Focus on growth, not inequality, to reduce poverty

By: |
January 30, 2021 2:30 AM

The focus must continue on growing the size of the economic pie rapidly at least for the foreseeable future, it said.

The Survey 2019-20 argued that ethical wealth creation – by combining the invisible hand of markets with the hand of trust – provides the way forward for India to develop economically.The Survey 2019-20 argued that ethical wealth creation – by combining the invisible hand of markets with the hand of trust – provides the way forward for India to develop economically.

Given India’s high potential rate of economic growth and the high absolute levels of poverty, the country’s policies must focus on growth to alleviate poverty rather than on inequality, economists in the finance ministry have suggested.

“Given India’s stage of development, India should continue to focus on economic growth to lift the poor out of poverty by expanding the overall pie,” chief economic adviser Krishnamurthy Subramanian said. Redistribution is only feasible in a developing economy if the size of the economic pie grows, he added.

The Economic Survey 2020-21 has arrived at this conclusion by examining the correlation of inequality and per-capita income with a range of socio-economic indicators including health, education, life expectancy, infant mortality, birth and death rates, fertility rates, crime, drug usage and mental health across the Indian states.

The analysis shows that both economic growth and inequality have similar relationships with socio-economic indicators. Economic growth has been represented by income per capita at the state level.

The Survey stated that over time, global commentaries have mostly highlighted a potential conflict between economic growth and inequality. The conflict between economic growth and inequality becomes pertinent once again because of the inevitable focus on inequality following the Covid-19 pandemic.

However, the policy objective of focusing on inequality may not apply in the Indian context given the differences in the stage of development. The examples of India and China have posed a striking challenge to this conflict. The growth stories of India and China have shown a significant reduction in poverty due to high economic growth, it noted.

“Focus on policy of growth does not imply that the redistributed objectives are unimportant, but that redistribution is only feasible in a developing economy if the size of the economic pie grows,” the Survey concluded.

The focus must continue on growing the size of the economic pie rapidly at least for the foreseeable future, it said.

The Survey 2019-20 argued that ethical wealth creation – by combining the invisible hand of markets with the hand of trust – provides the way forward for India to develop economically.

An often-repeated concern expressed with this economic model pertains to inequality. Some commentary, especially in advanced economies post the Global Financial Crisis, argues that inequality is no accident but an essential feature of capitalism. Such commentaries, thus, highlight a potential conflict between economic growth and inequality.

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