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Resource centre on India's rural distress
 
 

Redistribution is not inclusion growth by Arvind Panagriya

Only in India does redistribution, which keeps the poor and marginalised out of the mainstream of the economy, pass for inclusive growth. In much of the rest of the world, inclusive growth would mean giving the poor and marginalised a direct stake in the economy with fast-growing industries and services absorbing them into gainful employment and, thus, making them true participants and partners in the growth process. 

But in India, we go by an altogether different paradigm: we tell the marginalised to stay where they are. Indeed, we do everything to bolt them down to their rural location offering employment and free health and education if they would stay where they are. "Why bother moving," we tell them, "when we are bringing the fruits of rapid growth elsewhere right to your doorstep." 

Lest you mistake this for cynicism of a pro-reform - or 'neo-liberal' if you prefer a pejorative - economist, contrast our 'inclusive growth' with that of South Korea in the 1960s and 1970s. Between 1965 and 1980, South Korea grew at an annual rate of 8.3%. Data gathered by economist Jungho Yoo in a Harvard University working paper shows that, during this period, the proportion of the workforce employed in agriculture fell from 59% to 34%. Workforce employed in industry (manufacturing plus mining) rose from 10% to 23% and in services from 31% to 43%. 

Alongside, real wages rose 11% a year. Rather than keep the poor bolted in agriculture,South Korea opened the floodgates of gainful employment in manufacturing and services, mostly in towns. The story was much the same in Taiwan in the 1960s and 1970s, and similar if slightly muted recently in China, less than 40% of whose workforce is in agriculture. 

In contrast, between 1993-94 and 2004-05, the share of agriculture in employment in India has fallen by just 8 percentage points from 62% to 54%. Worse yet, with the workforce rapidly growing in size, this small change in the share has not arrested the rise in theabsolute number of workers in agriculture. With industry and services growing far more rapidly, the current share of agriculture in the GDP has fallen below 15% but it continues to employ half theworkforce. 

Thanks to our past policy of reserving the labour-intensive products such as apparel, footwear, cosmetics and light consumer goods for manufacture by tiny enterprises, liberalisation in the 1980s and 1990s that helped accelerate growth did not accelerate job creation. Beginning in the late 1990s, the then-finance minister Yashwant Sinha, who meticulously promoted reforms, understood the problem and substantially dismantled the reservation. 

Indeed, he even put the draconian Chapter V.B of the Industrial Disputes Act on the anvil but he was unsuccessful in persuading his colleagues to move forward with the reform. This law still remains the most important barrier to the expansion of the labour-intensive manufacturing and, hence, to a South Korea-Taiwan-China-style transformation. 

In 2004, the United Progressive Alliance (UPA) successfully ousted the National Democratic Alliance of which Mr Sinha was a part and put sudden brakes on the reforms. Just as Mrs Indira Gandhi in an earlier phase had invented the slogan Garibi Hatao to play down growth, Mrs Sonia Gandhi and those surrounding her invented the 'inclusive growth' mantra. And like Mrs Indira Gandhi, these latter decided that redistribution would henceforth be the focus of the government's policy. 

So, with the forces of competition unleashed by the reforms of Mr Sinha - and of Dr Manmohan Singh before him - but formal employment of workers still subject to draconian restrictions, we saw the capital- and skilled labour-intensive sectors such as automobiles, two- and three-wheelers, engineering goods industries, petroleum refining, telecommunications and software industries grow rapidly. 

While these industries generated enough revenue for the UPA toexpand the social programmes for the marginalised, their impact in generating well-paid jobs and pushing upwages in the countryside was far more limited than in South Korea or Taiwan in the 1960s and 1970s. 

No doubt redistribution in agrowing economy is a moralimperative to bring immediate relief to the poor. But israpid growth in the cities with a small part of the resulting revenue spent in the countryside all there is to inclusive growth? 

Ironically, if the latest expenditure survey is to be believed, the mega National Rural Employment Guarantee Scheme, the crown jewel of the UPA, has done precious little to accelerate poverty reduction. Some observers say that real wages in the countryside have risen recently but others claim stagnation, especially in the hinterland. 

Whatever the truth of the wage data, the bottom line is that poverty reduction has not accelerated and, moreover, half of the workforce remains employed in agriculture, which produces by far the lowest output per worker. 

Some observers complain that the focus on growth has crowded out the debate on social programmes. But isn't it just the other way around? The discussion of reforms that would make growth process itself more inclusive instead of relying primarily on redistribution to bring the fruits of rapid growth to the poor has all but disappeared. 

Few commentators today talk about reforms that would spread growth - rather than just its fruits - widely and, thus, pave the way for the common man to make a decent living on his own instead of depending on government handouts in perpetuity.