Deaton’s work confirms what Sen has long argued—affirmative policies for poor are key to sustainable growth
Given that economists today are sceptical about capitalism, the economics Nobel Prize this year going to an economist focused on poverty and welfare doesn’t come as a suprise. Angus Deaton has been recognised for his work on consumption, welfare and poverty, having worked in India and other developing countries on these issues.
With the Nobel for Deaton, the now-dated but infamous altercation between economists Amartya Sen and Jagdish Bhagwati should see the scales of global opinion tilt in favour of Sen—Deaton’s premise is that mere growth numbers mean nothing if the lower income segments do not see a commensurate flow of benefits. From a business perspective—and not just a humanitarian one—this large section must have enough consuming power because consumption growth led by the higher-income group alone can never be self-sustaining.
The Indian growth model since 1991 has had a top-down approach, with direct intervention chastised as being imprudent. Deaton would say that for an economy to flourish, we have to focus on consumption, not income. ‘Saturation in consumption’ has made developed countries turn to developing nations for furthering investment and production. In India, too, we have seen growth being stunted when low income groups did not have enough purchasing power.
This, as per Deaton, would be the pressure point for an economy like India—it must have greater equality and must increase the purchasing power of lower income groups to sustain development. The government should measure consumption in addition to income. Profiling for consumption through income-stratification would reveal whether or not consumption levels have gone up, and, by implication, welfare. Instead of GDP, we must look at gross domestic consumption (GDC) and its distribution across various income groups.
The National Sample Survey provides, by far, the most comprehensive data over time, and it is such extrapolations across income groups that should serve as the basis for future policy action. Deaton would very much approve of the calorie-based approach to measuring poverty—in retrospect, the approach of the Planning Commission was right. We need to improve the calorie intake of these sections by enhancing their access to consumption of other goods, too. In this context, the approach of the Food Security Act would stand vindicated as it is only when we reach out to this segment would the topline growth numbers make sense.
Deaton starts with the micro-level on consumption—how we allocate our income towards consumption. Price could be one factor determining how much of a good we consumer. But other considerations, too, are factored in, viz. alternatives, necessities, quality, etc. Hence, consumption builds at the economy-level based on decisions taken by myriad people at the micro-level.
Two implications emerge. First, Deaton observes that consumption changes very smoothly, unlike income that can change sharply. Consider a situation where rural incomes do not increase significantly and consumption for essentials remains stable. Then, with high inflation, there is less money left for buying other consumer goods. This scene has been playing out in India where demand has been affected for the last 3 years and industrial growth has been impacted.
The second is that if income levels of the poor or their consumption doesn’t increase, there will be issues for savings.
If consumption is fixed, savings would tautologically be just residual. Hence, trying to improve savings through incentives will not work down the line and the only way out is to increase their income of the households, with focus on households at the lower income levels.
This has some interesting implications for banking, which focuses a lot on financial inclusion (for instance, the Jan Dhan programme), including payments- and small-banks. All eye a greater share of the poor man’s wallet, in the form of deposits. But if the incomes of the poor do not increase, they will not be able to save.
At the macro-level, too, efforts to increase savings to fund investment must be made and this is where Deaton becomes important. His Nobel is a sort of confirmation of what Sen has long been arguing. We need affirmative policies to ensure that the poor are taken along in the growth process. It is not a favour, but a necessity, given that even though our population is large, we need to have a large consuming class; this is not possible unless we have such measures that take the majority along. Programmes like the the MGNREGS or loan waivers would find favour under this dispensation. Even India Inc will be looking keenly at this segment, as this is where great spending potential lies. Every October, there is an expectation that rural demand will pick and urban spending will increase, due to the festival season. But when more is being spent on food under conditions of unchanged income levels, there would be less money left for non-food expenditure.
At a broader level, Deaton’s recommendation would also move towards taxation policy and its impact on consumption. Policy makers and analysts have always argued for reduction of subsidies, and linking fuel prices to the market. An increase in crude prices, if not subsidised by the government, will affect prices of all goods, including food, as transport costs go up. This is where we need to use our judgment because the market system does not distinguish between the people and charges everyone the same price, which is not ideal in this situation. The repercussions go across consumption, production, savings, investment and growth. Angus Deaton’s contribution and the recognition of his work should, hopefully, strike the right cord with governments in all developing nations.
Relying less on the market and lowering our obsession with plain growth numbers will help us to focus and do right.
The author is chief economist, CARE Ratings. Views are personal