Challenges of Inclusive Growth in India

Author: Parth J Shah
Publication: Lee Kuan Yew School of Public Policy, University of Singapore
Date: 12 October 2011

On 12 October 2011, Dr. Parth J. Shah, President of the Centre for Civil Society in India, gave an evening talk entitled “Challenges of Inclusive Growth in India” at the Lee Kuan Yew School of Public Policy. Dr. Parth’s central argument was that India’s lopsided economic growth is a result of uneven reforms.

Dr. Parth gave the audience some background on India ’s economic liberalisation policies that were introduced in 1991. These policies, among other things, removed licenses and associated bureaucracy to set up or run businesses in India; lowered import tariffs; and allowed partial convertibility of the Indian rupee. Further, India’s sectoral reforms in the telecom and the airlines industry brought about a dramatic economic transformation in a matter of decades. Today, India has amongst the highest number of cell phone users in the world and booming air traffic. The effectiveness of the reforms disproved the view of protectionists who feared that India will be gobbled up by multi-national corporations. On the contrary, at this point there is a strong trend of outward FDI from India.

Dr. Shah argued that such economic successes have not percolated down to all parts of the society and the reason is that all “sectors have not yet been reformed”. One commonly held diagnosis of India’s lopsided economic development is that of the ‘the rural- urban divide’.  He quoted Jeffrey Sachs: “India's economic growth (is) urban-led, with the gaps in living standards between the cities and the countryside widening in recent years.” He argued that such diagnoses have led to blunt responses by the Indian government. An example is the Mahatma Gandhi National Rural Employment Guarantee Act, (MGNREGA), which guarantees a hundred days of wage-employment in a financial year to adults of a rural household to do unskilled manual work. Dr. Shah argued that the analytical framework of India’s uneven economic growth is “reformed versus un-reformed sectors” and not the traditionally held view of “rural-urban divide”.

He pointed out that people engaged in sectors that have been liberalised and reformed are doing well irrespective of whether they are in rural or urban areas. This, however, has not been true for the people engaged in the yet-to-be reformed sectors. He said India’s uneven growth was the result of two broad types of sectors:  Liberalized, Privatized and Globalized (LPG) sectors versus License, Permit and Quota (LPQ) sectors. He provided examples of three sectors in India which have not yet seen reforms – the urban informal sector, the agri-sector and the forestry. In the case of the urban informal sector, he pointed to the rickshaw pullers of New Delhi. Archaic laws do not permit ownership of more than one rickshaw per rickshaw puller. However, the rickshaws are illegally owned by another individual who rents these out to the pullers at a fee. This does not permit the rickshaw pullers to improve their earnings or expand business. In the agri-sector, he illustrated the plight of farmers, who under India’s Essential Commodities Act have to sell their produce to the government’s marketing board. This in turn creates a monopsony, leading to lower earnings for the farmers versus the middlemen. Finally in the case of the forestry sector, he exemplified the case of an archaic law which classifies bamboo as ‘tree’ instead of ‘grass’. This prevented tribal populations in the bamboo-rich parts of India from utilizing this natural resource to their economic advantage.

Dr. Parth ended his talk by pointing to the downward trend in India’s Economic Freedom Index. He said this was partly a result of policies that gave economic opportunities to the industrial sector but excluded the abovementioned sectors. He advocated a correct diagnosis of India’s problems to bring about more inclusive reforms.