Figuring out distribution

President Barack Obama recently kicked off a series of speeches to start a new conversation on economic policy in the US. It seeks to outline the cornerstones of “what it means to be middle class in America and rebuild a society where everyone who works hard,can get ahead”. This is no less relevant for India. For a nation shadow-boxing with the twin spectres of economic gloom and political despair and distracted by non-debates between stalwart economists,the times beseech a new economic and social policy conversation.

A word cloud of the mainstream debates on economic reforms here will reveal the easing of foreign direct investment norms,financial deregulation,liberalisation of labour laws,corporate tax reforms and infrastructure creation as the priorities. This,while undoubtedly important for economic growth,betrays a narrow and short-sighted approach that overlooks other,equally important determinants of growth.

Primarily,any serious debate on a development model has to go beyond aggregate measures of growth and also address distributional issues. We need a conversation that holds out the promise that all Indians can benefit from economic growth. Apart from its normative appeal,this is also sound economics.

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Economies grow sustainably when markets expand — more people demanding goods and services attracts investment,raises production,creates jobs and employs people,increases purchasing power,creates demand for more and newer goods and services and so on. The critical factor is “more people demanding goods”. The base of the “demand pyramid” has to broaden,eventually encompassing all Indians.

But people can enter the market only if equipped with a basic set of human capital resources to access the opportunities that arise from economic growth. In all successful growth stories,including most recently from East Asia,governments have laid this platform by making large and effective investments in human capital formation. They have generally been in the form of investments in education,healthcare,nutrition and skills development. Our Constitution too promises to secure for all Indians “equality of access to opportunities”. It is,therefore,the responsibility of the state to enable this access,so that every Indian can get to the starting line.

It is,of course,possible that in a continental economy like India,high growth rates can be sustained for some time by a much narrower pyramid base in relation to its potential size. But as World Bank economist Martin Ravallion highlighted in a recent op-ed here (‘Why promotion is better than protection’,August 13),India’s antecedent human capital inequalities,apart from ensuring that poor people benefited disproportionately less from recent growth,are also a constraint to sustained economic growth. Further,neither access to opportunities for human capital formation nor the capacity of the state to provide the required thrust for improvements in human capital formation automatically follow from economic growth.

The most compelling proof of this comes from India’s dismal performance on human development indicators in the recent high-growth years. While they have doubtless improved with growth,and faster than before the economy liberalised,the progress has been slower than even those made by many poorer countries in the same period. Though we are only a few years behind our major emerging economy competitors in GDP aggregates,we are decades behind them in all social indicators. In fact,we fare no better,sometimes even worse,than strife-torn sub-Saharan African countries.

All this assumes even greater significance since we have to manage two critical large-scale demographic transitions. One,as the economy modernises,the share of people employed in agriculture,currently over half the workforce,will decline sharply in the coming years. Two,India’s demographic dividend will ensure that nearly 1.2 million people will enter the workforce each year for the foreseeable future.

In a country of India’s diversity and scale of deprivation,even with the most enlightened policies and their effective implementation,such growth and demographic transitions will leave large populations vulnerable to shocks. This can disrupt social stability. Therefore,a minimum but robust enough social safety net,which assures a life with basic dignity without distorting individual incentives,is important to maintain social stability and sustain growth. It will cushion both those who are striving to overcome their human capital deprivation as well as those who fail to access their initial opportunities. Politically,it will provide the space for governments to push through policies that,while growth-promoting,raise disturbing distributional concerns.

Finally,all these objectives can be achieved only by dramatically improving our governance systems. The Indian state needs to become capable enough to get stuff done. This applies in equal measure to interventions that range from consistently delivering midday meals of an acceptable standard to 120 million children,to completing the billions of dollars’ worth of infrastructure projects with good quality and within reasonable time.

We need to debate how we define access to opportunities. What should be the basic set of human capital development resources available to all Indians? How do we enable access to them? What should be the nature and design of each enabling policy? What share of our resources do we spend on them? What should be the constituents of a minimum social safety net? How do we target into and transition out beneficiaries of welfare?

For far too long,we have sought to gloss over these questions,preferring to focus on the far simpler and comfortable issues of aggregate growth.

The writer is an IAS officer,batch of 1999,and a graduate student at the Harvard Kennedy School,US.

Views are personal