The Telegraph
Since 1st March, 1999
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- India needs both the market and the state

It is now considered to be a matter of great national pride, at least by some influential quarters within the country, that the Indian economy is heading towards an eight per cent annual growth rate. More important, the high growth rate is expected to persist for a while. Some even hope that it would go up further, and no one really believes that it has a chance of tripping down in near future unless something very unusual happens. The optimism is supported by the rapidly changing face of the Indian city. It is upheld by the newly emerging shopping malls, multiplexes, sky-scrapers and fly-overs built on uprooted slums and evicted shanty towns. It is also reflected by the euphoria in the perceptions of foreign investors who are keen to put their money into the Indian market, at a scale they had never done before.

Other quarters would like to rubbish the exuberance. The feeling of well-being, they would point out, has been limited to a very small section of the population, to the specially privileged, skilled and endowed, who are able to take advantage of the opportunities thrown up by the unleashed forces of the market. The golden chariot of globalization has not been able to accommodate the rest. It is urged that such lopsided growth, leading to an unprecedented rise in inequality, should be shunned, for it cannot be a matter of national pride but one of public disgrace that so few are prospering at the cost of so many.

The conflict between growth and inequality is an old one. It is an important one too. Especially so in the present Indian context where the close and parallel coexistence of a few centuries cannot escape even the eyes of the most casual observer. We can not deny that recently there has been growth in some sectors. Neither can we dispute that this growth has been rather miserly in its trickling down effects. So, before we start applauding the radiant performance of the economy, we must face the question of inequality of income distribution squarely and firmly. How serious is the state of inequality in India compared to other countries'

The Human Development Report 2004, published by the United Nations, gives cross-country data on various measures of inequality. One such measure looks at the total income earned by the richest ten per cent of the population of a country as a proportion of the income earned by the bottom ten per cent. It might surprise a few, but the fact of the matter is that if we go by this or any other measure given in the report, we find that by international standards ours is not at all an unequal society. According to the Human Development Report, some of the African and Latin American nations top the list of unequal countries: in Namibia, for example, the richest ten per cent earns 128.8 times more than the poorest ten per cent. Botswana (77.6), Swaziland (49.7), Lesotho (105.0) Sierra Leone (87.2), Brazil (85.0), Venezuela (62.9), Colombia (57.8) and Mexico (45.0) are some of the other highly unequal countries, where the figures in parenthesis represent richest ten per cent income as a proportion of poorest ten per cent income. By contrast, the corresponding figure for India is only 7, which is lower than the comparable figures for the United States (15.9) and the United Kingdom (13.8) on the one hand, and China (18.4), Malaysia (22.1), Indonesia (7.8) and Thailand (13.4) on the other. Only some Scandinavian countries like Norway (6.1) and Sweden (6.2), some erstwhile Socialist Bloc countries and Japan (4.5) and Germany (6.9) are better placed than us in terms of a fair distribution of income. It may also be worth mentioning that other countries of the Indian subcontinent, like Bangladesh (6.8) and Pakistan (7.6) have a similarly low level of inequality like India.

A couple of caveats before we proceed further. First, while some of the above figures represent true income proportions, others, including those related to the Indian subcontinent, have been obtained by using relative consumption expenditure as a proxy for relative income. This clearly underestimates inequality, for the rich and the poor are likely to be comparatively more equal in terms of consumption than in terms of income. Second, the numbers for the different countries are calculated for different years. Some are as old as 1993 and some others as recent as 2002. These are, however, minor problems ' firstly, because in a less developed country like India the vast majority of the poor consume their entire income and secondly because inequality has a tendency to persist and is unlikely to change significantly over a span of ten years.

What do we make out of these numbers then' In India, the low relative inequality figure actually suggests that the number of rich in the country is very small. Only the top one or two per cent may perhaps be called affluent, but the lower stratum of the distribution starts almost immediately after that. Therefore, when we are looking at the top ten per cent income earners, we are actually considering a lot of not-so-affluent people. This is confirmed by the huge number of people living below the poverty line, with 35 per cent Indians spending less than a dollar a day and 80 per cent spending less than two dollars a day in 2002. In comparison, the less-than-a-dollar criterion places less than 2 per cent of the population below the poverty line in Malaysia and Thailand, 16.6 per cent in China, 8 per cent in Colombia and 8.2 per cent in Brazil.

Our problem, therefore, is one of absolute poverty and not of relative inequality. The curious point is that the two may not be totally unrelated. Simon Kuznetz, the noted Nobel-Prize-winning economist, had a hypothesis, which may be invoked in the present context. According to the Kuznetz hypothesis, the relationship between growth and inequality, when plotted in a graph, looks like an inverted U. This means that starting with a low level of income as a country keeps growing, inequality goes up at first. It reaches a maximum at a somewhat middle level of income and eventually comes down when the country becomes developed. The Kuznetz process may have some relevance for the Indian economy.

In India, when domestic markets were protected from international competition, a handful of traditional industry houses prospered and the number of affluent remained limited. This is reflected by the present data on income distribution. With liberalization, new opportunities are opening up and those who are in a position to take advantage of these opportunities have started to flourish. This should increase income in the top ten per cent bracket and consequently inequality should also go up. But growth in the economy would create demand for fresh labour. If the poor could sell their labour in the market they could certainly gain from this overall expansion. This, in turn, should improve their condition in the long run and inequality should eventually go down.

The question is, can the poor automatically take part in the emerging markets, and the answer is an unqualified no. In fact, the state needs to help them with education, skill formation, health services and other infrastructural facilities like roads, electricity, sanitation and so on before this wretched lot can participate in the market. For a proper economic development, therefore, we need both the market and the state. The market would create new possibilities and increase the demand for labour. The state, on the other hand, can partly take care of the supply side by making the poor market-worthy. One should not worry too much if in the process there is a little rise in inequality.

The current level of inequality being low, we can certainly afford such a rise provided it comes with an increase in growth. Indeed, the fear that globalization might transform the Indian economy into another Latin America is rather ill founded, for, as the data reveals, we are still away from the really unequal economies of the world by a fair distance.

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