The limits of political fruits of growth | Number Theory

Tamil Nadu chief minister M K Stalin has announced a payment of ₹5,000 to 13.1 million women beneficiaries of the state’s cash transfer programme

Tamil Nadu chief minister M K Stalin has announced a payment of ₹5,000 to 13.1 million women beneficiaries of the state’s cash transfer programme. Of this amount, ₹3,000 is an advance payment for the months of February, March and April, and ₹2,000 is a special payment. Stalin has also promised that the amount could increase after elections (read if his government comes back to power). While cash transfers before elections are now an established pre-election protocol in Indian states, the fact that a high income and industrialized Tamil Nadu needs it as much as a poor state like Bihar raises an interesting question. Why does better economic performance not help states avoid such freebies? Here are three charts which answer this question.

Tamil Nadu chief minister M K Stalin has announced a payment of ₹5,000 to 13.1 million women beneficiaries of the state’s cash transfer programme

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  Consumption standards are more equal than per capita GSDP across Indian states

  Tamil Nadu’s per capita GSDP – it is Gross State Domestic Product divided by population – was more than five times that of Bihar in 2023-24, the latest year for which we have comparable consumption data from the Household Consumption Expenditure Survey (HCES). Its average Monthly Per Capita Consumption Expenditure (MPCE) exceeded Bihar’s by a multiple of less than two. GSDP matters as far as a state’s overall economic prowess and the fiscal state is concerned. But when it comes to elections, one can reasonably argue that MPCE is a better indicator of well-being levels. And states are more equal and precarious on this count than what GSDP or per capita GSDP levels would tell us. Even Tamil Nadu’s MPCE in 2023-24 was less than ₹7,000. This makes a windfall transfer of ₹5,000 in a bank account a politically significant freebie. This argument holds not just for a Tamil Nadu – Bihar comparison but across states. Divergence across GSDP is significantly larger than it is across MPCE.
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  The asymmetry between GSDP and consumption stems from a relative equality of average wages over white-collar wages and profits

  What explains this muted reflection of per capita GSDP levels on consumption standards across states? The answer is that the nature of economic growth is skewed towards the top where the rewards are cornered by a selected few. One way to illustrate this is to compare per capita direct taxes collected across major states in 2023-24 with average wages of regular wage employees. Direct taxes are levied on corporate profits and salary incomes above a certain threshold. While their share has been rising over time, the tax base is extremely skewed as was shown in these pages earlier this month. Average regular wages, on the other hand, track incomes of even those workers who do not earn enough to pay taxes. The comparison is revealing. Tamil Nadu’s direct tax collections adjusted for number of workers was 23 times that of Bihar but its average regular wages were only 1.1 times Bihar’s. Once again, the argument holds across states.
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  This is not to say growth does not matter at all

  Even richer states having to dole out populist schemes like the poorer ones in India is a big indictment of how unequal our economic growth is. This, however, should not be inferred as an argument which ridicules or trivializes the importance of growth itself. States and most of their residents are better off when growth and per capita GSDP levels are higher rather than lower. This leads to a fall in unpaid work, generates salaried work – it is the most economically rewarding in India – for a larger part of the workforce and can even help transcend inequalities rooted in other structural factors such as caste. Data shows this clearly. The share of unpaid self-employed and regular wage workers shows a negative and positive correlation with per capita GSDP levels. Even the lower end of the social strata in richer states earns more than those at the top in poorer states. A story in these pages in October 2023 had snown that the average non-Scheduled Caste (SC)/Scheduled Tribe (ST)/Other Backward Classes (OBC) person in Bihar has a lower MPCE than the average SC person in Tamil Nadu.