Growth vs Social Justice: a Flawed Debate

Swaminathan S Anklesaria Aiyar, presentation at IMF, April 28, 2011.

Abstract
Critics say India's record GDP growth of 8% in recent years has benefited a tiny elite, bypassing poor regions and groups. In fact 8% growth has been made possible only by phenomenal growth in poor states accounting for half India's population. So, it is not the case that, having achieved 8% growth, India must ensure that something trickles down to poor regions. Rather, fast growth has trickled up from poor states to the national level. They are now enjoying a demographic dividend that bodes well for the future. Literacy has improved fastest in the poor states. Dalits in north India have registered big leaps in dignity and incomes in the fast-growth era. One result is that three-quarters of incumbent governments now get re-elected, whereas three-quarters use to lose. Despite these gains, enormous problems remain of poverty, inequality, discrimination and dismal public service delivery.

Amartya Sen vs Bhagwati

Internet debate cites Sen and Bhagwati. Bhagwati says growth is key to creating jobs and revenue for pull-up strategies. Sen says stupid to focus on double-digit growth while neglecting social spending. In fact social spending more than doubled in last five years, rose from 5.33% to 7.23% of GDP between 2004-05 and 2009-10. James Lamont in FT: High Growth Fails to Feed Indias Hungry. Claims big, poor states (eg Uttar Pradesh, Madhya Pradesh and Chhattisgarh) still falling behind. Claims undernourishment is chronic; calorie intake of poor stagnating; 11 states have 80% anemia; half of kids under 5 stunted, poor brain development.

Critics: record 8.5% growth bypassed the poor

Earlier GDP growth 5.5% in 1980-92, 6% in 1992-2003, 8.5% after 2003.Big jump. Critics say post-2003 boom (a) benefited only a small elite, bypassed the poor. (b) benefited only advanced states, bypassed poor backward states (c) Fueled Maoist insurrection in poor states, worsening growth in vicious circle. This is mostly exaggerated or wrong.

Poor states, half Indias population, have become miracle economies

CSO estimates Bihar Chhattisgarh Jharkhand Madhya Pradesh Orissa Uttar Pradesh ALL INDIA Mean % growth/yr 2000-04 4.5 6.1 1.9 1.9 4.8 3.3 5.6 Mean % growth/yr 2004-09 12.4 9.7 8.5 6.6 10.2 6.7 8.5

Caveats on poor states

State-level data not viewed as best quality. High volatility, esp Bihar, leads to doubts Two droughts depressed base period 2000-04. Source CSO, series at 1999-2000 prices. Table refers to mean growth, not CAGR. Without more electricity, Bihar miracle unsustainable Yet remarkable acceleration in poor states. Per capita income up many times. Chhattisgarhs growth above national average throughout 2000s, despite Maoism!

Misconceptions of Maoist impact

Lamonts thesis: desperate poor opt for Maoists, who prevent development, creates poverty/low-growth trap. But Maoist belt has record GDP growth too. Worst Maoism in Chhattisgarh, but it has grown above national average for a decade. Despite problems it has good record in social services, public food distribution. Growth not led by mining: this is in fact hit by Maoist and activist agitations. Raipur in Chhattisgarh is now 10th most industrialized district in India. Jharkhand has boom industries in Jamshedpur, Bokaro, Ranchi. Manufacturing growth over 15% in recent years in Orissa, Chhatisgarh Jharkhand (Indicus Alanlytics). Literacy has improved significantly in Maoist belt. Maoists tax industries, contractors, and so rarely close them down.

Conflict due to ethnicity not poverty

Punjab was richest state, yet bad insurrection in 1978-93, led by richest community (Jat Sikhs), opposed by poor Mazhbi sikhs. Kashmir has lowest rate of poverty, yet has worst insurrection. ULFA: upper class Assamese against poor Bengalis Maoist trouble better seen as ethnic problem of tribal vs non-tribal, not rich vs poor. Rural gini is just 0.20 Jharkand,0.24 Chhattisgarh, 0.25 Orissa, against national 0.25 in 2004-05 Dirt poor areas like Bundelkhand have no insurrection.

Trickle up, not trickle down

When will benefits of fast growth trickle down? Wrong question. In oil-rich states income concentrated in a few hands, fast GDP possible while bypassing the poor. Not possible in large diversified India with gini of 0.37. Growth of 8.5% possible there only if bulk of population has rising productivity. Thats why 8.5% growth is so rare. Not the case that rich in India have created 8.5% and we must ensure benefits trickle down. Rather, rising productivity and growth in poor states has trickled up to boost national GDP growth. Two-way flow of growth impulses from centre to states and back, self-reinforcing. Boom means more revenue, more investment, more jobs that raise real wages, bigger opportunities for migration and convergence. Real casual wages up (eg. In AP, min wage up from Rs 60 to Rs 120/day, male casual wage up from 87% to 1-03% of min wage between 2005 and 2009).

Rising inequality,falling poverty

National Gini coefficient 0.37, worsening with rising income. Not necessarily social injustice, can mean new opportunity and social mobility. New opportunities seized by new entrepreneurs who soar, software being a great example. Such social mobility is desirable, yet worsens equality. Manmohan Singh on new generation of entrepreneurs: These are not the children of the wealthy, they are the children of reform. Low ginis can indicate poverty and backwardness, not social justice. Lowest rural Ginis in Bihar, Assam. Indias poorest states have the best ginis, far below the national average! People migrate from poor, equal states to unequal but richer states. Pathetic govt schools, health clinics impede social mobility. Cries out for reform, but nothing happens. So, no equality of opportunity.

Rural Gini coefficients for states 2004-05

Poor states Bihar 0.17 Assam 0.17 Jharkhand 0.2 Rajasthan 0.2 UP 0.23 MP 0.24 Orissa 0.25 Chhattisgarh 0.24

Advanced states Maharashtra 0.27 Gujarat 0.25 Punjab 0.26 Haryana 0.31 Kerala 0.29 Tamil Nadu 0.26 Karnataka 0.23 INDIA 0.25

Poverty falls? Data disputes galore

Latest estimate poverty HCR at 32% in 2009-10, down from 37.2% in 2004-05 and 45.3% in 1993-94. Critics say its one percentage point per year, no acceleration despite record growth last five years. Wrong. Poverty reduction/year in1993-2004 was 0.73 percentage points/year, has risen to 1.02 percentage points per year in the high growth period 2005-10. Note: 2009-10 was a drought year, would depress HCR below trend. Problem: ratio of consumption measured by poverty surveys to consumption measured by national accounts is falling crazily: from 87% in 1972-73 to 48.8% in 2004-5 and just 43% in latest 2009-10 survey. Leftists claim missing consumption is entirely of rich, and that consumption of poor is captured by NSS surveys. Very unlikely. NSS data suggests no buoyancy in rural demand at all. But marketers of everything from shampoo to motor cycles to cellphones talk of rural boom. NCAER surveys suggest 23% of supposed poor own pressure cookers, over10% own two-wheelers Mini-sample survey 2007-08 showed HCR down to 27%. Bhalla sneers that NSS data claim that real consumption fell 7 % in next two years, like Great Depression! Devesh Kapur: poor understate their living standards to ensure not cut out of govt subsidies/freebies. Trend probably worsened after 1999 when subsidies more sharply targeted at poor, more incentive to understate.

Malnutrition high, yet hunger vanishes

Hunger ratio down from 17.3% in 1983 to 2.5% in 2004-05. Fall sharpest in poor states, zero hunger in Rajasthan. Hunger ratio also very low in UP, Bihar; much higher in Kerala, West Bengal!

Poor states much less hungry

% people below hunger line
1983 Orissa Bihar MP UP West Bengal Assam Kerala Rajasthan INDIA
Source: Deaton and Dreze 2008.

1993-94 14.2 6.8 2.6 3.3 14.3 9.9 9.4 1.5 5.2

2004-05 5.9 3.2 2.1 1.9 11.7 5.5 2.5 0 2.5

35.1 34 14.1 10.7 36.5 14.9 17.5 4.2 17.3

Nutritional puzzles
Per capita calorie consumption falling for all deciles although far below nutritional norm of 2,200 Kcal/day Consumption switch from cereals to superior foods esp fats: not sign of distress. Hunger is also almost gone. Why then are nutrition indicators among the worst in the world? Many puzzles. Richest 20% of pop has 20% underweight kids, 25% stunted,13% wasting. Anaemia, diabetes very high, but affects richest too. FHS-III suggested underweight kids barely changed from 47% to 46% between 1998-99 and 2005-06. But stunting declined from 51% to 45%. Wasting worsened from 20 to 23%.Very puzzling: why should wasting worsen if heights improving? NNMB survey has almost opposite resultfall in underweight kids and wasting, rise in stunting! Indicators look terrible, yet many puzzles defy analysis. (Deaton and Dreze 2008)

Literacy booms in most poor states

Improvement in literacy 2001-11 (percentage points)

Bihar Overall literacy Female literacy 16.82 20.2 UP 11.45 17.1 MP 6.9 9.7 Orissa 10.37 13.9 Jharkand 16.07 15.3 Chatisgarh INDIA 6.3 8.6 9.7 11.8

Why literacy improved

In two decades 1991-2011, literacy up 21.83 points. In earlier two decades (1961-1981) literacy up just 15.27 points unadjusted, and barely 13 points after adjusting for changes in census methodology. Literacy gap between males and females down from 21.6 % in 2001 to 16.7% in 2011. Female literacy from 54% to 65% ,faster than for men. Phenomenal female gains in poor states. Why so? (a) Govt spending.GDP up marginally, but GDP itself rising fast. Huge teacher absenteeism wastes funds. (b) State govts have hired huge numbers of contract teachers, earn onefifth of regular teachers, better outcomes. So, more bang for buck. (3) Rise in private spending on education, may be 1.2% of GDP.(4) Fast growth raised wages, boosts affordability of private schools, boosts returns to education. Literacy is not enough, need better learning outcomes and skills. But literacy is a starting point.

Population growth slows

Fall in population growth rate between 2001 and 2011 (percentage points)
Bihar 3.55 UP 5.76 MP 3.96 Orissa 2.3 Jharkand 2.1 Chatisgarh INDIA -4.3 3.9

Demographic dividend poor states

Pop growth in last decade only 17.64%, down from 21.54% earlier. Poor states still lag, but for first time their pop growth decelerated overall. Promise for future, especially UP. Kids aged 0-6 years fallen in absolute numbers by 3.08%. Presages big rise in worker/population ratio, demographic dividend. Percentage population 0-6 years fallen sharply in UP (4.1%), Rajasthan (3.5%), MP (3.4%) Chattisgarh (3.1), all above national 2.8%. Aiyar and Mody 2011: DD may account for 40% of additional GDP growth. Earlier DD benefited advanced states, now benefiting poor ones. Between 1961 and 2001, population share of 15-60 yrs (working age) rose from 53.7% to 62.1% in 3 leading states--Tamil Nadu, Karnataka and Gujarat. But in 3 lagging states-- UP, Bihar, Madhya Pradeshalmost unchanged, from 53.1% to 53.4%. Now laggards to will get rising working age share of pop, boosts GDP growth. Aiyar and Mody estimate DD of 1.34% in 1990s, and project 1.74% in 2000s, 1.98% in 2010s and 2.04% in 2020s.

Dalits: higher living standards

Devesh Kapur et al (2010).Self-assessment of dalits in two districts in east and west UP, between 1990 and 2008 TV ownership up from zero to 45% (west) Cellphone ownership from zero to 36.3% (east) Two-wheelers, status symbol, from zero to 12.3% (west) Dalits consuming dal up from 30% to 90% (east). Kids eating yesterdays leftovers down from 95.9% to just 16.2% (east)

Dalits: improved social status

Dalits say changes began 10-15 years ago. Reforms plus rise of Mayawati. Dalits seated separately at weddings: down from 77.3% to 8.9% Non-dalits accepting food at dalit houses; up from 8.9% to 77.3%. Halwaha (bonded labour) incidence falls from 32% to 1% Using cars at weddings: up from 33% to almost 100% Running own business: up from 6% t0 36.7% (west) Proportion of dalit agri workers down, 76% to 45.6%(east) and 46.1 to just 20.5% (west). Sharecropping up from 16.7% to 31.4 Dalits get fields ploughed by upper castes in tractors

Election results suggest inclusive growth

Earlier 75% incumbents lost elections. Since 2007, 75% incumbents win. Broader gains. Panagariya and Gupta say in 2009, 85% incumbent MPs won in fast growth states, 50% in medium growth states and 30% in low growth states. Many other factors matter (alliances, caste, regional issues, inflation). But when poor states cross 6% growth, incumbents start winning. Suggests fast growth is inclusive.

Whats changed in poor states

New leaders take development seriously. In UP, Bihar CMs aim first for dignity for lower castes, development focus come later. Laloo focused on dignity of OBCs and Muslims, said development benefits upper castes. Mulayam supported cheating in exams to benefit OBCs! Mayawatis dalit statue craze aims for dignity. Once dignity established, go for development. Nitish and Maya best examples. Convergence. (1) First policy changes open up opportunities. Advanced states grab these first, backward states follow with a lag. (2)Development becomes election winner, changes political economy. (3) revenue boom helps: so do Central schemes-Bharat Nirman, Sarva Shiksha Abhiyan, National Rural Health Mission. (4) Fast growth creates labour shortage, raises real wages . Demographic dividend underpins inclusive growth in poor states. Fall in absolute number of kids aged 0-6 year means less shortage of teachers, smaller class size.

Huge problems remain, growth helps solve them

Terrible public service delivery. Need major structural reform, not more spending that is largely wasted. Huge waste of fiscal resources on handouts and leakages; big corruption; callous, unsackable civil servants; moribund police-judicial system. Heritage Foundation index of economic freedom: India ranks only129th of 183 countries, categorized mostly unfree. Big unfinished reform agenda. Doing Business series: India is 134th/183 countries. Worst in ease of starting business (165th), construction permits (177th), enforcing contracts (182nd). India far below potential in both growth and social justice. But record growth has benefited poor people, poor states, and dalits. Fast growth has trickled up from poor states to national level. This is an inclusive model, no contradiction between fast growth and social justice. Convergence and demographic dividend will continue boosting poor states, and India too.