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Resource centre on India's rural distress
 
 

Growth as tool to alleviate poverty

The Prime Minister's focus on double-digit growth is not due to any ‘growth mania'. It is for the benefit of the poor.

At a recent function for police officers, the Prime Minister observed: “If we don't control Naxalism, we have to say goodbye to our country's ambition to sustain a growth rate of 10 to 11 per cent per annum.”

Some commentators (like Prof Prabhat Patnaik of JNU) interpret this (in a newspaper piece) as the Prime Minister prioritising 10-11 per cent growth over poverty alleviation as a national objective. Prof Amartya Sen, in a different context, has stated in a article (in The Hindu) that it is “silly” to compare India's growth rate with China's, without comparing their performances in other spheres such as education and basic health. India should concentrate on improving the quality of life of its people by focusing energy and resources on providing food, shelter, education and health to all, even if that comes at the cost of a lower overall growth rate.

Another group of economists, led by Professors Jagdish Bhagwati and Arvind Panagariya of Columbia University, US, takes a somewhat different line. Their point is that though high growth is certainly not an objective in itself (no serious economist would ever think so), for practical reasons it is the most important means by which poverty can be reduced in a sustained manner.
 
GROWTH AND TAX REVENUE

High growth helps reduce poverty through two basic channels — by directly creating productive employment and increasing the tax revenue that can be spent on education, health and various social welfare programmes (like NREGS) specifically directed at the poor. Our Plans have emphasised on poverty alleviation. But the universal Right to Food or Education can be implemented only to the extent tax revenues permit.

With higher tax revenues coming out of higher growth (tax-GDP ratio typically goes up during growth) due to reforms in fiscal, trade and industrial policies, it has now become easier to spend money on providing food, education and health to the poor.

Incidentally, Prof Sen also agrees on this specific point. Moreover, NREGS — however desirable as a component of a social safety net — cannot create productive jobs in a sustained manner. For this, the growth rate needs to pick up. In fact, given that modern enterprises are using more automated technologies, the growth rate needs to be higher than before to create the same number of jobs.

Though China's achievements in poverty reduction have been far more successful than India's, these economists would attribute this primarily to China sustaining a double-digit growth rate for nearly three decades.

POVERTY AND JOB CREATION

But the Maoist regime was not that successful in reducing poverty. That had to wait for economic reforms ushering in high growth in post-Mao China. Most poor people in India are poor not because they do not work, but because they are engaged in low-productivity jobs. Higher growth has opened up many new job opportunities (think of masons, electricians, plumbers, furniture makers, shop floor assistants, waiters in food courts, car drivers, security personnel, repair and maintenance technicians) for people from very ordinary families — not just software engineering or English-speaking call centre jobs.

Construction activities in urban areas have also induced migration from rural areas. Though the average income per person in such jobs may not have gone up significantly, family income has gone up at a higher rate since more members in a family (including women) are now able to find some jobs — though not necessarily high-income ones.

Economists also emphasise that job growth and poverty reduction would have been even higher if India (like China) had developed more labour-intensive manufacturing rather than capital and skill-intensive industries and services. This requires, among other things, reforms in labour and bankruptcy laws, which would make both hiring and firing of labour easier and remove the anti-labour bias in India.

Further, 60 per cent of the Indian population still depends on agriculture, which contributes less than 20 per cent to GDP. Hence, reforms in agriculture are urgently needed to improve productivity and to raise the growth rate to at least 4 per cent per annum (as against the current rate of around 2 per cent). This would further help the poverty alleviation process.
 
COPING WITH INEQUALITY

The spread of education, though desirable in itself, will not reduce poverty until growth creates more jobs to absorb these people in productive occupations.

So, the focus of the Prime Minister on double-digit growth is not due to any “growth mania”. It is for the benefit of the poor.

At the same time, since much of this growth would come through the initiative of the private sector, we may very well see more Indian billionaires in Forbes list and greater inequality of income and wealth.

But, given our dismal record on poverty alleviation under the 3.5 per cent “Hindu growth rate” period when the ‘licence permit raj' was in force, should we mind if, along with greater inequality, a much larger number of people are pulled above the poverty line?

Hence, according to the Bhagwati-Panagariya line of thinking, growth should occupy centrestage, rather than being a sideshow.

After Communist China moved to a liberalised economic regime and succeeded in achieving both high growth and rapid poverty reduction, most Indian economists and policymakers were persuaded to think that if China could do it, so can India.

That is why the comparison of India with China in terms of achievements in growth and other respects was and is still relevant, as we need to learn from the successes and failures of the Chinese experiment.

Most economists and policymakers in India have recognised that high growth facilitates the process of poverty alleviation.

In this quest for double-digit growth as an instrument of rapid and sustainable poverty reduction, our administrators should not get confused between the means and the end.

(The author is a former Professor of Economics, IIM, Calcutta.)