A Time for Deeper Reform

Source: Indian Express

Relevance: Fighting poverty and ensuring inclusive growth

Synopsis: India should not just rely on redistribution to fight poverty. Faster economic growth is a much better alternative.

Background

India made little progress in poverty reduction between 1952 and 1985. It is only after 1991-92 that India began to make significant progress in fighting poverty. The post-liberalization period lifted over 200 million people out of poverty between 1992 and 2012 on the back of a doubling of India’s GDP growth rate.

Poverty scenario

Pre-pandemic

• Indian economy was on the decline even before the pandemic hit, resulting in almost 13 quarters of continuous decline in real GDP growth.

Post-pandemic

• It shrunk by a post-Independence record 7.3% in 2020-21. This contraction was also greater than the 3.3% contraction of the world economy in 2020.
• In other words, India did poorly with respect to both its own past and the rest of the world. The economy is now expected to return to its pre-pandemic level of GDP only in 2022.
• A recent study by researchers at the Azim Premji University estimates that 230 million people may have fallen below poverty measure of Rs 375/day in rural India and Rs 430/day in urban India between January and October 2020.

In other words, the economic contraction of 2020 has reversed a large part of the poverty reduction that was achieved over the past three decades.

Growth prospects for India

Unfortunately, on the most part, both external and domestic conditions look gloomy as of now.

External conditions:

Positives: The economic recovery in the advanced economies will create demand for products from the rest of the world, including India.

Negatives:

1. Inflation: There are signs of rising inflation in advanced economies which typically induces a monetary tightening cycle.
2. Rise in interest rates: There is rising concern in advanced economies about the need to normalise the monetary policy stance by raising interest rates from their current near-zero levels. As growth and inflation rise in these economies, the pressure to raise rates will only grow. These forces will make foreign capital more expensive.
3. Rise in public debt: Public debt levels in advanced economies have risen sharply during the pandemic as they responded to the crisis with debt-financed fiscal expansions. There will be a reduction in spending which will likely reduce demand.
4. Fourth, the increase in global oil prices presents yet another external constraint.

Domestic economic conditions:

Domestic economic conditions were already problematic leading into the pandemic and still face following problems:

• The NPA problem in the banking sector has not been resolved, and the economic contraction of last year will have only worsened the situation.
• The uncertainty surrounding the economic environment had already induced an investment slowdown before 2020.
• Vaccine policy has now created additional uncertainty regarding the state of public health going forward.

Way forward:

Given the acute lack of available fiscal resources, the most promising way forward for the government is

• to embrace regulatory reforms in labour and land markets.
• Focus on growth of large-scale low-tech manufacturing. Without reforms that reduce the risks of hiring labour and acquiring land, this sector will not grow.
• Pursue public sector divestment on a war-footing.

The fiscal costs of deep reforms are low, but their economic returns are potentially high.

Conclusion

The key lesson to take away is that the most effective way of helping the poor is faster economic growth. Social welfare programmes that work through redistributive schemes can at best be complementary mechanisms that provide social insurance against bad luck in the labour market or in health. But, in the absence of growth, relying on redistribution to fight poverty only guarantees a lot of poor people.

Terms to know:

• Headcount index