted by a very


low level of education and general capability
development. This constraint is fundamental.
So recent growth has not been inclusive by our
first criterion, as the opportunities are not equally
distributed.
Recent growth also does not satisfy our second
requirement, that growth cater to the entire
range of our needs.

The absence of growth in two widely


different areas may be noted.
First, in agriculture. And secondly, in
infrastructure, both social and physical.

So we can identify education, health and


physical infrastructure as the missing
elements in the Indian economy.
What can we do to rectify this absence?

Both history and economic theory tell us


that the broad policy of relying on the
market is not sufficient to deal with this
problem.
All succesful economies from Europe to
Japan have relied on mass public
education to raise the general level of
capability of their economies.

For half a century, the UK has had a National


Health Service that provides free medical care of
the highest order.
The inter-state highway system in the United
States was built by the government.
The economies of the EC combine high levels of
income with substantial welfare provision.

The role of public provision of services is that it


mitigates income poverty. It is an important
instrument of inclusiveness.
The theoretical reason for the belief that better
government alone can bring about inclusiveness
is investment on education and infrastructure,
and even health, has a social rate of return that
is higher than the private rate of return. We know
from theory that the market under-provides such
goods.
There is also the general collective goods
problem in public goods provision.

Recognising the historical experience of development


of the currently richest economies and the theoretical
case for public provision of public goods, we can turn to the
Indian case.
It is by now clear that the policy focus has excluded social
and physical infrastructure.
There is a policy deficit.
Public goods are not on the radar, as we find from the
flooding of Mumbai during the monsoon, the outbreak of
cholera in Bangalore and Chikungunya, a mosquito-borne
ailment, in Kerala within the last six months. Public health is
in a precarious condition.

Can the reforms per se handle the paucity of


public goods in India? This question is relevant as
the case is constantly made that what India needs
most now is more reforms
To answer the question posed we need to first
understand the nature of the reforms since 1991.

Since 1991 the economic policy environment in


India has been liberalised.
Much of this was necessary and has shown
results, notably in manufacturing.
However, in areas where the government has been
inactive in the past particularly social and
physical infrastructure it continues to remain so.
This indicates the prospects for greater supply of
public goods in India unless the problem is
specifically addressed.
We know that benign neglect will not deliver the
goods.

Improved public goods provision straddle the 2 elements


in our definition of inclusive growth.
First, they can enable participation in the opportunities
thrown up by those currently excluded.
Secondly, in some avatars such as sanitation, roads
and urban recreational spaces they are constitutive of
an inclusive growth.

The challenge of bringing about a more inclusive


growth may be demonstrated with an example from
the agricultural sector.
The agricultural sector currently occupies the
overwhelming majority of Indians. Not only is it
growing slowly, it is also not able to produce food
cheaply. The relative price of food has not declined
since 1991.
It is believed on the basis of past research that the
main factor in raising the rate of growth of
agriculture, as proposed in the Eleventh Plan, is the
expansion of irrigation.
But irrigation expansion has actually slowed since
1991.

Public expenditure on irrigation and flood control


Nominal Expenditure
in Rs. crore

Expenditure
at 1993-94
prices

Third Plan (1961-66)

664.7

7402.0

Annual Plans (1966-69)

471.0

3699.0

Fourth Plan (1969-74)

1354.1

8484.3

Fifth Plan (1974-79)

3876.5

15095.4

Annual Plan (1979-80)

1287.9

4127.9

Sixth Plan (1980-85)

10929.9

25717.4

Seventh Plan 1985-90)

16589.9

28349.1

Annual Plans (1990-92)

8206.0

10413.7

Eighth Plan (1992-97)

31398.9

28353.7

Ninth Plan (1997-2002)

63009.5

42817.0

Tenth Plan (2002-2007)

103315.0

55450.3

Period

The case of irrigation is illustrative that political


negotiation is going to be as important as
economic resources in bringing about inclusive
growth in India.

India: relative price of food


(source: authors calculation)
1993-94

1.00

1994-95

0.97

1995-96

0.98

1996-97

1.01

1997-98

1.01

1998-99

1.02

1999-00

1.04

2000-01

1.04

2001-02

1.05

2002-03

1.03

2003-04

1.00

2004-05

0.99

India: A health card, Child anaemia


(source: Bose, 2007)
Anaemia status
(grams per dcl)

NFHS (2005-06) NFHS (1998-99)

Any (< 11)

78.9

74.3

Mild (10.0 -10.9)

25.7

22.9

Mod. (7 - 9.9)

49.4

45.9

Severe (< 7.0)

3.7

5.4

The need to recognise trade-offs


Conflicts: Emerging consequences of the
NREGS.
The Knowledge Commissions recommendation
on higher education.
What price PDS?

Where is India headed?


Political consensus and social cohesion.
Far greater debate needed than we have
today. Economic policymaking is far more
removed from civil society than it was in the
fifties.

India: Percentage of undernourished households


source: Ray (2008)
1987-88
(NSS Round 43)

2001-02
(NSS Round 57)

Rural

48.16

66.90

Urban

36.97

51.00