The Hindu Business Line : Why this shine is for all

India's shine is not for the rich alone. The poor too are quickly and steadily acquiring better purchasing power, and primarily because of the State governments. Clearly, there has been no let-up on the creation of job and incomes. India and its States are on the right track in making the shine happen with discernible intensity in basic and simple branded goods, says G. Ramachandran.

IT IS very likely that the findings of India 500 Plus have been misinterpreted as proof that the rich are getting richer. Such a misinterpretation is the result of ``inference by percentages''. ``Inference by absolutes'' shows that India's shine is for all. India's shine is not for the rich alone. The poor too are quickly and steadily acquiring better purchasing power, and primarily because of the State governments.

Percentages pose problems to policy-makers, analysts and commentators because they offer opportunities for misinterpretation and wilful wrong interpretation. Inferences about economic policy and outcomes that are based on `percentages' can be used to mislead policy-makers and their targets of policy.

Consider two four-person households. Both households earn their incomes entirely through effort and do not earn any interest or dividends from financial investments. The first household's annual income grows from Rs 100,000 to Rs 140,000. The annual growth is 40 per cent. The second household's annual income increases from Rs 200,000 to Rs 260,000. The annual growth of the second household's income is 30 per cent.

The first household would appear to be the smarter of the two since its income has grown by 40 per cent, while the second household's incomes has grown by 30 per cent. But the second household is the more productive of the two since it has added Rs 60,000 to its annual income. The first household could add only Rs 40,000 as incremental income. Since both households depend on their effort and productivity to earn their incomes, the second has been more successful in earning higher incremental income.

What can be inferred from the examination of the rudimentary facts pertinent to the two households is that the choice of the yardstick to determine the more productive of the two is as important as the fidelity of the facts. Percentages may be more apt when comparing outcomes from financial investments while absolute changes may be very apt and extraordinarily informative when comparing outcomes of human effort, governance and leadership.

Eight times as good

India's total purchasing power grew by Rs 7,227.57 billion in four years (Table 1). Purchasing power expended on luxury goods grew merely by Rs 809.91 billion. By contrast, the purchasing power expended on basic goods grew by Rs 2,173.78 billion. Ordinary people who consume basic goods benefited 2.68 times as much as those that consume luxury goods. The purchasing power expended on simple branded goods grew by Rs 2,647.3 billion. The additional benefit to ordinary people is 3.27 times as much as those that consume luxury goods. The purchasing power expended on other branded goods grew by Rs 1,596.61 billion, 1.97 times as much on luxury goods.

The absolute changes pertinent to India's purchasing power deployed on basic goods, branded consumption goods and luxury goods between 1999 and 2003 show that the State and Central Governments have together worked assiduously towards making the lives of ordinary people better. They have added Rs 7.92 to the purchasing power deployed on basic and branded consumption goods for every rupee added to the purchasing power deployed on luxury goods. Purchasing power expended on goods and services other than luxury goods has grown 7.92 times. But percentages conceal a lot. They conceal the ground realities.

The base counts

What is clear from the changes in purchasing power over the period 1999 through 2003 is that a very significant part of the absolute increase in purchasing power was the result of the expansion of the market for basic goods, simple branded goods and other branded goods. But relative to their market sizes in 1999, they grew less than the luxury goods market. If the `inference by percentages' method were used, the luxury goods market expanded by 342 per cent in four years, or by a compound annual growth rate of an astounding 45 per cent.

The stunning growth of the luxury goods market has to be evaluated after reckoning with its size in 1999. The market for luxury goods was merely Rs 236.81 billion, the result of years of high excise duties and tariffs and conservative spending habits. A market as small as that can post dizzy growth rates in percentages.

Finicky economists and political leaders who know how to separate the grain from the chaff appreciate the importance of the base — Rs 236.81 billion in the case of the luxury goods market. Had the base been higher and if the absolute growth in luxury goods been Rs 809.91 billion, the argument that the rich are getting richer would have been weak. This explains why earnest political leaders care to examine the absolute changes. What cannot be ignored is that the market for simple branded goods and basic goods has expanded by 5.95 times as much as luxury goods.

Reality check

Serious economists and political leaders understand the importance of absolute growth. Absolute growth counts in the context of effort, jobs, incomes and taxes. Basic goods, simple branded goods, other — read high-end — branded goods and luxury goods produce jobs, incomes and taxes in that order. Basic goods produce the most jobs and luxury goods the least.

The output to effort ratio for basic goods is lower than that for luxury goods. Luxury goods are typically very material-intensive and their methods of production are quite capital-intensive. By contrast, basic and simple branded goods are more human resources intensive. Their methods of production and distribution depend more on services and logistics. These in turn produce more jobs, incomes, consumption and taxes.

The purchasing power expended on basic goods and simple branded goods grew by Rs 4,821.1 billion, almost six times as much that on luxury goods. Quite clearly, there has been no let up on the creation of job and incomes. India and the States are on the right track. They have succeeded in making the shine happen with discernible intensity in basic and simple branded goods.

India — either as a union or as a federal establishment, and the constitutional nuances do not matter in the context of growth economics — has to continue to pay serious attention to the composition of purchasing power and the impact of market expansion on jobs and incomes.

Without that, there will be little growth in consumption, and consumption is indeed the fundamental prerequisite for economic growth. It can be said with considerable cheer that consumption is growing in all directions. This shine is for all!

(The author is a financial analyst. Feedback may be sent to indiagrow@sify.com)