India is currently the fastest growing large economy in the world. She recently overthrew China from this top position (this came to light last year after India changed the way she estimates GDP). With a high proportion of its population in the working age group, India is all set to continue her high growth rate. But surely there are challenges as well that India’s economy has to face? What could these be?
While India’s economy is certainly surging ahead, those who know better will look not only at the rate of growth of the total income but also at how this income is distributed among the country’s people. It is indeed necessary to grow fast, but that is not sufficient. Growth needs to be inclusive. And it is here that India faces her greatest economic challenge. Since the 11th Five Year Plan, the role of “inclusive” growth has been emphasized upon. What do we mean by the term ‘inclusive’? Only ‘pro-poor’ growth should qualify as being worthy of pursuit. There are various ways in which the pro-poorness of growth can be estimated. One important way is to measure the elasticity of poverty with respect to the GDP growth rates, i.e., the ratio of percentage decline in the Head Count Ratio to the percentage increase in GDP. While empirical evidence shows that the elasticity has increased in absolute terms it is not statistically different from the elasticity observed during the 1980s. One of the major reasons for the slower decline in poverty is that India is experiencing an increase in income inequality.
According to Banerjee and Piketty, the average income of the top 0.01 percent of India’s income distribution was about 150-200 times the average income of the entire population during the 1950s. This ratio fell down to 50 by the 1980s but then rose again to 150-200 times during the late 1990s. This trend is further substantiated by the increasing inequalities among the State Domestic Products (SDP).
The increase in income (or consumption) inequalities is a result of inequalities in education, health, and other social achievements. A poor illiterate person with poor health can achieve only so much in the labour market. Inadequate government expenditure and poor regulation of private players in the health sector have resulted in unequal access to health facilities.
But are we not well integrated into the world economy that poor illiterate workers can find work in labour intensive firms that serve the world market? India has only to look at China to learn how to effectively utilize her large growing population. China too has a large population with varying levels of skill and education, and unlike India, China uses her large unskilled masses to produce toys, furniture, even e-rickshaws. Producing these goods may not be as “cool” as producing software programs, but it is worth noting that the significant growth in India’s service sector has not resulted in a complimentary growth in its working population. We added only 1.25 million to our workforce in the late 2000s while the target was close to 50 million! The current government’s efforts through programmes such as “Make in India” and “Start-up India” are aimed at addressing this problem. A young educated labour force if left to idle aimlessly can turn out to be a harbinger of doom. The increasing levels of alcoholism in Kerala and Tamil Nadu are warning signals.
Unless India learns to distribute her trail blazing growth more evenly, she will become a basket case. We have already earned a bad name for the number of starvation cases reported despite our overflowing food stocks. In fact if we stacked the food sacks available with the Food Corporation of India (FCI) one on top of the other, they can make a trip to the moon and back (J. Dreze)! Such horrendous economic policies if allowed to pervade will be politically destabilizing too.
Issues related to unequal distribution of resources amongst different castes and gender may be traditionally treated as ‘social’ issues but they very much belong to the economic arena. Empirical evidence has found that an educated healthy mother contributes to an educated and healthy family. The relatively low adult female literacy rate of 51 percent is correlated with a high infant mortality rate of 47 per thousand live births, which is unacceptable when compared with that of our neighbours. Sri Lanka has an IMR of 11. Even our poorer neighbours, Nepal and Bangladesh, are better off with IMRs of 39 and 37 respectively. That this is an economic waste is not difficult to see. Here one also has to make a mention of S. Korea whose IMR is 4. In 1947, India and S. Korea were very similar to each other (in fact they even share their date of independence). But today when one looks back one can see that S. Korea’s growth has been a better planned one. Before Korea opened up its market in the 1960s, she ensured that an egalitarian society and economy was in place – gender equality playing a key role.
When it comes to caste, we seem to be up there and alone. Immunization rates are as low as 31.3 percent for the Scheduled Tribes compared to the All India average of 43.5 percent. The under 5 mortality rates of non-ST, SC, and OBC is 59 compared to 96 of the STs. Caste inequalities reinforce health inequalities, which in turn result in economic inequalities.
Sectorally, the poor performance of agriculture has been definitely disheartening. The fact that 50 percent of the workforce is employed in this sector and yet it chugs along at less than 4 percent growth rate is simply unacceptable. Greater investment, public or private, needs to be urgently put in place to emancipate the ‘kisan’ from his rain dependent destiny.
Some challenges that have caught the attention of both the media and credit rating agencies are related to India’s fiscal health and monetary system. Our fiscal deficits are above the self-imposed target vide the Fiscal Responsibility and Budgetary Management Act (FRBM Act) but they are not precariously high. Also, more than the size of the deficit one must keep an eye on the quality of this deficit. Are we spending at the right places and not pruning the essential public services?
The fact that the Indian banking system is suffering from uncomfortable proportions of Non-Performing Assets is known to one and all but the largest defaulters (worth thousands of crores) are big infrastructure companies and their likes and not the poor farmer who commits suicide when he finds a payment of a few thousand rupees looming on his head. The monetary system has to go through the painful process of cleaning up the balance sheets and that poses a threat. The giant monopolistic borrowers have to pull up their act.
So far we have been discussing India’s internal challenges. Now moving on to the challenges that India faces in the world economy. The world’s market for Indian goods and more so services has been drying up since the monstrous global financial crisis ripped the world apart. With Europe, US, and now China slowing down we really have to hope against hope. Thanks to rock bottom world oil prices we have been able to tide over this storm but sooner or later oil prices will go up (they are expected to rise by 2017) and we had better prepare ourselves for that certainty. We should also hope that the rise in oil prices will be a result of the upturn in the world economy bringing life back to our export sector.
All said and done, India is still a working democracy (Rohit Vemula and Kanhaiya Kumar being solid proof), where voices are not and cannot be easily muffled. Also that India is committed to a sustainable and environment sensitive growth is a proud reminder that all is not done yet.
The author is Assistant Professor at St. Stephen’s College, Delhi University. Her areas of interest include econometrics and the Indian economy. She can be reached at firstname.lastname@example.org.