The growth rate in India is galloping, so are the inequalities. However, experiences across Indian states show that the poor gained more from the growth process in states with higher financial development, flexible labour markets and higher average education.
How effective, then, has past economic growth been in making a distributional impact? A recent International Monetary Fund working paper, “India: Is the rising tide lifting all boats?”, by Petia Topalova, says “all measures point to a significant increase in overall inequalities in the 1990s, particularly in urban areas, and within all but one state (in Bihar inequality remained flat)”.
The paper pointed out that while inequality was stable (in urban India) and declining (in rural India) in the 1980s, the trend had reversed in the 1990s. This is reflected in the change seen in distribution of consumption across households.
However, the paper said the shift in the growth pattern of consumption was striking. From 1983-1994, the bottom of income distribution outpaced growth at the top, especially in rural India. In urban areas, this growth was distribution-neutral. The paper sees this as “consistent with the explicit goal of the socialist-inspired development policy of India until 1991”.
After liberalisation in 1991, overall growth accelerated but was faster at the top than the bottom. “In almost all states, growth became less equalizing in the 1990s…” Between 1993-94 and 2004-05, consumption of the richest grew by an average of 3% per year. However, for the poorest, the growth was slightly above1%.
Noting that there was no evidence of a correlation between the speed of growth and inclusiveness, the paper observed variations among states as well as a link between the policies followed and inclusiveness.
For one, states which had less protective labour regulations stood to gain more, it says. ‘The…regulations which sought to improve worker protections in fact ended up benefiting the rich more than the poor, by slowing down the expansion of the secondary sector”.
Second, states that had easier access to finance did better as this enabled people to move out of agriculture into higher-earning activities.
Third, states that invested more in human capital gained more from the growth process, leading to a larger supply of educated and skilled workers. For instance, the study found that in the 90s, consumption of households which had completed middle school and above was much higher than those with lower education “The fastest growth in consumption was registered by those with college education and above”, it added.
In tandem with Prime Minister Manmohan Singh’s concern about the distributional impact of the growth process in India, calling for an ‘inclusive growth strategy’, the IMF paper, too, refers to a positive correlation between states’ social spending and inclusiveness of growth. It calls for policy focus on increasing access to quality schooling and social services to enable the poor to participate in economic activities.