indian economy since 1980- virtuous growth or polarisation

8/7/2019 Indian Economy Since 1980- Virtuous Growth or Polarisation

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S p e c i a l a r t i c l e sI n d i a n Economy s i n c e 1 9 8 0

Vi r tuou s G r o w t h o r Polarisation?It is widely believed that India's economic growth in the 1990s accelerated - in responseto the orthodox economic reforms initiated in 1991 - mainly on account of a faster growthin the tertiary sector. There is also a growing consensus that (i) the improved growthsince 1980-81 reduced poverty, and (ii) the reforms in the 1990s increased the growth ratefurther, without dampening the process of poverty reduction. This study seeks to verifythese propositions. Further, it examsines some dimensions of income distribution - aneglected issue in the recent times - to assess if the developments during the last twodecades led to a diffusion of growth - or a polarisation in the economy.

R NAGARAJ

IntroductionP icturethe economic discourse in the

early 1980s. There was widespreadgloomaboutIndia's macroeconomicperformance- perhaps, best captured inthe words of Raj Krishna:A review of the economicdevelopmentofIndiain the last three decadesreveals an

astonishingfact: a large number of theindicatorsof developmenthave remainedstuck at very unsatisfactory evels...Thestability of numerousparameterswouldnot be a matterof concernbut for the factthattheir stable values epitomise a largeand a growing mass of unrelievedsuffering...For 2 yearsthe rateof growthof national income has been stagnatingarounda miserablemeanof about 3.5 percent.This ratekeeps India as low as 71stin the list of 104 countriesorderedaccord-ing to the rate of growth of income percapita [Raj Krishna1984:62-63).

Now, consider the discourse, one and halfdecades later. Intervening in a populardebate on the development policy, T NSrinivasan illustrated his arguments withan assessment of India's recent economicperformance:

During 1980-90, the rate of growth in-creasedto 5.8 percent andwas exceededby only eightoutof 113 countries.During1990-98,thegrowthrate urther ncreasedto 6.1 percent and was exceeded by only9 out of 131 countries...Onlyafter thegrowthaccelerated n the 1980s,was therea significantdecliningtrend n poverty,a

trendthatappears o have continued aftertherecovery rom he1991crisisandreform[T N Srinivasan, The Financial Times,September27, 99)9].That the (orthodox) economic reformsinitiatedin 1991 have improvedeconomicgrowth with a continued positive effect inreducing poverty has made scholars opti-mistic thatacceleratingthe growth furtherwill banish poverty very quickly. Partici-pating in the same debate, Deepak Lalargued:

...dispute about thc poverty numbers inIndia merely reflects the fact that rapidgrowthhas not occurredor has not beensustainedto make a markeddenton pov-erty. The stalled reformlshave failed toraisegrowthrateappreciably.Some esti-mates that...lhave made...showthat f thegrowth rate rises to 9-10 per cent thatChinahasseen, by 2006 the povertyratiocan fall fromitscurrent ateof over30 percent to just over 5 per cent [DeepakLal,The Financial Times, October8, 1999].These views reflect the dramaticchangein the professional perception about theIndian economic performance and pros-

pects- especially in theinternational ircles- over the last two decades., Vijay Kelkaralso echoed asimilarview recently:"FThereis, in fact, some evidence that during thenineties the growthratein Indiahas shownsome acceleration".He furthercontended,"As we enterthe new century,theeconomystands at the crossroads. It can take eitherthe 'business as usual' road which meanscontinuedpovertyandthe low-growth trapor the high road to prosperity through

accelerated reforms" [Kelkar 1999:2326,2329].Thus, the emerging consensus is:

(1) Improved economic growth since in.1980-81 has reducedpoverty significantly.(2) The growth rate improved as a resultof the economic reforms initiated since1991, without affecting the trend declinein poverty.(3) Therefore, more reforms - popularlycalled the 'second generationreforms', or'completing the reform agenda' - willfurther improve the growth rate, and re-duce poverty.2More recently, there is a growing viewin popular writings that Indian economyis increasingly driven by services, as thetertiary sector now accounts for close toone-half of GDP. Therefore, India is per-ceived as a post-industrial society - a'knowledge' based economy. Such opti-mism is perhaps argelybased on therecentspurt nsoftwareexportsand theperceivedpotential of trade in services such as in-formation technology, communicationsand.entertainment.The foregoing views and perceptionshave considerable significance, both forthe current policy initiatives in India, aswell as for the'development discourse ingeneral. Therefore, there is a need for acareful examination of these propositions,both for their analytical soundness andempirical validity.Whether the reforms - as 'defined bystabilisation and structural adjustmentprogramme, or as popularly called the

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'Washington Consensus' - result in asuperioreconomic performancehas beenseriously questioned in the literature.Dornbusch had warned a decade ago;"Stabilisationmay be inevitable but is nota ticket to prosperity...One should notpresume that the market automaticallysolves the coordination problems..."[Dornbusch 1990:42-43].More recently, there has been consider-able rethinking on the neo-liberal ortho-doxy (Washington consensus) within themainstreameconomics.3 This is perhapsbest illustrated in the writings of JosephStiglitz. According to him,

The goal of the WashingtonConsensuswas to provide a formula for creating avibrantprivatesector and stimulateeco-nomic growth. In retrospect,the policyrecommendationswerehighlyrisk-averse-- they were based on the desire to avoidworstdisasters.AlthoughtheWashingtonConsensusprovidedsome of the founda-tions forwell functioningmarkets, t wasincompleteand sometimeseven mislead-ing IStiglitz 1998:30].Empirically, there is little unambiguouspositive association between the reformsand economic growth. The 1999 annual

reportof the WorldBankOperationEvalu-ation Departmenthas reportedsome star-tling facts. In its assessment of the WorldBank ending or28 countriesbetween 1981and 1997, the annual report came to thefollowN;ingoncluisions.Toquote the report,

The factsof growthandpovertyin the 28countries between 1981 and 1997 aresobering:- In40 percentof thecountries, ercapitaincomeeither failedtogrowor shrank.-- In25 percent, the shareof populationin absolute poverty increased.- In23percent, ifeexpectancydeclined.- In54 percent, the peopleexperiencedstagnating ercapitancome,risingpov-erty and declining life expectancy,ora combinationof these events.- In 85 percent,percapitaincomegrewI percent a year or less in the 1990s.- In 59 per-cent,gross savings as a per-centageof GDPwere low (less than 10

per cent) or declining.- In 67 per cent, investmentefficiencywas less than10 percent or declining.These findingsconfirmthe view...that thebattleagainstpoverty s beinglost andthatbusinessas usual will not accomplishtheobjectivesof thedevelopmentcommunity[WorldBank 2000:17].In a careful assessment of the structural

adjustmentin Latin America since 1980,Agarwal and Sengupta (1999), conclude

that there is no evidence of a positiveassociation between reforms and growth.In addition to growth andpoverty, thereis a considerable evidence of growinginequality among countries that have sys-tematically followed the reforms. Grow-ing inter-regionaldisparitiesinChinaaftermarket-oriented reforms were initiated in1978 is, by now, a well-accepted p'ropo-sition [Tsuui1996].Inthe context of similarreforms in the 1980s in Thailand, JohnLewis and Devesh Kapur (1990) hadwarned of a growing rural-urbandivide.Quite apart rom thequestion of how thereforms affect income distribution,recenteconomic literature has witnessed a re-newed interest on the effects of growth oninequality, from a variety of analyticalperspectives.

Bringing Income DistributionBack InIn theKeynesianliterature,ncomedistri-

bution is central to the pace and patternof economic growth in terms of its impli-cations for aggregate demand. Within themainstream economic discourse, micro-economic arguments are increasinglybrought in to understand how greaterequality is conducive to faster economicgrowth.4 Yet another strandin the recentyears,following thepublicchoice theoreticliterature,has shown how income distri-bution influences economic growth as itaffects voting behaviour in a democracy[TanziandChu 1998]. In thisgenreof lite-rature,there are several chains of causa-tion, in which initial level of inequalityaffects conomicoutcomes.Theseareperhapsbest described in AlbertoAlesina's words:

Several channels imply an inverse rela-tionship runningfrom initial income in-equalityto growth.A fiscal channelsug-gests that income inequality creates ademand or redistributive iscal policy. Ina median votermodel,thekey measureofinequality s thelevel of incomeor wealthof the medianvoterrelative otheaverage.The poorerthe median voter, relative tothe average,the largerthe amountof re-distribution hat a majorityof voters willfavour.Moregenerally,a large,impover-ished fraction of the populationcreatespolitical pressurefor redistributivepoli-cies.Thepressuremaytakedifferent ormsin different institutionalcontexts but it isgenerally feltin both democracies anddictatorships.In fact, in order to survive,even dictatorscannottotallyignore popu-lardemands.Redistributive iscal policeslead to high levels of taxation, whichnegativelyaffectsgrowth.Thus,thechain

of causationgoes fromhighinitial ncomeinequality to high taxes and from largeredistributionso low growth.An alterna-tivearguments that herich nveryunequalsocieties have the political and economicresources o escapetaxationbyexitingtheeconomy with capital flight or by taxevasion. Thus, demand for redistributionpolicieswith avanishing ax basemay eadto large budget deficits.A second channel linking inequalityandmacroeconomic erformanceoesthroughpolitical instability. Income inequalityfosters social discontent and unrest.Theassociated hreats oproperty ights,policyvolatilityandgovernment ragilitydepressproductive investment, promote capitalflightandultimatelyeduce rowth Alisena1998:301].Empirically, it has been foundthatin theOECD countries, in the post-war period,economies with less unequal income dis-tribution have performed better.5 Simi-larly, comparing the performance of the

east Asian economies with those of LatinAmerica,JefferySachscontended,"...highincome inequality...[In Latin America]contributesto intense political pressureformacroeconomic policies to raise incomeof lower income groups, which in turncontributesto badpolicy choices andweakeconomic performance" [Sachs 1989:9].Seen in this background,a neartotal lackof interestinhow thegains of the improvedgrowth in India since the 1980s are dis-tributed is surprising.6Perhaps, it is im-plicitly believed that the problem of ab-solute poverty is more acute in India, andthata decline in it implies an improvementin income distribution. Since there is awidespread consensus on the positiveeffects of growth on poverty reductionover the last quartercentury or so, con-cerns of income distribution seem to havetaken a back seat.The brief discussion above on growth,reforms and inequality - both from ana-lytical andcomparativeeconomic perspec-tives - provides a meaningful backgroundto formulateworkinghypotheses to exam-ine the recent Indian experience. In lightof the foregoing, we will examine thefollowing propositions:- Has GDP, or any of its major compo-nents,shown astatisticallyvalidchangein its growth rate since 1991?- How valid is the postulatedassociationbetween economic growth,povertyandthe policy reform. Does the inverse re-lationshipbetween growthandpovertyreductionhold at thedisagregated evel?- How has theimproved growthratesince

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the 1980s been distributedacross ruraland urbanareas,between the organisedand unorganised sectors, across themajor Indian states, and between thefactors of production in the privatecorporate sector?IIDataSourcesandTheir

LimitationsThis study mostly uses the NationalAccountsStatistics (NAS). Recently a newseries of NAS has been introduced withthe baseyear 1993-94, replacingthe earlierone with the baseyear 1980-81. As the newseries are available only from 1993-94,and the old series stopped with 1996-97,we had to use a chain index to convert thedata for the recent years to the old baseyear. To this extent, the findings reporthere are tentative. As the data for 1998-99and 1999-2000 are based on quick andrevised estimates respectively, they aresubject to revision. Hence our growthestimates are tentative on this count also.

State domestic product (SDP) data,thoughavailablein time series, have manylimitationsfor comparabilityacross states[Nagaraj 1998]. Planning Commissioncomputes 'comparableestimates' of SDPthat are used for the finance commissionawards.7 Apparently, these estimates,though comparable across states, are notcomparableover time. Therefore, in prin-ciple, it is difficult to be sure,which seriesis superior. Thus, it would be useful tocheck if the two series give similar results.However, such a question will remainhypothetical,as the 'comparableestimates'are not made public.Data on poverty and employment arebased on the widely used five-yearly sur-veys conducted by the NSS. We avoidedusing the results based on the yearly 'thinsample' surveys, which are found to havea largevariance,and hence unreliable.Wehave followed the official definition ofpoverty and used the head count ratio.Since the unorganised sector accountsfor over 60 per cent of NDP and over 90per cent of workforce, 'mixed income'forms a large share of India's nationalincome. As mixed income is a compositeof wage income and property income, itis difficult to studyfactorincomes system-atically. Therefore,we examine the distri-bution of income across broad structuralcategories like ruraland urban,organisedand unorganised and across regions.However, we study factor incomes in the

private corporate sector since the mid-1980s,assystematicaccountsfor this sectorare available.In analysing growth rates,we use semi-log trend analysis; and employ a dummyvariable to test for statistically significantbreaks in the trends. We use as long a timeseries as possible to minimise problemscaused by the omitted years. Where dataare available for discrete time points, wehave computed implicit growthratesusingcompound growth rate principle.

IIIFindingsTrends in GDP

Table *1 i) provides estimated growthrates for GDP, and'its main sectors, be-tween 1980-81 and 1999-2000; and testsof significance of the dummy variable.Evidently, there is no statistically validbreakin the series at 1991, implying that,so far,on a trendbasis, GDP hascontinuedto grow since 1991-92 at the same rate asit did during the previous decade - at5.7 per cent per year.8 This result holds,even when the year 1991-92 is excluded.There is no change in the trend growthrate between the 1980s and the 1990s for

the primarysector as well, at 3.2 per centper year.Though modest, there is a statisticallysignificant slow down in the growth rateof the secondary sector, after 1991-92.Thus, the widely held view that there hasbeen acceleration in the GDP growth ratesince the introduction of the reforms is notstatistically correct. The same holds truefor the tertiary sector as well. However,since the secondary sector growthratehasmodestly slowed, the tertiary sector hasbecome the fastest growing sector in the1990s - but not because its growth ratehas improved in that decade, statisticallysignificantly.A furtherdisaggregationof GDPsuggeststhat none of the industrygroup(atone digitlevel) show a statistically significant im-provementitsgrowthrateafter hereforms.However, (i) total manufacturing and(ii) public, social and personal services -constituting around 30 per cent of GDPin the 1990s- have witnessed astatisticallysignificant slow down since 1991-92.Growth and Poverty ReductionFigure 1,describes theofficial estimatesof povertylevels (right-handscale) andtheabsolute number of persons below the

Table 1(i): Trend Growth Rate of GDP and Its Principal Sectors, 1980-81 to 1999-2000(Percentperyear)Sector 1980-81 to 1980-81to DummyVariable1990-91 1999-2000 Sign SignificancePrimary 3.4 3.2 - NotsignificantSecondary 7.0 6.8 - Significant**Tertiary 6.7 7.1 - NotsignificantGDP 5.6 5.7 - NotsignificantGDP# 5.6 6.2 + NotsignificantNotes: Datafor1999-2000representsthe revisedestimates, released inJune 2000.# Excluding 991-92.**Statistically ignificant t 99 percent confidence interval.Source: NAS,various ssues, and the officialpress releases.

Table 1 (ii): GDP Growth Rates - Disaggregated Trends, 1980-81 to 1999-2000(Percent peryear)Industry1-digitNIC) 1980-81to 1980-81to DummyVariable1890-91 1999-2000 Sign Significance1 Agriculturend allied 3.1 3.1 - Notsignificant2 Mining 7.7 5.8 - Notsignificant3 Manufacturing 7.4 7.0 Significant**3.1 Reg Mfg 8.3 7.7

- Significant3.2 Unregd Mfg 6.1 5.8 - Significant4 Electricity, as andwater 8.9 8.3 + Notsignificant5 Construction 4.6 5.1 + Notsignificant6 Trade,hotel andrestaurent 6.1 7.3 -Not significant7 Transport,ommunication 7.3 6.2 + Notsignificant7.1 Railways 4.1 3.4 - NotSignificant8 Financeand realestate 7.4 8.1 + Notsignificant8.1 Bankingand Insurance 13.0 13.1t + Notsignificant9 Services 6.5 6.2 - Significant9.1 Publicadminand defense 7.7 6.2 - SignificantGDP 5.6 5.7 - Notsignificantt - These estimates are forthe period,1980-81to 1997-98,based on the NAS.Source:NAS,EconomicSurveys,various ssues, andthe officialpress releases.



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Figure 1: Poverty in India, 1973-74 to 1993-94335 .. ..... 60330 -500 325 0E 40320-315 - 300I 310 - 200o 305 -z 300295 - ----01973-74 1977-78 1983 1987-88 1993-94YearQ Number Q Poverty Ratio

Figure 2: Poverty Ratio7876-74-o 72-70 -2 68-.66-.64_ 62 -6058 1972-73 1983 1993-94YearD Poverty ratio

poverty ine(left-hand cale) since 1973-74,for all-India combined for rural and urbanareas (Economic Survey, 1998-99). Itshows that the proportion of populationliving in poverty has steadily come down- from55 percentin 1973-74,to 36 percentin 1993-94. Evidently, thewidely believedpoverty reduction started in the 1970s,quiteafew yearsbefore theeconomy got onto the higher growth path after 1980-81.Thus, Srinivasan's propositions that pov-erty began to decline only after the growthrate improved and, that the growth accel-erated in response to the reforms in 1991- as we have seen above - are not sustainable.

Admittedly, the official estimates forall-India do suggest an inverse relation-ship between growth and poverty, at leastsince the 1980s. But does it hold acrossthe states? To find it out, we estimated twokind of correlation: one, between thelevels, andtwo, between the growth rates.This we did for the years since 1973-74across 13 major states for which data areavailable - 5 for the levels, and 4 for thegrowth rates. There is an unambiguous,statistically significant, inverse relation-ship between per capita SDP and levelsof povertyacross thestates, for all theyears(Table 2 (i)). But, no such relationshipwasfound between growth in per capita SDPand change in poverty for all the fourperiods (Table 2 (ii)). This is true, bothwithsimple correlationcoefficient, as wellas with the rank correlation coefficient.Thus, our finding provides a basis toquestion the widely believed virtuousassociation between output growth andpoverty reduction at a disagregated level.However, since the bulk of poverty isin ruralareas, with agricultureas the mainsource of livelihood, we estimated theassociation between growth in SDP percapita in the primary sector and povertyreduction in rural India across the majorIndian states (Table 2 (iii)). The associa-tionis negative andstatistically significantinonly one out of two cases. Thus, it seems

reasonable to infer that the suggestedinverse relationshipbetween primarysec-tor growth and poverty reduction in ruralIndia is at best a weak one.9As officially reported, if poverty hasindeed declined by about 20 per cent inthe two-decades after 1973-74, it would bereasonabletoexpect asteady improvementin average per capita consumption, espe-cially of the bottom half of the population.Expectedly, as Suryanarayana 2000) hasshown,themonthlypercapita consumptionexpenditure in ruralIndia has increasedby32 per cent during the two decades, fromthe level of Rs 18.40 in 1973-74.

However, on a closer examination, thewhole process largely appearsa statisticalmirage. If one takes a longer period since1960, as Suryanarayanahas documented,there was a drop of about 20 per cent inthe average consumption during 1960-65.And, it took over a decade (ending in1977-78) torecover thisconsumptionloss.Nevertheless, during the subsequent 16yearperiod,between 1977-78 and 1993-94,the average consumption grew annuallyat0.9 percent. More significant, the averagefor the bottom half of rural populationincreasedannuallyat 1.5percent. 0Thoughmodest, these trends indeed suggest aprocess of growth with redistribution inrural India.But the growth in per capita consump-tion did not result in any improvement inthe nutritional status of the poor, mainlyfor the following reasons.- Since the 1970s, to acquire the samelevel of nutrition,the poor had to sub-stitute expensive cereal like rice andwheat forjowar, bajraand othermilletswhose productionhas fallen sharply inper capita terms.- The decline in the institutionof perma-nent farm servants and an increase incasualisation of ruralworkforceresultedin monetisation of the ruraleconomy.This required (i) a 'diversification' of

consumption of the poor to include fuel

and other complementary items, and(ii) an increase in 'overhead' cost ofacquiring the same level of nutrition.In otherwords, changes in the croppingpattern and the institutional setting inrural India seem to have wiped out thepotential benefits of improved - albeitmodest - average consumption growthin value terms.

Thus, when measured in terms of nutri-tional status there is, in fact, a definiteevidence of an increase in poverty in India(Figure 2). The proportion of the ruralpopulation not getting adequate nutritionTable 2 (i): Correlation between Levels ofPoverty and Per Capita SDP acrossMajor Indian States(Noof observations= 14)Year SimpleCorrelation RankCorrelationCoefficient Coefficient1973-74 -0.683* -0.535*1977-78 -0.525* -0.3411983 -0.722* -0.605*1987-88 -0.702* -0.627*1993-94 -0.596* -0.682**Statisticallyignificantat 95 percent confidencelevel.Table 2 (ii): Correlation between Growthin Per Capita SDP and Change in PovertyLevel across Major Indian States(Noof observations= 1.3)

ChangeOver Simple Rankthe Years Correlation CorrelationCoefficient Coefficient1977-78 over 1973-74 -0.043 -0.0071983 over 1977-78 -0.254 -0.1181987-88 over 1983 -0.493 -0.3501993-94 over1987-88 -0.493 -0.484Source: EPWRF1998),Economic urvey1998-99)Table 2 (iii): Correlation between Growthin Per Capita SDP in Primary Sector andChange in Rural Poverty Level acrossMajor Indian States(Noof observations= 14)ChangeOver Simple Rankthe Years Correlation Correlation1987-88 over 1983 -0.738* -0.654*1993-94 over 1987-88 - 0.273 -0.375


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Figure 3: Ratio of Rural-Urban PerCapital Income44 - ...........-........'a 438o42-co41

40--39 1970-71 1980-81 1993-94Years

E Ratioof rural-urbaner capitaincomeFigure 4: Ratio of Unorganised toOrganised Sector NDP Per Capita

20

12* ...10

a. 8642

1970-71 1980-81 1993-94Years2 Ratioof unorganised o organised sector NDPper capitaFigure 5: Coefficient of Variation ofSDP Per Capita50

40

. 20

o 10-0_ I"r- 0 O(D CCo i)O COa) a ) a>5 0 a)

Yearending- Coefficient f variation f SDP per capitahasgone up by 10 percentage points from65 per cent in two decades after 1972-73.Admittedly, a nutrition-based measureof poverty has limitations [Lipton andRavallion1995]. Butconsidering theprob-lems of measurement when changes in theruraleconomy and the cereal output mixsignificantly affect consumption patterns,it may nevertheless be valuable to knowhow anutrition-basedpoverty measurehasperformed.Therefore, a simple yet robustnutritionbased measure perhapshas somemerit. This is particularly so, since foodstill accounts for about 80 per cent of theconsumptionbasket of the bottom half ofthe rural population.If the above finding is valid, then thequestion arises, how is it that in spite of

a sustained growth in per capita incomefornearlytwo decades since 1980-81, therehas been no real improvement in thenutritional status of the poor. Intuitively,one couldargue hatalarge-scalesubsidisedfood distributioncould have, in principle,improved the nutritional status. In theabsence of such aprogramme,perhapsoneshould look at how the labour markethasperformed, since it is only through gainfulemployment on a large scale that demandfor food could go up, and thus improvethe nutritionalstatus of the poor. As AmitBhaduri rightly reminded us,It is throughthe labourmarketthat boththe stimulus to economic growthand theprocess of social justice could largelyoperate' And, the extent of increase ingainfulemployment pportunitiesrovidesthecrucialbridgebetween conomicgrowthandefficiency on the one hand andsocialjustice on the other...Economicreforms,no matter abelled 'capitalistor socialist'- arebound o falterwithout noughpopularsupport,unless they meet this lattertest"[Bhaduri 1996:15].

Trends in EmploymentSince the incidence of poverty andunemployment as highly correlated, onewould expect that if poverty has reallydeclined, then it would have reduced

unemploymentandunderemployment.Butwe find is that since 1973-74, there hasbeen an economywide decline in employ-ment elasticity of output (Table 3).11 Forinstance, the elasticity for the economy asa whole has declined from 0.61 between1972-73 and 1977-78, to 0.47 between1987-88 and 1993-94. The fall is morepronounced in the secondary and tertiarysectors. Although therehas been a modestdecline in the proportionof population inagriculturesince the 1970s, and there hasbeen some diversification of ruralworkforce into non-farm activities espe-cially in the 1980s, there is no evidenceof a sustained reduction in unemploymentlevels, however measured[Ghose 1999]. 12

On the contrary,there is a distinctdeterio-ration in the quality of employment. Be-tween 1977-78 and 1993-94, the share of- the organised sector in total workforcedeclinedfrom 8.7 percent to 8.1 percent;- wage employment in the unorganisedsectorwentup rom6.6percentto7percent;- self-employed in total work force de-clined from 56.5 per cent to 51.7 percent; and,- casual wage employment went up from28.2 per cent to 33.2 per cent.Some of these changes, in principle, couldhave improved labour marketflexibility.13However, they could have been equallyresponsible for thechanges in the level andcomposition of aggregate demand thatcould have adversely affected the con-sumption growth of the unemployed.14 Ifthe suggested implications for the labourmarkethave any value, then the observedgrowth process is likely to have beeninequalising. In other words, since theimproved growth since the 1980s did notresult in a proportionate increase in em-ployment (and poverty reduction), it isvery likely thatthe growth has helped onlythose persons, regions, or segments of theeconomy thatarealreadyemployedorbetteroff. To test this proposition, we now lookat some dimensions of income distribution.

Trends in Income DistributionAs in most developing economies, thereis no information on personal incomedistribution since over 9/10th of theworkforce is in the unorganised sectorwhere the majority of the population isself-employed. As a proxy, the consump-tion distribution is widely used. As notedearlier, there has been a modest improve-ment in the per capita consumption of thebottom half in rural India in value terms,since 1977-78. But it has not improvedtheirnutritionalstatusmainly as they havebeen compelled to consume costlier cereallike wheat and rice, since the output ofinferior cereals has fallen sharply.

Table 3: Employment Elasticity of Output, by Industry1-Digit ndustryGroup 1977-78 Over 1983 Over 1987-88 Over 1993-94 Over1972-73 1977-78 1983 1987-881 Agriculture 0.54 0.49 0.26 0.542 Mining 0.95 0.67 0.81 0.363 Manufacturing 1.05 0.68 0.35 0.394 Electricity 1.67 0.74 0.74 0.535 Construction 0.35 1.00 3.43 0.016 Transport,torageandcomm. 0.76 0.92 0.39 0.627 Trade,hotel andrestaurants 0.76 0.598 Services 0.80 0.90 0.52 0.688.1 Services includingrade 0.39 0.769 Total 0.61 0.55 0.32 0.47Source:Bhalla 1997:217).


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Figure 6: Per Capita SDP of Top and Botton Three States5.4 - .-

xv 4.8co 4.6-0_J 4.4

4.2 I IcO o O) I- Cc\J S CDCC OD OD CD c a) a) a) )a) a) o C C) O) ) C

Year-- Average of top 3 states -- Average of bottom 3 states

Figure 7: Wages and Profits in Private Corporate Sector40

- 35, 30- - - __--> 25- -0 20

00

no 15 -*-^- M---^-^ - . ^ ------..

co co cc co cc cc cc cc c' cc cc ccO ---.---,--,--,---I--.--.---.--.--.---.

YearShare of wages in GVA - Share of PBT in GVA

However, there is evidence to suggestthat the distribution of income measuredin otherstructural nd institutionalcatego-ries has deteriorated over the last twodecades. Figure 3 shows the rural(nomi-nal) per capita income as a proportionofurban per capita income. Evidently, theratio, which improved in favour of ruralIndia between 1970-71 and 1980-81,deterioratedduring hesubsequent 14-yearperiod. The per capita rural income hasdeclined relative to urban per capita in-come, from 42 per cent in 1980-81 to 38per cent in 1993-94.15A similar comparison of (nominal) percapita ncomeintheorganisedandunorgan-ised sectorsis even morerevealing (Figure4). Over the decade since 1983, the percapita NDP in the unorganised sector asa proportionof thatin the organised sectorhas steadily gone down by 3 percent. Thisdecline is notjustbecause of a fastergrowthinemploymentin thatsector, butits outputgrowth has also been slower.Anotheraspectof income distribution ina heterogeneouscountrylike India is inter-regional inequality.This inequality, mea-suredby the coefficient of variationin percapita SDP across the major states, hasnearlydoubled in 25 years since 1970-71,from about 0.2 to 0.4 (Figure 5). However,more significantly, the divergence in percapita income between the top three andthebottom hreestates haswidened sharplysince 1986-87 (Figure 6). In 1980-81, theaverage percapitaSDP of thebottom threestates (Bihar, Orissa and Assam) was 43per cent of that of the top three states(Punjab, Haryanaand Maharashtra).Thisratio fell to 27 per cent in 1995-96.Moreover, n absoluteterms,theper capitaSDP of the bottom three states was lowerin 1995-96, compared to 1988-89.16Finally, we look at the distribution ofvalue addedbetween wages and profits in

the private corporate sector.17 Althoughthis sector accounts for roughly about atenth of GDP in the 1990s, it uses a muchgreater share of domestic savings andattracts a disproportionately large atten-tion of policy-makers. As Figure 7 shows,the share of wages in value added, incurrentprices,hasfallen fromabout 35 percent in 1985-86 to about 20 per cent in1996-97. Duringthesameperiod,theprofitshare(measuredby profitbefore tax, afterdepreciation and interest) has gone up byabout 15percentage points- roughly equalto the fall in thewage share.Although sucha simplistic comparison may have analyti-cal limitations, perhapsthe sharpchangesin factor incomes, in just over a decadedoes indicate, however crudely, a distinctchange in income distribution n favourofowners of capital, and against workers.18In a highly diverse and heterogeneouseconomy like ours, perhapsone can docu-ment many more dimensions of economicinequality.Butperhapsour limited inquirydoes suggest an unambiguous increase ininequality in Indianeconomy over the lasttwo decades or so.

IVConclusionsWhat does all this add up to? Between1980-81 and 1999-2000, on a trendbasis,the domestic economy has grown annu-

ally, at about 5.7 per cent. The growth islikely to have been faster in per capitaterms in the 1990s, when the populationgrowth rate is said to have declined no-ticeably. The growth is laudable in acomparative perspective as well, asSrinivasannoted. While debt and inflationravagedlarge partsof thedeveloping worldin the 1980s, India improved its growthrate, with a greater stability. Moreover,Indiawithstood the 1991 externalpayment

crisis as well as the recent east Asiancontagion, without any slow down in thegrowth momentum.It is widely believed - especially amongthe policy-makers and in the developmentprofession - that India's economic perfor-mance during the last quartercentury orso has been a virtuous one: growth withpovertyreduction.Moreover,theeconomicreforms nitiated since 1991arebelieved tohave improved the growth rate further,without adversely affecting the trend re-duction npoverty.The findings reported nthis study question these stylised views oftherecent conomicperformance.We found:(1) There is, at least as yet, no statisticallysignificant acceleration in India's growthrate after 1991-92. This holds excluding1991-92 as well, the year of externalpayment crisis. Thus, on a trend basis,GDP growth rate between 1991-92 and1999-2000 is the same as it was between1980-81 and 1990-91.(2) The secondary sector growth ratewitnessed a modest, statistically signifi-cant, slow down after 1991-92.(3) Contraryto the popularview, there isno statistically significant acceleration inthe growth rateof the tertiarysector in the1990s. On a trend basis, the primaryandthe tertiarysectors, like GDP, have grownat the same rates as in the 1980s.(4) As the widely believed decline inpoverty started before the growth rateimproved in the 1980s - and the reformsin 1991 - there is no association betweenthewidely believed povertyreduction withthe improved growth rate, or with theeconomic reforms.(5) There is no statistically significantassociationbetweenthegrowth npercapitaincome(SDP) andpovertyreductionacrossthe major India states. Further,the corre-lationbetween thegrowthinprimary ectorSDP per capita and poverty reduction is



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found to be ambiguous. This evidenceconteststhewidely held view of an inverserelationshipbetween growth and povertyreduction nIndia,atadisaggregatedlevel.(6) Moreover,the widely believed povertyreductionis probably a statistical mirage.The nutritional status - a contentious yetrobust measure of poverty - of the average(as well as that of the bottom half) in ruralIndia has not improved at all in the entireperiod since the early the 1970s. Recentresearchcited, in fact, suggests that ruralpoverty, measured in terms of nutritionaldeficiency, has gone up by 10 percentagepoints since 1972-73, from 65 per.cent.The absence of an association betweengrowth and poverty reduction across themajor India states - contrary to muchpopularand scholarly writing - is perhapsnot surprising (or intuitively understand-able), if one looks at the labour marketperformance. After all, if the growth ispoverty reducing, it should then, in prin-ciple, work through a large-scale ruralemployment creation,especially in poorerstates, as the unemployed and under-employed form the bulk of the poor.The study shows that while the growthrate improved since 1980-81, there is nosustainedreduction nunemploymentrates,however measured.Although employmentgrowth roughly kept pace with the growthin workforce - as has been widely docu-mented- there has been an economywidedecline in employment elasticity of outputsince the mid-1970s, suggesting that thefruitsof highergrowthare argelyrestrictedto those-already employed. Further, thequality of employment has deterioratedduring the 16 years since 1977-78. Forinstance, there has been (i) a declining theshare of regularwage employment in theorganised sector, (ii) an increase in theshare of wage employment in theunorganisedsector, (iii) a decline in self-employment in rural India, and (iv) anincreasein casualisation of the workforce.While these changes may have reducedsome of the widely perceived rigidities inthe industrial abourmarket,they have notresulted in greater labour absorption- asanticipated in the mainstream economictheory.Consideringthese, the widely heldinverse association between growth andpoverty reductionin India, during the lasttwo decades or so, seems suspect.Inrecentyears,attentionhas been mainlyfocused on the widely believed virtuouseffects of growth on poverty reduction,overlooking how the improved growthsincethe 1980sisdistributed.Such aneglect

of concerns of equity is surprising, sincethere has been a renewed interest in thisquestion in the recent economic discourse,both from analytical and comparativeeconomic perspectives. There is an in-creasing appreciation- both in theoryandexperience - that greater equality is con-ducive for growth. Further, recent evi-dence suggests thatthe economic reformshave, more often than not, accentuatedinequalities since the 1980s across thedeveloping world. It is with this concernthat we looked at some aspects of inequal-ity in Indiaover the last two decades. Theresults,thoughlimitedto a few dimensionsof the problem, appear quite startling:- The ratio of rural to urban (nominal)

per capita income, which improvedduring the 1970s, deteriorated during14 years after 1980-81.- There is a secular deterioration in theratio of the unorganised to organised(nominal)per capita ncome since 1982-83.- Since 1970, there has been a steadyincrease in inequality across the majorstates, as measured by the coefficientof variation in SDP per capita.- The ratio of per capita income of thebottom three states, as a proportionofthat of the top threestates, has widenedsignificantlysince 1986-87. Further, helevel of per capita SDP of the bottomthree states is lower in 1995-96, com-pared to seven years earlier.- In the decade since the mid-1980s, inthe private corporate sector, the shareof (nominal) gross value added accru-ing to labour has steadily declined byabout 15 per cent, while that of capital(profitbeforetax,afterdepreciationandinterest) has gone up correspondingly.These changes in income distribution doseem to indicate thatthe growing inequal-

ity - as in the case of poverty - representlong-termtendencies in India.However, itmay be reasonableto inferthat the increas-ing market orientation of the economysince theearlythe 1980sprobablyhastenedthe process of widening of disparities.If the above findings and inferences arevalid, then the gains of faster economicgrowthsince 1980-81 have been unequallyshared by different sections of the Indiansociety. Growth has favoured urbanIndia,

organisedsector,richerstates andpropertyowners - against ruralIndia, unorgansedsector, poorerstates and wage earners. Toanswer the question posed in the title ofthis study: India's growth process duringthe last two decades does not seem to have

been a virtuous one - it has polarised theeconomy. It has been a period of growthwith inequality. 9Interestingly, such an inequalising pro-cess of economic growth has occurred ata time when there is a distinct diffusionof political power towards the erstwhiledisenfranchsed classes and castes, whichbroadly represent those left behind ineconomic development.20To quotePranabBardhan'srecent assessment of the politi-cal changes in India:

Along with political power driftingfromthe centre to the regions, there is an as-sociated drift towards the backwardandlower castes.This isclearlyasignofdemo-cratic progression n an unequalsociety.The numerical strength and increasedassertiveness of some of the historicallysubordinatedgroups have compelled theupper lasses andcastesto formdownwardalliances andbrought o the fore politicalactors from backward communities andregions.Theseplayersmaynot be initiatedin the etiquetteof parliamentary emoc-racyand social graceof modernity,but arequite astute in pursuingthe interestsoftheir constituencies(and,of course,theirown self interest) [Bardhan1988:132].

If such an iniquitous growth process is notcorrected - and corrected quickly - Indiansociety may have to pay a huge politicalprice for it. [nZNotes[Following the usual disclaimers, I thankErrolD'Souza, Veena Mishra, K V Ramaswamy,C Rammanohar Reddy, S L Shetty andM H Suryanarayana for their comments andsuggestions on earlier drafts of this study. JayanJose Thomas's computational assistance isgratefully acknowledged.]1 Reviewingbookson India n the TinesLiterarySupplement, Jagdish Bhagwati wrote,"...india's liberal and outward orientedeconomic reforms,began in earnest after theexternal-paymentcrisis of 1991, have beenaccomplished by a sustained increase in agrowthrate hathadremained tuckat a drama-tically low level of around3.5 per cent overnearly three decades of illiberal and autarkicpolicies. The 1980s, treated to only a smalldose of suchreforms,werealreadyregisteringhigher growth rates..."(March 31, p 28).2 The meaningof the term, 'second generationreforms' is far fromclear, except to broadlymean a continuationof the market-orientedchanges npolicies nitiated arlier.Reportedly,Sebastian Edwards coined the term in an

unpublishednote in 1996 to mean (i) centralbank independence,(ii) budgetaryconstrainton all levels of government,(iii) creation ofanefficient civil service, (iv) improvement ncitizens' security,and (v) judicial reforms tostrengthenthe rule of law.3 This is best illustratedby the deliberationsofa groupconstitutedby the United Nations "toreview some of the key questions that arisein formulatingstrategiesfor development inthe contemporaryworld", in the forwardbyEdmond Malinvaud and Amartya Sen

2838 Economic and Political Weekly August 5, 2000


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[Malinvaudet al 1997:v].4 For a fine set of recentessays on this issue,see Solimano 1998).Also, see Osmani 1996)for a lucid review of variousstrands f thoughton therelationshipbetween economic growthand income distribution.5 There is a large literatureon this issue. SeePersson and Tabellini (1994).6 One could contend that our emphasis oninequality s misplacedsince what matters nIndia is not so much inequalityas much asthe need to focus on human development.Since there has been a steady improvementin humandevelopment,one could argue forimproving it further rather than focus oninequality.Sucha view can be contestedbothon empirical and analytical considerations.Empirically, mprovementn humandevelop-ment across the Indian states depend onpublic expenditure,and not on GDP growth[Duttaetal 19971.Analytically,whetherpublicspending is used for improving humandevelopment or for providing subsidisedservicesfor the betteroff would in turndependon incomedistribution.Therefore, nequalitywouldbe centralto how public resources areraised and the patternof their spending.7 These estimates are not made public. UmaDuttaRoy Chaudhary1993) publishedtheseestimates for the years 1966-76 to 1985-86.As the data for more recent years are notavailable,wecould notcrosscheckourfindingswith the another data source.8 Unless mentioned otherwise, all estimatesreported n this study arc at constant prices.9 Ahluwalia's1978)evidenceon therelationshipbetweenruralpovertyandagriculturegrowthwasambiguous.Recently,Ravallionand Dutt(1999)have ought o address omewhat imilarquestions.However,they seem to have over-lookedsimple yet robustassociations thatwehave reported.10 I gratefullyacknowledgeM HSuryanarayanafor providingthese estimates.I1 There s asharp all in theelasticitiesbetween1983and1987-88,andan mprovementduringthe subsequent5-year period.This is due totheseveredrought n 1987-88. However,thisdoes not vitiate the long-termdecline in theemploymentelasticities.12 Undoubtedly,during this period, there hasbeen a significant growth in real wages inagriculture, oth or menandwomen. Between1977-78and 1993-94,real wage rate for menand women rose at 2.9 per cent and 3.1 percentperyear respectively.However,since theabsolute evel of wages are so low thatwagegrowthdid not enable ruralpoor to acquireadequate onsumption o come out of poverty.13 Robert Solow has recently argued that themuch discussed employment elasticity withrespect to labour market flexibility may bemodest.To quotehim, "...the ssue is whetherlower wages, on average, will more or lessautomaticallyprovidenew jobs...I think it isfare to say thatthe measuredresponsivenesshas been disappointedly small" [Solow1998:30-311.14 Further,as Bhaduri explained, "...a moreflexible marketpermitting ower real (moreexactlyproduct)wagerateswould nduceprofitmaximising firms to produce more throughgreater employment, until the diminishingmarginalproduct qualsthat ower wage rate.This neo-classicalview inwhichthe economictransmissionmechanism operates from the'active' labourmarket o the 'passive' productmarket may be contrasted against the'Keynesian'view, whichclaims theopposite.(Bhaduri 1996:15).15 A decadeago, in a popular ecture, K N Raj(1990)hintedat thegrowingrural-urban ivide- a caution that was largely ignored.

16 One of the reasons for it could be the sharpfall in public investment - much of whichis in infrastructure- as we know it has adampening effect on increase in equality(Nagaraj tal2000).Significanceof inadequatepublic infrastructure nvestment in absolutedeclineof states ike Bihar sbeing ncreasinglyappreciated among the policy-makers.Recently, Raja Chelliah (1999) advocated aspecial development programme or Bihar.17 This is based on CMIE data.18 Roughly during the same period, a similarpattern s evident in Europeas well. OliverBlanchard 1997) founda steadyrise in profitshare in Europe in the 1980s. I am gratefulto Kaushik Basu for this reference.19 One may neverthelessdraw comfort from thefact that the observedgrowth process is fol-lowing the Kuznetsian inverted U. Alter-natively,one maydefendtheprocessas beingParetosuperior.These arguments re of ques-tionablevalidity.Evidenceduring he lasthalfa centuryof developmentexperiencedoes notsupporttheKuznetshypothesisunequivocally.Invoking Pareto could be misleading, as itignores nitial ncome distribution.As FrancesStewart had warned,"If a given income dis-tribution is considered to be wrong, thenmaximisingon thatmay lead to a worse outcome than taking a Pareto-inferiordecisionthat leads to a better income distribution.Welfare conclusions...cannotoccur indepen-dentlyof an assessmentof income distributionin two situations"[Stewart 1988:286].20 We are aware, our inference, in turn,raisesmanyquestions.For nstance, fpoliticalpowerhas really shifted in favour of the erstwhiledisenfranchised lasses andcastes, why havethey not been able to grab a largershare ofthe domestic output?We have no answer atthe moment,as the question lies outside thescope of the present study.References

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indian economy since 1980- virtuous growth or polarisation

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