GDP planning: number crunching won't do

The budget is out and one thing it reflects is our continued affliction for numbers: the focus is on growth rate with the Finance Minister P Chidambaram saying ‘I believe that growth is the antidote to poverty.’ This also follows Prime Minister Manmohan Singh’s insistence on a higher growth rate for the next Five Year Plan. The Planning Commission is working to get the approach paper for the country’s 11th Five Year plan, beginning 2007, up on the table for getting a nod from the National Development Council. The paper is some weeks away.

The rampaging bull at the stock markets has complemented the growth rate by breaching the 9000 mark for the first time in history, and then, the 10000 mark. Going by news reports, $21 billion dollars were added to the $140 billion foreign exchange reserves in one year alone. According to the the Economic Survey released on 27 February, the GDP for 2005-06 has been 8.1 per cent and the country can expect to sustain a growth rate of 10 per cent per annum.

Inequality, income growth, GDP

Suppose there are only 2 people in the country - the first earns Rs.100 and the other nothing. So the total GDP is Rs.100.

Next year, suppose the first one saw her income increase to Rs.120. The other saw no growth. So the total GDP is Rs.120, with 20% growth.

Despite the impressive growth, only the wealthiest person in economy benefited, and the poorest saw no gain, yet the GDP growth number doesn’t reflect that.

This simple example illustrates that unless inequality in India is falling, higher growth mathematically just means higher growth for the wealthiest people.

This problem was recognized by Montek Singh Alhuwalia (then at the World Bank). Alhuwalia’s solution, the Ahluwalia-Chenery Welfare Index, was an alternative measure of income growth, one that gave equal weight to growth of all sections of society.

—Tarun Jain, Univ. of Virginia.

• Business and the good society

• Progress by any other measure

• A thin Indian poverty line

Indeed, the economy has surprised everyone, giving optimism for setting a challenging growth target. This euphoria of growth, of an India shining, was sure to take the planners and economists to a new high, not just the PM and the FM. The Prime Minister’s reiteration of his expectations of growth while commenting on the budget speech on 28 February, and earlier, his asking the planners to juggle with numbers to set a 10 per cent GDP over the next five years, must be seen in this light.

But will juggling the numbers do it?

Underlying these figures is the familiar divide between India shining and Bharat in darkness, also seen in the Economic Survey. While the growth rate may have shown steady progress, food grain availability has declined to an all time low of 438 grams per day. The prices of essential foodgrains are going up — wheat is up by 10.7 per cent, and pulses up by 19 per cent. Markets may have performed beyond expectations but the unemployment rate in rural and urban areas has reached an all time high of 9 and 9.3 per cent respectively. Earlier, unemployment increased to an unprecedented high of 7.2 per cent, the National Sample Survey had reported. The skewed development affects no less than two-thirds of the country’s population, an estimated 72 crore people.

Agriculture, that contributes to one-fourth of country’s GDP and has around 410 million people in total relying on it, continues to stagnate at 2 per cent. Low farm productivity and lack of investment in farming has led to the inevitable decline in growth from an impressive 3.8 per cent during the recent past. With over 17,000 farmers’ suicides in the past few years, the future of 60 per cent of India’s population remains uncertain.

The poor care less about impressive numbers like the growth rate of GDP. They care about whether jobs are available, how much those jobs pay and what the cost of living is! Even if farming sector with its dependant population were merely left to the mercy of monsoon risks, growing unemployment will continue to scare the growth curves.

Under current conditions, planners have a serious task at hand - of creating a growth model sans agriculture. And it isn’t that farming reforms have not been pursued by governments. Farm sector reforms have been pursued thus far under an infrastructure development model: roads, irrigation networks, potable water and sanitation, and marketing infrastructure in rural areas. Much of the proposed Rs 24,000 crore towards Bharat Nirman is aimed at building infrastructure. But infrastructure is necessary, not sufficient. Infrastructure is needed, and not at the cost of other priorities like education, employment and health.

In addition, contract farming policies being pursued by states like Punjab, Rajasthan and Andhra Pradesh and the Land Lease Act 2005 of Chattisgarh clearly reflect the tilt towards corporatisation of agriculture. Apparently, contract farming policies are aimed at easing the debt burden on small and marginal farmers through leasing out of land to companies. While contract farming is luring farmers to lease out their small holdings (which doesn’t sustain them anyway), evidence is showing that they migrate to shanties in urban areas. With productivity being low even in irrigated areas, farmers already have little option and the policy environment further encourages the migratory trend. Farmers’ lands in the meanwhile are tilled by someone else.

Not by GDP growth alone

• The health of nations

• Lens on education

• Vidarbha agrarian crisis

But with the manufacturing sector driving growth, the task for our planners has been made easy. For once, Indian manufacturing has become lean, competitive and innovative. Not without reason, it has logged an impressive growth of 11.3 per cent. In its stunning performance from a low of 7.9 per cent last year, growth of manufacturing has helped gloss over weak farm sector performance.

Brewing discontent

Meanwhile, over past few months, the running debate about the US economy has drawn quite a few parallels to the Indian situation. Despite recent GDP growth, wages for most U.S. workers haven’t kept up with inflation, and most Americans have good reason to feel unhappy about the economy. Similar to an upbeat Delhi, Washington too churns out its favourite growth statistics!

Yet, there are gross differences in two situations. While 11,000 people may have turned up to fill 400 jobs at a new Wal-Mart super store in Northern California recently, the fact that at a legal minimum, fully employed Americans paid at 5$ an hour get at least $40 dollars a day makes them distinct to most wage labour in India, who survive on less than a dollar a day (or 4-5$ dollars a day in purchasing power terms). Added to this is the fact that the increasing income inequality between the poor and the rich is creating social unrest that the current growth paradigm will find hard to arrest.

One indicator of income inequality is the Gini coefficient, conceived by Italian statistician Corrado Gini, and used by development economists. Measured on a scale between 0 and 1, where 0 implies perfect equality and 1 connotes total inequality. The Gini coefficient in India now varies between 0.37 and 0.42 and more significantly has been steadily rising with the advent of liberalisation and globalisation. The GC for the United States has also risen in recent times, from 0.40 in 1980 to 0.42 in 1990 and the figure for 2000 stood at an all time high of 0.46. China’s Gini coefficient has increased from 0.34 in 1999 to 0.45 now, the People’s Daily, published from Beijing, reported recently. (The obvious caveat with Gini coefficients is that equality should not come about because everyone became poorer.)

GC apart, rising inequality is also being indicated through protest actions by peasants and workers. Quoting the People’s Daily again, in China, such actions jumped from 58,000 in 2003 to 74,000 in 2004. The recent protest by adivasis in Kalinga Nagar, Orissa wherein a dozen adivasis were killed in police firing, indicates that the proposed 44 steel plants in the region mean little to the poor if it is at the cost of their existence and traditional livelihoods. Infrastructure investment has to be seen in this light, and it is brewing discontent.

India may have shown prosperity but it has been far more iniquitous than ever before. Witness the glaring gap between the rich and the poor in access to clean drinking water, decent housing, good education, proper health care and reliable power supply. The poor have been trapped into ‘inequality trap’ in addition to being in the ‘poverty trap.’ The distinction is that in the first trap ‘the poor are poor because the rich are rich’ and in the second ‘the poor are poor because they are poor.’

Simply put the country needs a policy thrust that can raise GDP by redistributing assets, raise national savings and the growth rate. Unless the projected economic growth rate shows up in wages and until market surges translate to more universally affordable basic services, the model of growth based on GDP may continue to risk social unrest and chaos. It may be true that the last 40 odd years were relatively peaceful despite substantive inequality, but this is no guarantee that it will continue to remain so. This is the challenge before our planners, to ensure that economic expansion benefits everyone.

Number crunching alone will not do.