India and it’s ‘Segregated Growth’

This article tries to show that high rates of GDP in India need not trickle down to the rest of the masses and also strives to explain why ‘segregated growth’ further fuels inequality. By ‘segregated growth’, I refer to growth which takes place in sectors which employ relatively a small percentage of the total labour force.

The IT revolution is happening but the GDP contribution of agriculture is decreasing.  One inference from this change could be that, labour from agriculture is migrating to the services sector; but that is not the case in India. India is witnessing farmer suicides, increased debts, droughts and low productivity in the agricultural sector.

Sustained economic growth requires progress in several dimensions – education, health, infrastructure, legal institutions, etc. [Noll 2006] For the whole of the population to enjoy sustainable growth, it is essential that growth takes place in all sectors of the economy. Otherwise, it will lead to growth, but only in a few sectors, like the IT boom which India faced. This growth is not sustainable in the long run. Another consequence of such ‘segregated growth’ is that, the GDP figures will show an increase. And as the GDP is the most commonly used (By the media) measure among the masses to portray economic growth, the picture presented will appear rosy.

Moreover, the per capita income will also show a rise due to the increase productivity coming from ‘such sectors’. This increased GDP will not trickle down as many economists and others state. This increased income accruing to the denizens of ‘such sectors’ will only be spent in conspicuous consumption. Thorstein Veblen coined the words ‘conspicuous consumption’ in his book ‘The Theory of the Leisure Class’. The basis on which good repute in any highly organised industrial community ultimately rests is pecuniary strength; and the means of showing pecuniary strength, and so of gaining or retaining a good name are leisure and a conspicuous consumption of goods. [Veblen 1899]

On Poverty

And though the country (India) has made significant strides – poverty levels are roughly 35%, down from close to 60% in the 1970s, (by the World bank’s $ 1 a day definition of poverty, though precise numbers are the subject of never-ending debate) – the benefits of this rapid growth are yet to trickle down to the masses. [Bhusnurmath 2006]

Development agencies define poverty as an income of less than $2 per person per day (about $3,000 annually for a family of four). By this standard, nearly 3 billion people are poor. [Noll 2006]

I wonder why India still defines poverty as an income of less than a dollar per day for a person. I had argued for a restructuring of the current poverty line in another article of mine. Probably the present estimate makes it easier to state that poverty levels have come down from 60% to around 35%!

On Development

Amit Bhaduri, in his recent paper in the Economic and Political Weekly, wonders if it is Developmental Terrorism or Development which is taking place.

Destruction of livelihoods and displacement of the poor in the name of industrialisation, big dams for power generation and irrigation, corporatisation of agriculture despite farmers’ suicides, and modernisation and beautification of our cities by demolishing slums are showing everyday how development can turn perverse. [Bhaduri 2007]

Conclusion

Thus, the Indian populace is dichotomized in terms of economic growth; there are certain areas where growth levels are very high along with a majority of sectors which are witnessing a decline. Thus, this kind of ‘segregated growth’ fails to ‘trickle down’ to other sectors of the economy.

References

1) Roger Noll, The Foreign Aid Paradox, SIEPR Policy Brief, October 2006.

2) Thorstein Veblen, The Theory of the Leisure Class, 1899. (Full book available here)

3) Mythili Bhusnurmath, Time for a reality check, www.forumblog.org, November 25, 2006.

4) Amit Bhaduri, Development or Developmental Terrorism?, EPW, February 17, 2007.

42 thoughts on “India and it’s ‘Segregated Growth’

  1. Alex,
    You wrote:

    The IT revolution is happening but the GDP contribution of agriculture is decreasing. One inference from this change could be that, labour from agriculture is migrating to the services sector; but that is not the case in India. India is witnessing farmer suicides, increased debts, droughts and low productivity in the agricultural sector.

    The transition from agriculture to services is a huge step, and to expect it to happen, and happen in a few years, is unrealistic. The missing link is manufacturing; and I’m surprised you totally ignore this in your post.

    The point is that unless the Indian economy creates a massive amount of jobs in the manufacturing sector, pulling people out of poverty (regardless of how you define it) will remain a pipe dream. So why, unlike China, is India not able to create those millions of manufacturing jobs?

    One, distorted labour markets thanks to inflexible labour laws. Two, inadequate infrastructure that can enable massive growth and investment in manufacturing. Labour reform is off the UPA’s policy radar…and apart from rhetoric (and less than a handful of airports) there’s no real investment in infrastructure.

    India’s auto industry, which could have created some of those much needed jobs, has a high capital to labour ratio matching that of developed countries, despite labour being relatively cheap in India.

    If growth is seggegated, there is no one else to blame but the UPA for avoiding reform that would benefit the very people it claims to be working for.

  2. Nitin,

    Thanks for pointing that out.

    A very valid point indeed. Yes, there has to be targeted policies at Industry, like making labour laws more flexible and improving infrastructural growth.

    I did miss industry out as the post purports to contrast the low productivity of agriculture and the very high productivity of the Service sector. Manufacturing needs to be stepped up along with the agricultural sector.

  3. Trickle down Economics rarely work. If this man vouch for this predicament; then what else do you need?

    [LINK]

    There is an obvious problem with these unsustainable development. There is mass migration happening in India from the hinterlands to the burgeoning metros, more and more people are pushed in to the litters of a congested metro doing odd jobs, agriculture does not earn you the way it did earlier. Public distribution system is in utter dis-array, we don’t need to speak about medical facilities- They have been completely doled out to private ventures – It is not any more affordable.

    The problem in India is that the Neo-rich rarely agrees about the poverty, discrimination and odd practices in India. Some journalist take their pride in suggesting that we have only 260 million poor! I never got the crux of this!

  4. first i don think uve made a convincing case. the basic argument is simple, growth is there, but then the gini coefficient hasnt decreased, why? because it isnt trickling down. secondly, india has not yet reached the stage US has, where there is the paradox of affluence to say a .4 gini coeffieient doesnt matter.

    secondly the biggest reason for growth not trickling down is the dichotomised indian economy. growth is coming from the organised sector, and isnt transferred to the unorganised sector, namely dominated by agriculture due to imperfect markets.

    finally nithin does mention manufacturing, but that too requires a reasnoable quality of labour standard, which our education system cannot produce given its current state, therefore the lewis model of excess labour nithin suggests wont lift india out of poverty.

    for growth to actually spread we need to remove the market imperfection in the unorganised sector, integrate the economy, and then maybe manufacturing growth will help a bit.

    in this incoherent and badly written comment, im saying, though i agree with you, i feel you havent made a strong enough case.

  5. Vatsan,

    Thank you for your ‘strong’ comment.

    for growth to actually spread we need to remove the market imperfection in the unorganised sector, integrate the economy,

    The basic reason for a dichotomised India is mainly because of the dearth of adequate ‘public service systems’ and infrastructure both physical and social. I do agree that growth will be more inclusive if ‘integration’ takes place. This is a mammoth task in itself.

    This integration will take place only is ‘neglected’ sectors are given adequate importance. And it also needs changes in the socio-economic framework too. Thus what Nitin mentioned about inflexible labour laws and inefficient manufacturing sector is important.

    Only if there is growth in all sectors, can the poverty reduce; and not with the current kind of ‘segregated growth’.

    PS: I liked your arguments. :)

  6. //The basic reason for a dichotomised India is mainly because of the dearth of adequate ‘public service systems’ and infrastructure both physical and social. I do agree that growth will be more inclusive if ‘integration’ takes place. This is a mammoth task in itself.//

    alex, once again i think ur being a little bit naive, the unorganised sector is huge and infrastructure physical alone wudnt suffice. so if physical infrastructure is present, will that break the cartels who are involved in procuring rice? or the cartel that lends money at high rates to farmers? i think that is a naive assumption to make.secondly neither will social infrastructure, the idea should be to integrate it using policy measures. for instance one could be to legalise and regulate traditional money lending networks. what you and nitin are speaking about are in the fringes, they dont deal with the heart of the problem.

    and secondly, the government investing more money, given its current inefficient usage of funds, will make no difference, its just like throwing more money into a wishing well hopind things will change.

    ok, now im gonna play devils advocate, india has grown at a tremendous pace over the last 6-7 yrs only, give this current phase of growth more time, then the trickle down theory will work. its to soon to expect a radical change. it takes time for growth the percolate down to the poorest. and i think uve made ur judgement way too soon.

  7. Vatsan,

    The aim of the post was never to outline what measure to undertake, rather where the measures ought to be targeted. Also the GDP rate is nothing to be complacent about.

    the government investing more money, given its current inefficient usage of funds, will make no difference

    What is your alternative proposal?

    it takes time for growth the percolate down to the poorest.

    I do not think i need to argue on this again. But just one question, what about the millions of people living in India NOW without access to basic needs?

  8. regarding ur earlier post, i a have a couple of questions, uve asked for a reforming of the poverty line based on the real basic needs. so what are the real basic needs? are they common across all cross sections? for instance some tribal groups might prefer their traditional lifestyle and shun modern world, (this does happen with the jarvas in andamans) so are they classified as being below the poverty line?

    secondly once again, u havent made ur case in a strong enough manner, but rather chose to skim the surface, hell u even havent mentioned clearly the problems with the current poverty line or the current system. ull need to state that before saying that it needs to be changed. once again uve made the same mistake as in this piece, ur idea is fine but u havent built a strong enough argument.

    once again, u decided to make a correct argument, but messed up big time while making it.

    Vatsan – A graduate student of economics

  9. the questions, ive asked in my comment should have been answered by the post itself. i find it incoherent. it contains just various facts, and makes no argument what so ever.

  10. Vatsan,

    In my earlier post, i argued so based on the paper done by Guruswamy and Abraham. I presume you haven’t gone through that.

    Since, you agree to my argument, the post has served it’s purpose. I do not make strong cases, because it gives space for the reader to think.

    Vatsan – A graduate student of economics

    Welcome. :)

  11. Interesting Post. Im not familier with the Indian Economy, however I impressed by your analysis and approach.
    Reading your post, I had more questions than answers (thats a good thing, you got me thinking). First, I assume by IT boom your talking about IT services, is it possible that the “trickle down” effect has less of an impact because these companies are not purchasing goods from within their own markets? If the answer is yes, then profits are either reinvested into the companies and the trickle down effect will lag, or the cash is trickling out of the country.
    This brings me to another question, what is the tax structure like? Are companies able to avoid paying taxes? Are their tax incentives for companies to grow within india?

    Keep up the good work with the blog.

  12. and u in ur earlier comment outlined some measures, which i felt were naive, just labour laws alone arent going to magically change the scenario, since only 5-10% are employed in the organised sector and covered by labour laws. i think it is more important to regularise traditional networks etc.

    and u ask me what about the people living below the poverty line now? well change will occur, growth will percolate to them. you of course cant expect radical changes over night right? in the future if we do follow the current development policy, growth will percolate down, and the trickle down theory will work.

    alex, when i read ur post, i expect u to make arguments. and i will read only ur post. if i am supposed to find coherent arguments in the link you ve given, why do u even bother writing a post with all the sources? u can make ur life easier by just providing the link. isnt that easier.

    since u aspire to be an economist, u have to make some arguments in ur work. what u consistently seem to be doing is throwing facts and expecting people to understand and interpret them. thats the problem. u dont make any arguments/cases.

    and u havent served ur purpose, since i already believe the poverty line needs to be redefined, not just in india, but globally too.

    PS: alex its one thing not to make arguments because u want to let ur audience think, and another not to know the arguments. my logic of growth percolating has a huge flaw, which i see u havent been able to identify.

  13. ooh, and EPW article uve linked has missed the structural problems with a poverty Line. even the 1$ a day level or any daily income level is flawed and needs to be done away with.

  14. Vatsan,

    The measures are naive as i am naive. :)

    in the future if we do follow the current development policy, growth will percolate down, and the trickle down theory will work.

    I don’t believe this. [No arguments]

    alex, when i read ur post, i expect u to make arguments

    I don’t deliver expectations.

    my logic of growth percolating has a huge flaw, which i see u havent been able to identify.

    Could you outline them?

    About the links: I provide them as a reference for those who want to know more or argue more.

  15. Peryourrequest,

    Glad it made you think.

    About your first question, by the IT boom i mean the growth happening in the IT services sector. Like you mentioned, it presume that the ‘trickle down’ effect has no effect whatsoever as it is consumed within the sector.

    Moreover, as Vatsan mentioned, the dichotomy in India is another main setback to the growth process. India is characterised by a traditional or unorganised sector and an organised sector.

    The direct taxes are progressive in nature, though the indirect taxes are regressive in nature. More of tax revenues come from indirect taxes. Tax evasion is quite rampant, though the Govt is trying. Moreover, the SEZ’s in the country are given a lot of tax concessions, so as to attract them into the country.

  16. pretty simple, first analyse where the growth is, in india its in IT and requires qualified labour. fr ppl to benefit from it, they need to have education of 12+3/4. which most people dont. so those who benefit from it are those who are either above the poverty line. or those who are below the poverty line but have education. ie cream of those below the poverty line. the poor arent a homogeneous section.

    their incomes will increase while the poor will remain poor, and therefore the gini coefficient will remain high/increase (as is the case in india). now most of the poor are not in a position to take advantage of the growth, since they dont have the capablity to take advantage of it. (more details regarding capability refer sen) and therefore will remain poor. growth will benefit only those at the top/middle of the education social pyramid.
    this is essentially why growth will not percolate down. and qualatative features of growth are important for poverty allevition as highlighted by the world bank when they said pro-poor growth is essential fr poverty alleviation.
    alex, thepoint is when i read ur post, i expect u say something. what u are essentially doing is throwing facts. what you are doig is merely throwing facts/links rather than saying anything. if u are going to recycle that link on why the poverty line shud be changed, and decide to write 400 words on it, the least u can do is summarise what that guy has written, which u havent. u just throw meaningless facts.

    i am sorry but facts dont make an argument. thts why i think u have good perspective, but when u do blog about it, its total trash, rubbish, and bullshit.

    and wats the point of even writing a blog, if u dont have ur own opinions? ur just wasting server space

    //alex, when i read ur post, i expect u to make arguments. and i will read only ur post. if i am supposed to find coherent arguments in the link you ve given, why do u even bother writing a post with all the sources? u can make ur life easier by just providing the link. isnt that easier.//

    look at the entire paragraph and not just the opening sentence. if u have absolutely nothing to say, then just provide a 1 line link, why do u bother with the rambling 400 worded bullshit?

  17. ooh and i forgot to add, with social divisions and our govt’s horrid delivery mechanism, which is unlikely to improve in the future because ppl don vote for the rite reasons, there is no way the poorest of the poor can actually join the IT or educated work force enmasse.

  18. Vatsan,

    You have given one reason for growth not percolating. There are more which i do not wish to argue on. You say education is a factor. Yes it is and many more, especially the social framework as you say in your following comment.

    I have my own reasons for writing a blog which does not need to necessarily coincide with yours.

    Your comments make me smile. :)

  19. vatsan, knowing you…you are just being jealous because Alex has one of the most important economic blogs around. U can throw all kind of above line, below line approximations, bs models and all…but he blogs about issues. You are preaching on models when the reality is Indian economics are dominated more by communal sentiments rather than market forces. Riots, religion and ideologies influence it more than a global understanding. That is why china has a better outlook, and better market for the future, because they act as one, collecting the resources for all the needs.

    And by the way, you think India will ever become an US in the future…tell me how long will it take. The results are real…the economy is moving forward, at the same time the poor is being ignored. its the malady of the democratic economies. Some will loose, some will win. But in the present economic climates, the winners are the ones affiliated with political connections rather than hardworkers. Thats the hard truth about Indian economic mentality and I have seen it first hand with the Indian workers over here.

    India is poised for greatness, but it must be willing to make the changes necessary to make it presentable to the world and not be stupid enough to open up its economics to who wants to whitewash and steal the profits simply because you want a global presence. All the fdi’s target the automobile and telco industries. The IT factor is not important because its already established and there is no way to shake or move it from India. Outlook is important, not inward looking.

    And Vatsan…please refrain from commenting if your only aim and goal is to trash bloggers. We are united against aggressors who simply has nothing to say but fire hip shots.

  20. GP, wat do u achieve by repeating what ive said in 2 words in 50 words? and i dont wish to be an economic blogger. i get enough traffic writing my own bullshit. so im not jealous as u claim of Alex. But i do have a problem with people who do write bullshit. i do point it out, u can chk my response ot chacko on his post on ministers in kerala, once again ive used similar language. this politeness is trash. if u do think im saying bullshit. call bullshit rather than being politically correct.

    and GP, i have nothing against alex, but his case is weakly constructed. that is the problem. hell he has nothing of his own to say which is a problem, he just says the obvious ie digital divide, has some facts and this makes people respond. (this is called making the audience think) and i havent said anything which is not based on some argument or the other. if the language puts u off, hell that ur problem not mine.

  21. Hey,

    This was a nice discussion until those personal attacks started.

    One more thing I have to add, and this particularly applies to economists, is this business of defining poverty lines. There’s so much argument (albeit not on this post) about what should consitute a poverty line, that much of the energy is wasted fighting over this.

    I found this discussion useful to the extent it was attempting to identify the bottlenecks hold back the spread of economic growth.

  22. im not a techie alex, so here is a link to a good article on poverty and reforming the line (much better than the weak article uve linked)

    Hulme, D. and McKay, A. (2005)”Identifying and Understanding Chronic Poverty – Beyond Monetary Measures””, UNDP-International Poverty Centre Conference on the Many Dimensions of Poverty, Brasilia, August 29-31; also presented at the WIDER Conference on the Future of Development Economics, Helsinki, June 17-18. (30 pages) Available at:
    [LINK]

    and i suggest u do take a look at world bank’s case study on bangladesh, titled operationalising pro poor growth. and also google for the number of landless in bangladesh. will help you understand the point ur making in this article, if u can connect the growth, and landless population.

  23. I’d recommend taking a look at Xavier Sala-i-Martin’s chapter on global inequality in the World Economic Freedom 2006 report. It covers the issue of measuring poverty in a broader, I’d say more useful, context.

    It’ll be great if some enterprising Indian economist could use the data from NSSO and other sources and compile a similar study across Indian states.

  24. ooh alex, in case u havent, also check out sens book development as freedom, and specifically the chapter called poverty as capacity deprivation

  25. [News piece]

    Hey alex,
    Can you help me in deconstructing this news piece listed above. It is very much of economics.. but wanted to know more about this in a common man’s perspective. If you can help me, it will be of a great help!!

    Cheers;
    Clash!!

  26. Pingback: On Perfect Information « Undergraduate Economist

  27. I wonder if you have used my three other books: Trade and Dependence (Sage India 2000), Global Finance with Risk (Palgrave Macmillan 2003) and Globalisation and Development (2007). Last one is a popular reader.

    Sunanda sen

  28. these are intersting arguments. i fully agree with these arguments. unless growth trickes down to the masses and creates an equitable society with equal opportunities for all; depriving people of their livelihoods in the name of development is more of following a terrorist policies, So we need to rethink our policies.

  29. Pingback: Kerala Blog Roll » On Perfect Information

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