Growth versus equity: A debate that India should’ve long settled

Source: The post is based on the article “Growth versus equity: A debate that India should’ve long settled” published in Live Mint on 21^st June 2023.

Syllabus: GS 3 – Indian Economy- Growth & Development

Relevance: Impact of higher growth on poverty and on inequality

News: There has always been debate over growth versus equity, means, how growth of nations impact the well-being of the people. This article explains the impact of growth on poverty and on inequality.

What is the impact of higher growth on poverty?

It is often argued that growth and poverty are in conflict, i.e., when the growth of a nation increases, it increases poverty.

However, in a democratic society, it is difficult to argue that poverty would decrease with high GDP. For instance, a higher GDP growth rate, such as 15%, is likely to reduce poverty more significantly than a lower rate, around 10%.

Moreover, the government’s measures to redistribute income would also face less resistance with higher growth.

Does higher growth increase inequality?

The relationship between growth and inequality is the inverse. For instance, a 15% growth rate is likely to be accompanied by greater income inequality compared to a 5% rate.

This is because capabilities are unevenly distributed in society, and different sectors of the economy grow at different rates.

For instance, those with the most suitable skills for the faster-growing sectors will experience proportionately higher income growth, while other sectors may find their skills inadequate for the new economic changes.

This structural adjustment occurs irrespective of the country’s political system. Even in China, income inequality has increased over the past decade.

The United States has also witnessed the shift of manufacturing production to developing countries, like China and east Asia.

However, in the US, the market has driven the re-skilling of workers, whereas in developing countries like India, there is a consensus that the state should fund or direct such re-skilling.

Therefore, the issue of inequality is critical for India, and it is often associated with the challenge of poverty reduction.

What are the challenges associated with India’s growth?

There has been a significant structural change in the country’s economy after 1991 economic reforms.

Due to these reforms, certain industries, such as small-scale textile and handloom sectors, faced intense competition from abroad, for which they were unprepared.

Despite the government support to the textile industries, the dominance of textiles as an export item has declined over time.

Countries like Vietnam, Bangladesh, and Pakistan are now leading the textile export economy in South and Southeast Asia.

What can be the way ahead for India?

There is a need for strong government incentives and support for Small Scale Industries (SSIs) and prioritizing re-skilling initiatives.

Economic growth with government support for re-skilling, rather than picking growth over equity, (or vice versa), is the right political choice.