Issues related to Economic growth

[op-ed snap] Fashioning the framework of a New India

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- How could focusing on inclusive growth help spur the Indian economy.

Context

As the Indian economy is going through a severe crisis, a major solution to the present economic crisis is to go in for inclusive growth; it also means shared prosperity.

Where India stands on poverty and how the slowdown is impacting the poor.

  • Bottom 30-40% adversely impacted: The slowing economy has had an adverse impact on the bottom 30%-40% of the population.
    • Absolute poverty on the rise: The incidence of absolute poverty, which has been falling since 1972-73, has increased to 30% (4% jump).
  • 44% population below the multi-dimensional Poverty line: The Human Development Report (2019) has shown, more than 44% of the Indian population is under the multi-dimensional poverty line.
  • Rising inequality: The poorest 50% population at present owns only 4.1% of the national wealth.
    • While the richest 10% of people own 73% of the total wealth in India (Suisse Credit 2019).
  • Rampant malnourishment: India has 15.2% population malnourished (women 15%) as against 9.3% in China.
    • And 50% of the malnourished children in the world are in India.
  • At 112th position on global hunger: India’s global hunger rank has gone up to 112 while Brazil is 18, China is 25 and South Africa, 59.
  • Dismal performance on education: In the field of education as per a UN report (2015), overall literacy in India is 74.04% (more than the 25% are totally illiterate) against 94.3% in South Africa, 96.6% in China and 92.6% in Brazil.
    • Almost 40-45% population is either illiterate or has studied up to standard 4.
  • Poor quality of education: Given the quality of education in India, the overall population is very poorly educated, with the share of ‘educated unemployment’ rising by leaps and bounds.

What needs to be realised?

  • Focus on domestic demand: It needs to be realised that when exports are declining, the economy will have to depend on domestic demand for growth.
    • It is no more feasible for the top 20-25% population to continue growing without depending on the demand from the bottom 40-45% population.
  • Demand by the bottom 40% a must: There is thus a strong reason now for the economy to increase effective demand of this bottom 40-45% population at least to continue growing-to reach a $5-trillion economy by 2024.

What is wrong with the growth process?

  • Bottom 40% not getting the fair share of growth: A major reason for the crisis is that the growth process has marginalised the bottom 40-plus% of the population.
    • It is in the sense that they do not get a fair share of the economic growth, and are more or less deprived of productive employment with a decent income.
    • They have not been used as active participants in the growth process. Their potential has not been promoted.
  • Less spending for the poor and its consequences: Though the bottom population depends on the government for basic health and elementary education (and also for access to higher educational opportunities)-
    • The government spends just 4% of GDP on health (against the norm of 4-6% of GDP) and 3% of GDP on education (against the norm of 6-8% of GDP).
    • How this dismal spending affects the poor: As a result of this below norm spending, these people are left hardly literate and sick, with poor nutrition and high morbidity.
    • They are incapable of acquiring any meaningful skills or participating actively when new technology is spreading in the rest of the economy.
  • The sub-optimal use of labour force: This sub-optimal use of the labour force in the economy is not likely to enable India to achieve optimal growth with proper use of the national resources -the labour force.

Inclusive growth- a solution to the present economic crisis

  • Inclusive growth also includes shared prosperity: Here, inclusive growth does not mean only including all sections of the population in the growth process as producers and beneficiaries; it also means “shared prosperity”.
    • Since India has already committed to sustainable and inclusive growth at the UN General Assembly, India is definitely obliged to implement inclusive growth.
    • This should be our “New India”.
  • What “New India” would involve?
    • Improve the capability and opportunities: To start with, to improve the capabilities of the masses as well as their well-being by expanding productive employment opportunities for them.
    • What expanding productive employment mean? The main steps to expand productive employment for all in the economy should be made up of-
    • A process of inclusion.
    • Expanding the quality of basic health for all.
    • And ensuring quality education to all.
  • How will “New India” help?
    • Which will by itself generate large-scale employment in the government.
    • Having a well-educated and healthy labour force will ensure high employability.
    • Such people will be able to participate actively in the development process.
    • The cycle of more productive employment: Having a well-educated labour force will help start-ups and MSMEs, in turn triggering a cycle of more productive employment in the economy.
    • Global competitiveness increase: This will also improve the global competitiveness of our production units.
    • Labour absorption potential of MGNREGA: Employment guarantee schemes such as the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) will also increase employment.
      • Assets generated under MGNREGA will expand capital formation in the economy, thereby raising the labour-absorbing capacity of the mainstream economy.
    • Why this strategy is advantageous?
      • Such a strategy has multiple advantages:
      • First– it will raise incomes and the well-being of those who need it most urgently.
      • Second– it will raise effective demand rapidly, which is so badly needed in the economy today to raise economic growth.
      • Third– growth will be equitable and sustainable.

Way forward

  • Finally, how does one raise resources to increase new public investments in the selected sectors?
  • Raise direct taxes: One major strategy is to raise direct taxes, both capital tax and wealth tax.
    • Past growth has failed to reach the poor: Growth led by providing tax cut and extra incentives, but this growth does not much percolate to the poor.
    • Consequently, taxing the rich has to be a major strategy to raise government revenue.
  • Treat public expenditure as an investment: The public expenditure on raising capabilities should be treated as social investment rather than social welfare, policymakers will be willing to spend on this capital formation.
  • Let the fiscal deficit slip: Finally, there was no sound economic reason to control fiscal deficit ratio. Sound macroeconomics never supports this.

 

 

 

Subscribe
Notify of
0 Comments
Inline Feedbacks
View all comments