Monday, April 2, 2012

Reconciling growth with equity in India

‘Growth versus equity’ is a theme that continues to occupy most of the policy debates in India, particularly after two decades of experimenting with economic reform.

The outcome of the reform process has been mixed: India’s commendable trend rate of economic growth is unfortunately accompanied by a sustained and increasing degree of inequality. New debates on official poverty estimates have flared up, and so have concerns about uncontrolled inflation, though the intensity has subsided a bit in the recent past.

The coexistence of prosperity, poverty and inequality is not specific to India. Rich countries such as the US have experienced very little growth in recent times because of serious financial crisis-led recession, and inequality in various forms has been on the rise there as well. In a way, growth or no growth, the world has become a more unequal place — a feeling shared by experts and non-experts alike. Equity should be a contentious issue, and far more so than it is usually allowed to be.

Rising inequality does not often find its solution in rising subsidies. Targeting India’s poor, needy and underprivileged and showering them with state resources, for example, has not yielded the desired results, as unintended beneficiaries corner a large part of the allocated resources. Pretence at fairness and equity has led to a tremendous concentration of benefits among particular segments of the underprivileged, which have now effectively ceased to be underprivileged. A false sense of equity in India has also meant equal salaries in universities for the most incompetent and the most qualified, while at the same time Indians are beginning to lean toward fee-paying private institutions to achieve global standards. A misunderstanding pervades the country: it is not the failure of the market that cripples India’s development across social groups and classes, it is India’s inability to allow markets to operate independent of manipulation by various influential groups. But debates on these issues seldom make headlines.

There are two critical economic issues — the problems of skill formation and appropriate policy targeting — that have far-reaching implications for growth and equity in India. These problems, though disconnected, are critical for developmental breakthroughs.

First, greater skill formation through education has the potential to transform India’s high levels of unskilled manpower into an efficient stock of human capital and to help India take advantage of the so-called demographic dividend. It is well recognised that India’s sustained rates of high economic growth over the last decade owe a lot to growth in the services sector and its share in India’s GDP. India’s trump card right now seems to be its available stock of relatively inexpensive skilled manpower, especially when compared to rich industrialised nations. But India’s supply of skilled manpower cannot grow at the desired rate if investment in quality manpower is constrained by a lack of capital and a declining supply of potential skill from below. The performance record of pre-tertiary education continues to be poor, which in turn points to the abysmal pass rate and significant drop-out rates in school education. Credit markets and capital in general must be mobilised to support human capital investment so that India’s poor but talented students do not suffer and languish in the poverty trap. Since technological progress often implies jobless growth in the manufacturing sector, the key policy concern must be to promote entrepreneurship, keeping in mind the idea that contemporary advances in technology are likely to help only those who can already help themselves.

Second, India must also focus on the problem of targeting policies and employing appropriate mechanisms to ensure that a policy’s intended beneficiaries do receive government-provided support. Millions of rupees in subsidies are regularly wasted because the government cannot effectively target those living below the poverty line. Many Indians who receive subsidies should not, and those who need them most are regularly overlooked. Increasing the amount of subsidies without also looking at who gets to spend them is a mistake of the highest order. A reluctance to conduct impact-evaluation studies is another gross error that India has been committing for a long time. The government is constantly leaving behind old, half-baked and half-executed policies and jumping quickly to the next policy solution without properly analysing the merits and reach of particular policies.

India needs more careful policy design to target subsidies effectively. A false sense of justice and equity blurs the country’s vision. It seems that Indians are more interested in preventing unintended beneficiaries from grabbing the subsidies than improving the absolute intake of the targeted group. But such a principle ultimately excludes many eligible beneficiaries as well. For example, in places with a more than 70 to 80 per cent incidence of poverty, we know that the poor are definitely benefitted if everyone gets the subsidy. It does not matter if 20 per cent of the beneficiary group is rich. But if we insist on the below-poverty-line target group, anomalies will creep in, and in the end maybe 30 per cent of the poor will get the benefit. True, this does not solve the problem as a whole, but in areas where poverty incidence is of a very high order, blanket subsidisation rather than targeted policy is a better deal. Government must think of such innovative strategies for reconciling growth with equity.

By Sugata Marjit Director and Reserve Bank of India Professor of Industrial Economics at the Centre for Studies in Social Sciences, Kolkata, and Chairman of the West Bengal State Council of Higher Education. This article appeared in the most recent edition of the East Asia Forum Quarterly, ‘Ideas from India’.

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