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Gap between big bucks and impoverished still wide

EconomicReforms25YearsOfChange Updated: Jul 28, 2016 12:46 IST
Zia Haq
Zia Haq
Hindustan Times
Economic reforms

India is Asia’s third largest economy. Yet, its economic path, apart from improving poverty rates, has produced a growing club of the super-rich. The poor human development record and rising inequality are reminders of how India can’t rely on growth alone. (AFP Photo)

Octavio Paz, the Nobel winning Mexican poet who travelled to India as his country’s ambassador in 1962, was surprised to see “incredible opulence” surrounded by “equally unbelievable” poverty. How has India changed today?

India is now Asia’s third largest economy. In 2015, it had more billionaires than any other country except the US and China, according to a Wall Street Journal report. A billionaire census by the firms Wealth X and Swiss bank UBS conducted the same year revealed India had more billionaires than Switzerland, Hong Kong and France together.

India’s economic path, apart from improving its poverty rates, has produced a growing club of the super-rich. Yet, a poor human development record and rising inequality are grim reminders of how India can’t rely on growth alone.

High but inequitable growth, while propelling India into a lower-middle income country category, has left significant numbers mired in poor living conditions.

Growing inequality is emerging as a major social and political challenge.

Mind the Gap

Economists have already sounded the warning bell. “Revisions that increase growth are more readily accepted than revisions that reduce growth. So I am more worried about growth being overstated than poverty being understated (in India),” Angus Deaton, the recipient of the 2015 Nobel Prize in economics, told Hindustan Times in an email interview.

The consequences of not tackling inequality in India, Deaton said, were the “same as in the US, that the rich capture more than their share of political power, so that the state stops serving the majority of people”.

The country’s economic survey this year pointed out that income inequality – a problematic feature in much of the developed world – is rising in India and similar to that of the UK.

(Anand Sinha/HT Graphics)

The budget-eve yearly report said the richest 1% Indians hogged 12.9% of all income in 2012, up from 9% in 1998. In the UK, the income share of the richest, though high, was more or less steady during the period: 12.5% in 1998 and 12.7% in 2012. This means inequality is rising faster in India than in the UK.

India sees itself as a rival to China in terms of growth. GDP growth hit 7.3% at the end of 2015, overtaking China’s. Yet, in many areas, beating Bangladesh, a poorer neighbour, could be a more realistic target.

With more effective human development policies, Bangladesh’s average life expectancy of 71.6 years is higher than India’s 68 years. The country’s maternal mortality rate (170) is lower than India’s (190). Infant mortality rate per 1,000 live births in 2013 was 41.4 for India and 33.2 for Bangladesh.

The World Human Development Report 2015 ranked India 130 among 188 nations, way below countries like Sri Lanka (73), Maldives (104) and Iran (69).

Push for Schools, Hospitals

When the economic survey was launched, chief economic adviser Arvind Subramanian called for linking “double-digit growth” to investments in health, education and delivery of services.

“If India has to reap the benefits of this ‘demographic dividend’ in the years ahead, it is imperative that investments in social infrastructure are made in an appropriate measure to achieve the desired education and health outcomes,” the report says.

(Anand Sinha/HT Graphics)

Education is a big laggard, it turns out. Trends in enrolment reflect a decline in the percentage of enrolment in government schools in rural areas, from 72.9% in 2007 to 63.1% in 2014 (annual status of education report 2014).

This decline is partly explained by private schools, which have registered an increase in enrolment from 20.2% in 2007 to 30.7% in 2014.

(Anand Sinha/HT Graphics)

However, lower state spending on “social infrastructure” – a term that denotes sectors such as education, health and delivery of crucial services – is a key constraint.

As a proportion of GDP, spending on education has hovered around 3% from 2008-09 to 2014-15. Likewise, there has been no significant change in expenditure on health as a proportion of GDP.

(Anand Sinha/HT Graphics)

Health spending has remained stagnant at less than 2% during the same period. In 2013-14, out of the total expenditure on social services, 11.6% was on education while 4.6% was on health.

The Tax Math

Worryingly, tax benefits have benefited the rich more than other income groups. Those with lower incomes tend to get a larger proportion of their money deducted because of mandatory tax cuts compared to wealthier individuals.

Explaining this, Subramanian had said: “Mandatory deductions from employee salaries are higher for poor than rich: 15% for Rs 5,500 earner vs 0.5% for Rs 55,000 earner. Who benefits from tax benefits? Not the middle-class or the rich, but the super-rich.”

The Modi government’s social welfare policy is based on JAM, a hightech financial inclusion platform that stands for Jan Dhan, Aadhaar, Mobile. But economists like Jean Drèze have shown how cash transfers have repeatedly failed in states like Rajasthan, Delhi, Jharkhand and Puducherry, highlighting the pitfalls of pivoting India’s social-welfare policy on cash transfers alone.