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.
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.
- 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.