[The link to the Chapter can be found here]
The Economic Survey 2021 was released on 30th January 2021. The ‘Economic Survey’ is basically a summary of the ‘annual economic development in the country throughout the year,’ released before the Union Budget. It is drafted by a team led by the Chief Economic Advisor (CEA) of the country. At present, this post is occupied by Krishnamurthy Subramanian.
The Economic Survey provides an optimistic picture of India’s post-COVID recovery, predicting a V-shaped recovery curve. It expects the economy to grow at 11 % (real growth rate adjusted for inflation) during 2021-22, after an expected 7.7 % contraction in the current financial year.
The document also argues that GDP growth leads to debt sustainability, but not vice-versa. In other words, it encourages the government to shed its fiscal conservatism (exacerbated by the Fiscal Responsibility and Budget Management Act, 2003) and create demand in the economy (to enable higher GDP growth) through an active fiscal policy and increased spending. The impact of this recommendation was immediately visible in the Union Budget, where the fiscal deficit target for the current year was increased to 9.5 % from the earlier estimate of 3.5 %. Further, ‘the fiscal deficit target for 2021-22 is 6.8 %. The two main sources for financing the deficit will be gross market borrowing and National Small Savings Fund.’
[You may also read: UNDERSTANDING INDIA’S HIGH FISCAL DEFICIT LEVEL, What is FRBM Act? and What is the roadmap to fiscal consolidation?]
The Survey makes compelling arguments to justify the importance of a growth-based approach towards eradicating poverty instead of an inequality-based one. It uses data from various states to show that inequality and poverty have no correlation in the Indian context, but there is a negative correlation between growth and poverty. This means states with a higher per-capita income (which is a measure of growth) have lower levels of poverty. The Survey also finds that, unlike in developed countries, most social indicators across the states are positively correlated with both growth and inequality. An increase in inequality doesn’t lead to worsening of social indicators, as long as there is positive GDP growth. In developed countries, however, social indicators are negatively correlated with inequality, i.e., they are worse when inequality is high. Therefore, India must focus on rapid growth for the foreseeable future to increase the size of the ‘economic pie’ before redistributive measures can be feasibly undertaken.
Relationship of Growth/Inequality and Socio-Economic Outcomes
The Survey initially measures ‘Inequality’ as the Gini Coefficient of Consumption. For the uninitiated, the ‘Gini Coefficient’ is a statistical tool to measure inequality across a given population. Its value lies between 0 and 1, with 0 being a measure of perfect equality while 1 is a measure of perfect inequality. ‘Growth,’ in the Survey, is measured as per capita income, and socio-economic outcomes include Health, Education, Life Expectancy, Infant Mortality, crime, drug use, mental health, Birth Rate, Death Rate, and Total Fertility Rate.
In the case of outcomes related to Health, Education, Life Expectancy, Infant Mortality, and crime, it is found that the indices correlate positively with both inequality and per capita income. But in developed countries, inequality correlates negatively with the afore-mentioned indices while per capita income correlates positively. In other words, while an increase in inequality leads to a worsening of the said indices in developed countries, in India, this is not true. On drug use, it is found that there is no correlation with inequality in India, while in advanced countries, there is a strong positive correlation. Further, in the case of mental health, results are similar for both India and the advanced countries, i.e., the higher the level of inequality, the higher is the percentage of people with mental health issues. For Birth Rate and Total Fertility Rate, there is a decline corresponding to increasing inequality and per capita income, while there is no correlation between inequality/per capita income and Death Rate.
Why ‘Consumption Inequality’ and not ‘Income Inequality’?
The Survey argues that ‘inequality of consumption’ is a better measure of the disparity in the well-being of the citizens, rather than ‘inequality of income.’ Because, as per the ‘Permanent Income Hypothesis,’ ‘individuals tend to smooth their consumption over time’ through borrowings or savings. A person may not have enough resources as income at a given point in time, but additional resources by way of savings and borrowings play a significant part in his/her overall well-being. Also, there is a very weak positive correlation between income-inequality and consumption-inequality. The divergence in income does not necessarily lead to a similar divergence in consumption, as poor persons have a higher propensity to consume than the rich.
However, according to the Survey, irrespective of the measure of inequality used (income-based or consumption-based), the correlations, as expounded above, hold true. By comparing two different periods, i.e., 2004 and 2011, the Survey also finds that the correlations are similar across different periods. Therefore, there is no trade-off between growth and inequality in a developing country like India; policy-makers need not choose one over the other.
The China Example
Through an intensive growth-oriented strategy since the 1970s, China has successfully reduced its poverty rates significantly. The headcount ratio of poverty (proportion of population below poverty line) has decreased by 94 % from 1980 to 2015 in rural China. The per capita income in the same period also increased at an annual rate of 6.9 %. The income for both the bottom 20 % and 40 % of households increased by 4.5 % and 6 % annually. Inequality did increase; the Gini Coefficient of Consumption increased from 0.241 in 1980 to 0.39 in 2011. But this was mainly because the richer population increased its income faster than its poorer counterparts. The ‘trickle-down effect’ was visible in the country, with a large majority of the working population shifting from agriculture in the countryside to urban industries. In fact, ‘Between 1978 and 2015, the number of people in nonfarm jobs as a percentage of total employment increased from 29 per cent to 70 per cent.’ According to the Survey, China is on its way to end poverty by 2030.
What is the bigger issue- inequality or poverty?
According to the Survey, there is a distinction between inequality and poverty. While inequality refers to the dispersion of assets, income, and consumption, poverty refers to the amount of assets, income, and consumption of those at the bottom of the ladder. The goal of public policy must be the eradication of poverty and not inequality. Using various experimental studies, it concludes that an increase in the incomes of the rich is not an issue until the poor have adequate incomes. However, the gap cannot be allowed to increase indefinitely, as it can lead to frustration and increased crime rates. In this backdrop, the Survey further contextualises the impact of Economic Growth and Inequality on Poverty in India.
What is the impact?
According to the Survey’s statistical analysis, in states with higher per capita incomes (measuring economic growth), poverty rates are lower, while there is no correlation between inequality and poverty. The analysis is also consistent with India’s economic history. As per World Bank, India’s poverty rates declined in the 1970s-90s only when the growth rate picked up from 3.5 % in the initial years. The rise of per capita income contributed about 87 % to the overall reduction, while redistribution was responsible for only 13 %. After the 1991 reforms, non-agricultural growth has been the primary driver of the reduction in poverty rates.
Thus, the Survey clarifies that a growth-oriented strategy is the way ahead, to increase the size of the economic pie, which can ultimately be used for redistribution. While the basic idea behind this chapter (that inequality is fine as long as everyone is better off) has been the position of many right-leaning economists for decades, its presence in the Economic Survey also marks a shift in our political economy towards the right. This complements the market-oriented reforms undertaken by the government in the farm sector and the labour sector recently. The hard facts presented by the chapter should be an eye-opener for the ‘inclusive growth’ brigade which considers ‘inequality’ to be the be-all and end-all of all economic problems; the brigade which would rather have poverty as long as it is equally distributed.
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