India’s Dilemma: Faster Growth or Poverty Alleviation?

Growth or poverty? Balancing the two is a challenge for India’s politicians

NEW DELHI: A poster child of globalization, India has recently lost some of its shine as growth slows and the question of inequality and serious malnutrition and hunger hits the headlines. India is doing relatively well on economic growth – an annual average of 7.9 percent – but as is often the case, poverty levels fall as incomes rise, but inequality grows. On international comparisons, India is middle-of-the-road in terms of who gets how much of the cake. But that is not good enough for those who get the narrowest slices. And such trends certainly make the government vulnerable in a populous democracy with 32 percent under the poverty line. 

How India meets the challenge of inclusive globalization holds lessons for developing countries.

Take for example, the fierce policy battles over the Food Security Bill, drafted with the ambitious aim of banishing hunger from the land. Mindful of the cost, the coalition government led by Congress wants to limit the sale of heavily subsidized food grain only to the very needy. But the National Advisory Council, chaired by the head of the ruling alliance, Congress President Sonia Gandhi, is pitching for a more ambitious scheme to provide 7 kilograms of grain a month to more than two-thirds of 1.23 billion people at something like an 80 percent subsidy. Agriculture Minister Sharad Pawar insists that the proposal is financially unaffordable and impractical in terms of what the country’s farmers can produce.

This argument builds on an earlier one, over the National Rural Employment Guarantee Scheme that started out in 2006 by promising work when demanded for one member of each family for up to 100 days in a year. In practice, some 50 million, more than 10 percent of the workforce, got an average of about 50 days work last year. The critics have slammed the policy for corruption in distribution and its effect on driving up agricultural wages, making farming unviable in parts of the country. Paying out cash support to poor families, they say, would deliver better results at a lower cost.

The same critics make the same points when it comes to distributing subsidized grain. Those who defend the unemployment program – among them, some leading members of Sonia Gandhi’s NAC – say that its benefits are self-evident, and they want a hike in the program’s wage-rate. In pushing for an all-encompassing food security law, they point to embarrassing numbers on malnourishment, even as the Global Hunger Index has ranked India 15th among developing nations with high levels of hunger – the index is calculated on proportion of population that is undernourished, the proportion of deaths of children under age 5 and prevalence of underweight children under age 5.

Underlying the debate is disagreement on basic facts, about how many “poor” people are in India. The government’s basic poverty line was redefined for 2004-05 as 19 rupees per day in urban areas and 15 rupees in rural areas – 50 rupees today are equal to US$1. On that basis, government said that 37 percent of the population was below the poverty line, revised to 32 percent for 2009-10.

Civil society activists who sit on the NAC contend that the number of poor is much higher, and the chasm between those sets of numbers explains the debate over how much of the population needs to be covered by food security law.

The problem with the activists’ figures is that they suggest a massively skewed income pattern, far more skewed than in most countries. Comparative figures for countries are given in the World Bank’s World Development Indicators: These show that inequality in India, as measured by the Gini coefficient, is 0.37 on a scale of 0 to 1 – a lower number signifies less inequality. India’s inequality is lower than China’s 0.42, the US’s 0.45 and Brazil’s 0.54, but higher than for neighboring Bangladesh, 0.33, which also has a greater hunger problem than India, according to the Global Hunger Index.

Another way to measure inequality is to look at the ratio of income between the top 10 percent and bottom 10 percent of the population. In India, the top 10 percent earns 8.6 times more than the bottom 10 percent. That compares favorably with China, 21.6 times, and the US, 15.9 times. With the exception of Scandinavian havens like Sweden and some ex-Soviet bloc countries, wealthier countries have greater inequality. So India should expect to see inequality increase as its economy grows, the argument goes.

This trend feeds the critics of a growth-centric policy, who argue that the country has done better on economic growth than on human development – a composite of levels of education, key health indicators like life expectancy, and the like. The country’s rank on human development in 2011 was 134 in a UN Development Program list of 187 countries, 10 notches lower than its rank on the basis of per capita income, suggesting a below-par performance on human development.

Responding to the challenge on human development, the government has stepped up spending on health and education, achieving dramatic results in school enrolment and student retention – children in the 6-14 age group who were out of school dropped from 25 million to 8 million between 2003 and 2009. Activists campaign for more: programs to quickly end poverty and malnutrition. They find support in a Congress party that sees political pay-off in offering meaty promises to voters. The Congress assumes that the coalition it leads won re-election in 2009 because of the delivery of the right to work; it would like to go back to voters in 2014 with a promise of the right to food.

Meanwhile, government economists fret that the fiscal deficit is already too high – for the central government, it is 5.5 percent of GDP; the combined figure for central government and states is about 8 percent – and that an enlarged subsidy program would spell macroeconomic trouble. The Reserve Bank has added its voice to those calling for cutting government spending for fear that it would hobble government’s fight against inflation. As it happens, inflation has been higher than normal in the last four years of higher government deficits. The Reserve Bank’s solution – high interest rates, introduced to curb inflation – have affected investment and business sentiment, so the trade-off is clear: More spending on the programs the political wing wants is likely to mean lower economic growth, which would negatively impact poverty reduction. With growth having slowed to 7 percent, down from 9.3 percent before the global financial crisis, the choices are real: What the government opts for will determine the country’s trajectory for the rest of the decade.

Is there a way of squaring the circle? Yes, if the large subsidies that go to the middle class could be cut to make way for programs directed at the poor, if government delivery systems could be made efficient and less corrupt, or new methods adopted to ensure targeted delivery. Yet either plan would ruffle many feathers – and the media lends a megaphone to middle-class concerns, and the government would have to withstand a political firestorm.

The problem is that the government, racked by scandal and riven by internal dissension, is in no position to run that gauntlet.