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Inclusion and Growth in India: Bare Facts, Revealing Branches

Though the names have been different, discussion about inclusive growth has been an age old issue. The emphasis, however, has also been different. In the 19th century, it was concern with widening inequalities in income which propelled scholars like Marx to argue for “forced” equalisation in incomes. For the last several decades, the discussion has been in terms of “redistribution with growth”, basic needs, market friendly growth, pro-poor growth and now inclusive growth.

“Inclusive growth” is likely more a process rather than an outcome, though obviously the outcome matters. There are also some possible misconceptions about inclusive growth; in particular, that inclusion means large scale “participation” on the part of the government. It does not; indeed, if the growth process is truly inclusive, the role of direct government involvement via subsidies and transfers should diminish, rather than increase, over time and development.

Data and Definitions

In the main, this study uses the large sample National Sample Surveys (NSS) for the years 1983, 1993-94, 1999-2000, 2004-05 and 2009-10. There are two surveys that the NSS conducts in each of the large sample years – a consumption and expenditure (CE) survey, and an employment and unemployment (EU) survey. These NSS surveys provide a rich, and exhaustive, basis for examining the inclusive nature of growth.

What is Inclusive Growth?

Surjit S Bhalla, Economist

Several definitions abound. Some readily acceptable features of what should be considered inclusive growth are listed below.

  1. First and most important is the objective of equality in growth, i.e., that the growth is shared equally by all the population. Related to this objective is the desirability of growth being equal to or perhaps even higher for the poorer sections of the population. Note that these objectives say nothing about the static distribution of income. It can be equal, or highly unequal. If the growth rates are equal, then the distribution of income will broadly stay at its original value. Equal growth rates will mean that whatever growth occurs, it was inclusive.
  2. There should be some growth, preferably high growth. One can think of growth-inclusion trade-offs, i.e., if high growth comes at the expense of some exclusion, then it is preferable to little or no growth for everybody.
  3. Growth should be inclusive across different sectors. In the case of India, there are historical divides between different caste groups, as well as divides based on gender, e.g., girls have traditionally had lower levels of education than boys, ceteris paribus. In addition, growth should be relatively even across different regions and especially that backward areas participate fully on a long-term, two-to-three decades basis.
  4. Poverty reduction. This is a central concern. The pace of poverty reduction is indicative of inclusion. Poverty reduction depends on growth and where the poverty line is relative to the distribution of consumption. With inclusive growth, the poverty gap (difference between the average incomes of the poor and the poverty line) should reduce over time. This will ensure that within the poor, there is “equal” progress.

The ratio of girl to boy education (i.e., how many years of education a girl aged 8-24 has completed for each year of education completed by a boy) was a low 61 per cent in 1983. In 2009-10, the girls are near equality – for each one year of education completed by a boy, a girl now completes 0.93

Notes: Estimates calculated from NSS Consumption Expenditure surveys for different years. Tendulkar poverty lines used for deflating the consumption values.

Inclusion and Growth – Some Facts

Growth

It is important to establish the background of growth, before attempting to probe its inclusive nature. There are three major phases of Indian growth. Post independence and till 1980, GDP growth in India averaged around 3.5 per cent. The story really begins in 1980 when growth started to exceed 5 per cent per annum on a consistent basis. Major economic reforms were initiated in 1991 but for a decade, there was no acceleration in GDP growth – it stayed constant at 5.5 per cent per annum. Starting 2003, however, there has been a marked acceleration in GDP growth to more than 8 per cent per annum.

Notes: Growth between different period refers to Annual log growth rates. Estimates computed from NSS Consumption Expenditure Surveys for different years.

Inequality

Inequality is conventionally measured by the Gini coefficient. If all income is in the hands of one person, the Gini is equal to 1; if each person has the same income, then the Gini is equal to zero. Nominal inequality Gini increased from a low of .304 in 1983 to a high of .364 in 2009-10. This 20 per cent increase has formed the basis for several discussions about the uneven nature of the growth process in India, how the rich are getting richer, etc. And such a large increase would be supportive of the conclusion that at least according to one important indicator, growth in India has not been that inclusive.

Notes: Bimaru States refer to Bihar, Madhya Pradesh, Rajasthan and Uttar Pradesh; Years of education estimated from education levels in NSS Employment and Unemployment Surveys for different years

However, trends in inequality that really matter, real inequality (nominal expenditures adjusted for inter-regional price differences) suggest a very different story. Inequality has broadly stayed constant throughout the 30 year period since 1983. In 1983, real Gini was estimated to be .304 and it dipped to a low of .284 in 1993-94 (see Table 1). That was a 7 per cent improvement in inequality. Since then, and including the high growth period since 2003-04, real inequality increased to .325 in 2009-10. That represents a 7 per cent increase since 1983. No doubt inequality has increased, but a 7 per cent increase over nearly 30 years might just be one of the lowest inequality increases recorded for a fast growing developing economy.

Poverty

The story on poverty decline is quite spectacular. Table 2 shows the poverty ratio for various socio-economic groups since 1983. Also reported are (log) percentage declines in the poverty ratio for the groups for two time periods – poverty declines more or less before the reforms (1983 to 1993-1994) and declines since then. (To be remembered is the fact that some of the poverty decline in the first period should be attributable to economic reforms).

Poverty decline since 1983 has averaged an annual decline of 2.6 (log) per cent per annum. But note the sharp decline during the high growth years 2004-05 to 2009-10. If ever proof was needed that the process of growth in India is inclusive, and that when growth increases poverty decline also accelerates, this is it

Poverty decline since 1983 has averaged an annual decline of 2.6 (log) per cent per annum. But note the sharp decline during the high growth years (2004-05 to 2009-10). If ever proof was needed that the process of growth in India is inclusive, and that when growth increases poverty decline also accelerates, this is it. In the twenty-one year period between 1983 and 2004-05, GDP growth was around 5.5 per cent and poverty decline about 2 per cent per annum (in log terms). In the five year period since 2004-05, as the growth rate increased, the pace of poverty decline also more than doubled to 4.7 per cent per annum.

Surjit S Bhalla, Economist

Education

There is a third very important aspect of inclusive growth (documented in Table 3). This table shows the trend in education of the youth of India (8-24 years). Conventionally, discussion of education centres around average literacy levels in the population. But these averages, since they include the older generations, do not indicate the true changing picture of education. The data presented are for years of education, and are striking in their portrayal of change towards inclusion and equality. The ratio of girl to boy education (i.e., how many years of education a girl aged 8-24 has completed for each year of education completed by a boy) was a low 61 per cent in 1983. In 2009-10, the girls are near equality – for each one year of education completed by a boy, a girl now completes 0.93.

Regardless of whether one looks at trends in inequality, poverty, or education, or gender equality, it is the case that the Indian record is about as good as it gets. It is somewhat surprising therefore that some economists, looking at the same set of data, reach an opposite conclusion. Two such economists, Jean Dreze and Amartya Sen, state the following in a recent analysis of inclusion and growth in India: “There is probably no other example in the history of world development of an economy growing so fast for so long with such limited results in terms of broad-based social progress.”1 (emphasis added).

Surjit S Bhalla

Surjit S Bhalla is an Economist
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