Growth has become more inclusive

People opposed to liberalisation in India often assert that though the overall economy is growing faster, the rich are getting richer and the poor are getting poorer. Is this true?

The growth rate of GDP particularly picked up from 2005-06, averaging about 9.5 per cent for the next three-years, dipped to 6.8 per cent in 2008-09 after the global recession started, and recovered to 7.5 per cent in 2009-10, despite a severe drought. The latest NSSO survey data for this five-year period (2005-2010) of high growth, however, throws up some surprises when compared with the earlier five-year period (1999-2004). In several ways, growth has become more ‘inclusive' than before.

EMPLOYMENT AND EDUCATION

For the first time in two decades the absolute number of unemployed has gone down by 6.3 million people during the five-year (2005-2010) period.

Consequently, the officially measured unemployment rate that went up from 7.3 per cent in 1999-00 to 8.2 per cent in 2004-05 has fallen to 6.6 per cent in 2009-10. Some see a puzzle here, as the participation rate of workers, specially female workers, has fallen, indicating that more people are withdrawing from the labour force.

Theoretically, one possibility is that a lot of people have stopped looking for jobs, having become despondent after searching for jobs in vain for a long time, which is a bad sign. However, the more likely possibility is that more people (especially women) are going for more education and some women (especially in rural areas) are withdrawing from work voluntarily as their better-earning family members can afford to let their womenfolk to stay home without working for wages outside.

This hypothesis is strengthened by the fact that some 12 million more girls have enrolled in schools in this period and there has been an all-round increase in real wages for regular and casual male and female workers in both urban and rural areas, indicating labour shortage pushing up wages. Moreover, the growth in real wages during 2005-10 has been much faster than that in 1999-04.

REAL WAGES UP

For casual women workers in rural areas (who are considered to have the least bargaining power), annual growth in money wage rates increased from 3.5 per cent during 1999-04 to 14.6 per cent during 2005-10. Despite a higher rate of inflation during 2008-09 and 2009-10, compared with the earlier years, the growth in the real wage rate in the high-growth five-year period, too, significantly exceeded the growth over the preceding five years.

The growth in employment and rise in real wages have also led to a big increase in per capita expenditure in both urban and rural India. Real per capita monthly expenditure in rural areas went up by 1.4 per cent per year during 2005-10, compared with 0.8 per cent increase per year over 1993-2004.

In urban areas, the corresponding figures are 2.67 per cent and 1.47 per cent. So, one may argue that the urban-rural gap in average consumption expenditure (which is currently Rs 1,054 in rural versus 1985 in urban) has been going up, along with greater overall prosperity.

According to provisional estimates, the poverty ratio, according to Tendulkar poverty line (which is substantially higher than the earlier official line), has fallen from 37.2 per cent in 2004-05 to 32.2 per cent for 2009-10.

The five percentage point decline in poverty ratio is the fastest decline in India in any five-year period. This happened, despite 2009-10 being a drought year with the worst agricultural growth rate since 2002-03.

GROWTH EFFECT

There are several factors at work producing these good news. Supporters of high growth (as against redistribution) strategy for poverty reduction would give most credit to high growth and consequent job creation.

Employment of more people within a family, even at low wages, has increased family income and hence per capita income and consumption within a household.

Though NREGS has played an important role by providing job guarantee in rural areas at minimum wage, even here some would like to hold high growth to be indirectly responsible by providing the necessary tax revenue to finance NREGS (that started in 2006 and got universalised from 2009).

Other contributory factors include substantial pay hikes for government employees through the Sixth Pay Commission, farm loan waivers, rising procurement prices (along with increasing food subsidy) and rise in agricultural prices globally which have allowed farmers to pay higher wages (in both nominal and real terms) to farm workers.

The disparity between the poorest and the richest has, however, been widening – more so in urban than in rural areas. Ratio of expenditure by the top 10 per cent of rural Indians to the bottom 10 per cent was 5.76 in 2009-10, compared to 5.63 in 2004-05. The same ratio in urban India increased from 9.14 in 2004-05 to 10.11 in 2009-10.

INEQUALITY INCREASES

This is expected since the opportunities to earn high incomes in both businesses and wage employment are more in urban areas and would increase at a faster rate with growth and urbanisation in the economy.

Since richer people spend a lower fraction of income and save the rest, the income inequality would be even higher than expenditure inequality.

Another interesting finding is that expenditure on vegetables, milk, egg, fish, meat and beverages is growing faster in the rural areas compared with urban India which is another indication of rising rural prosperity.

In rural households, cereals accounted for 15.6 per cent of expenditure in 2009-10, as against 22.2 per cent in 1999-2000.

Some economists conclude from declining per capita cereal consumption that poverty must be rising in India. But in view of the greater diversification of expenditure away from foodgrains, that inference is not valid.

(The author is a former professor, IIM, Calcutta.)

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