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ECONOMIC SURVEY 2016-17 Summary Chapter 10 – Income, Health and Fertility: Convergence Puzzles


economic survey 2017


Following is the Summary of ECONOMIC SURVEY 2016-17 – Chapter 10 – Income, Health and Fertility: Convergence Puzzles:


Introduction

Since 1980s India has been experiencing a rapid growth rate compared to its previous low levels of post-independence ‘Hindu Growth rate’. Thus India and its states should show convergence with other countries of the world in economic as well as health indicators.

 

Definitions of various terms used in this chapter

  • Life Expectancy at birth: Number of years a new born would live if prevailing patterns of mortality at the time of its birth were to stay the same throughout its life.
  • Infant mortality rate: Number of infants dying before reaching one year of age, per 1,000 live births in a given year
  • Total fertility rate: number of children that would be born to a woman if she were to live to the end of her childbearing years and bear children in accordance with age-specific fertility rates in a given year

Convergence

  • Astate that starts off at low performance levels on any relevant parameter, say the level of income or consumption, should see faster growth on that parameter over time, improving its performance so that it catches up with states which had better starting points

What does it mean?

  • In 1984 the per capita GSDP of Odisha in 1984 was 25 percent lower than the per capita GSDP of Kerala.Thus our convergence theory suggests that Odisha would experience higher growth rates over time, thereby reducing the gap between the two states

Convergence Puzzle

  • There is striking evidence of divergence, in income and consumption across the Indian states, in sharp contrast to patterns within China and across the world.
  • This trend is puzzling since that the forces of equalization—trade in goods and movement of people—are stronger within India than they are across countries, and they are getting stronger over time.

 

Analysis

This chapter will analyse two broad economic indicators namely

  • income
  • consumption and,
  • Three indicators of health and demographic outcomes
    • Life Expectancy
    • Infant Mortality Rate
    • Total Fertility Rate
  • And presents 3 Findings on them

Approach

  • Comparison of various Indian States with countries at comparative levels of development as well as provinces of china at similar levels, over a period of time

What does it mean?

  • Growth rate of poor states should be higher than that of rich states as well as that compared with international average growth rate for convergence

 

Finding 1: Income/Consumption Divergence within India

Income Convergence

Methodology

  • The growth rate of per capita GDP vs the log of per capita GDP (in PPP terms) is plotted
  • Indian states and provinces of China along with countries of the world are plotted

Desired result

  • For convergence to occur, the relationship should be negative because convergence theory says that the less developed you are to start off with the faster you should grow subsequently

Actual Observations

  • The relationship is strongly negative for the world and China, and weakly positive for India.

What does it mean?

  • Poorer countries are catching up with richer countries,
  • The poorer Chinese provinces are catching up with the richer ones,
  • But in India, the less developed states are not catching up; instead they are, on average, falling behind the richer states.
  • Internationally, growth rates of per capita GDP widened at least since the 1820s with poorer countries growing slower than richer countries, leading to the basic divide between advanced and developing countries. However, since 1980 this long term trend was reversed and poorer countries started catching up with richer ones.
  • In the 1990s, convergence patterns were not dissimilar across the world, China and India with either weak convergence or divergence. But things changed for both the world and China in the 2000s but not for India. This was despite the fact that less developed states such as Bihar, Madhya Pradesh and Chhattisgarh had started improving their relative performance.
  • These developments in Indian states were neither strong nor durable enough to change the underlying picture of divergence or growing inequality.

Consumption Convergence within India

Methodology

  • The growth rate of real consumption vs the log of Real consumption is plotted.

Observations

  • No sign of convergence was found.

Analysis

  • Convergence occurred within the United States and Japan over long periods at average rate of about 2% in income. This implies that a country will reach half the distance to the frontier in 35 years.
  • During the 2000s, China posted a convergence rate of nearly 3 percent in income which implies that the poorest province will catch up with half the level of the richest province in 23 years.
  • The evidence so far suggests that in India, catch-up remains elusive.

Forces of convergence

  • Convergence happens through trade and mobility of factors of production. If a country is poor, the returns to capital must be high and should be able to attract capital and labor, thereby raising its productivity and enabling catch up with richer countries.
  • Trade, based on comparative advantage, is really a surrogate for the movement of underlying factors of production
  • A less developed country that has abundant labor and scarce capital will export labor-intensive goods (a surrogate for exporting unskilled labor) and imports capital-intensive goods (a surrogate for attracting capital)
  • The driving force behind the Chinese convergence dynamic has been the migration of people from farms in the interior to factories on the coast, raising productivity and wages in the poorer regions faster than in richer regions.

 

Indian Situation

  • Trade within India is quite high
  • Mobility of people has also surged dramatically—almost doubled in the 2000s

 

Possible Explainations/hypothesis

  • Probably governance traps are impeding equalization within India.
    • If that is the case, capital will not flow to regions of high productivity because this high productivity may be more notional than real. Poor governance could make the risk-adjusted returns on capital low even in capital scarce states.
  • A second hypothesis relates to India’s pattern of development. India has relied on growth of skill-intensive sectors rather than low-skill ones
    • This is reflected not just in the dominance of services over manufacturing but also in the patterns of specialization within manufacturing
  • Unless the less developed regions are able to generate skills, (in addition to providing good governance) convergence may not occur, since the binding condition on growth in availability of skills.

 

Further Questions

  • These hypotheses raise another question. Since successful states serve both as models and magnets (attracting capital, talent, and people), why isn’t there pressure on the less developed states to reform their governance to be competitively attractive? Persistent divergence amongst the states is theoretically against the dynamic of competitive federalism which promotes convergence.

 

Finding 2: Health Convergence Within India

Methodology

  • The Average annual change in life expectancy vs Life expectancy levels in 2002
  • The Average annual change in IMR vs IMR levels in 2002
  • Indian states along with countries of the world are plotted

Desired Results

  • Intuitively, the worse the initial situation, the faster progress will occur because many medical “technologies” such as antibiotics and other medical practices are commonly available
  • Secondly there are clear bounds on health indicators that would naturally lead to convergence. For instance, once a country has reduced its infant mortality to near zero, it is fundamentally impossible for it to experience a drastic reduction while countries with high mortality rates have much more room for improvement.

 

Observation

  • On both indicators of health, there is strong evidence of convergence within India

What does it mean?

  • It suggests that there are no governance or institutional traps that prevent technologies from flowing freely within the country
  • Internationally,there is strong evidence of convergence in life expectancy; However, all Indian states are making slower progress than the average countries. For IMR, all the Indian states posted larger declines in the IMR than the average country.
  • Another key comparison is simply to compare the level of these LE and IMR against per capita GDP of indian states and the world countries
  • In LE, the indian states doing about the same or better than their international counterparts; but for IMR, most states look worse in this international comparison thus India is doing reasonably well on life expectancy on an international scale, but on IMR has scope for improvement

 

Finding 3: Great Performance on Fertility

  • 12 Indian states out of the reporting 23 states have reached levels of fertility that are below the replacement rate
  • Like LE and IMR, there is evidence of strong convergence across the states
  • All the Indian states (with the exception of Kerala) are performing much “better” (in the sense of more rapid fertility declines) than their international counterparts at present

 

Implications

  • India should not expect to see growth surges or growth decelerations of the magnitudes experienced by China and korea etc. since compared to them our TFR has declined at a gradual pace
  • This does not rule out accelerations for other reasons, related to reforms and strength of domestic institutions.
  • India might be able to sustain high levels of growth (on account of the demographic dividend) for a longer time as india is projected to stay at its peak working age/non working age ratio for a longer period of time compared to China and Brazil.

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  • Race 6.

    thnku sir.

  • Mission IAS 2017

    Hi can anyone pls share me the link of simplified forumias ecoomic survey…

  • Peaceful Warrior

    btw, team, any plan to bring summary and notes of India Year Book? If yes, then atleast i would safely wait for that rather than investing my time in 1000 pages currently.

  • ForumIAS

    😉
    Thanks Warrior.

  • Peaceful Warrior

    Big fan of your structuring and subheadings that you generate in each chapter in a complex doc like survey. Hats-off & Kudos!

  • ForumIAS

    Thanks.

  • Jyoti Singh

    I just love these compliation of Economic Survey,otherwise it is such a huge book to read.Thank You Team FORUMIAS making so easy to read Economic Survey.Thank You Once Again….!!!

  • ForumIAS

    Thanks Nodi ji.

  • Murinder Nodi

    Thanks sir ji. We will rock you.