Understanding India’s Economic Growth and Development

This post is a review of the recent book by Jean Drèze and Amartya Sen titled An Uncertain Glory: India and Its Contradictions. An earlier post in this blog has dealt with the vexed relation between economic growth and development and elsewhere, I have discussed the need to focus on the structure of economic growth. Drèze and Sen’s book contains 10 chapters including the introduction (‘A New India?’) and the conclusion (‘The Need for Impatience’); the main text spreads across 287 pages. Their argument is buttressed with comparative exercises between Indian states, international comparisons, historical facts, surveys, published data sources and contemporary events apart from ample secondary literature. However, this review does not engage with their empirical findings.

For Drèze and Sen, the aim of any society should be the expansion of human capabilities. And, institutions such as markets and democracy are a means to that end. Similarly, economic growth ‘generates resources’ which can be used to improve human capabilities. As they write in the preface, ‘the achievement of high growth must ultimately be judged in terms of the impact of that economic growth on the lives and freedoms of the people’ (p. viii). Human capabilities, as is to be expected, refer to a spectrum of endowments and the ability to access all of them. For instance, it includes, in no particular order, nutrition (pp. 157-162), education (see ch. 5), health (see ch. 6), clean environment (pp. 41-44), access to energy (pp. 84-87), transportation, communication and banking infrastructure. The ability to access them, however, is severely constrained by caste (pp. 218-223). And some of them are also constrained by gender (pp. 224-239) besides other power relations.

Given India’s high growth rate, the authors pose one major question: why has the ‘pace of change … been excruciatingly slow’ for majority of the Indian populace (p. 29)? According to Drèze and Sen, the major cause for this is the abysmal situation of public education and health in India. (There are some Indian states which have done relatively better.) This is because of issues relating to accountability and also due to insufficient public spending. Moreover, the authors harshly criticize the Indian media for their ‘excessive focus on a relatively small part of the population whose lives and problems are much discussed’ (p. 261; see also pp. 262-267). This wide gap in public discourse provides their motivation in writing the book. Hence, they point out the ‘importance of enlightened public reasoning’ as ‘a central part of the general thesis of this book’ (p. 239). Furthermore, they state that ‘this book is aimed much more as an attempted contribution to public reasoning, including discussion in the media, than at giving professional advice to the government in office’ (p. 253).

Is their account of economic growth and development entirely satisfactory? Their second chapter is about ‘Integrating Growth with Development’. First, what determines economic growth? According to mainstream (neoclassical) economics, a growth in physical capital, human capital (educated and healthy workforce) and technological progress causes economic growth. This is known as the supply-side view of economic growth. If we accept this growth account, then clearly an improvement in the quality of life directly contributes to faster economic growth. Drèze and Sen do not have theoretical dissatisfactions with mainstream economics, as is made very clear in the following passage written in the context of a discussion on markets.

Relying solely on the market has become a strongly advocated theme in India on the basis on highly exaggerated expectations, often based on a misreading of the conclusions of mainstream economics, which includes much scepticism of the performance of markets in the presence of externalities, public goods, asymmetric information and distributional disparities. We do not have to look for any “alternative economic paradigm” to see what the market cannot do, in addition to what it can do – and do very well. (p. 184; emphasis added)

They also approvingly cite Joel Mokyr and Elhanan Helpman who emphasize the importance of ‘accumulation of knowledge’ and ‘total-factor productivity’ through education in economic growth respectively (p. 35). This is the supply-side production function approach in understanding the growth determinants. No one denies their significance. However, if one is convinced by such a theory/view of economic growth, the popular version of it being the Cobb-Douglas production function in various clothes, then, theoretically, physical capital can be substituted with human capital. And, this would entail a very different method of attaining economic development from that mentioned in the book. Moreover, aggregate demand does not play a role in this growth account; as the authors write in the preface, the ‘expansion of human capability, in turn, allows a faster expansion of resources and production, on which economic growth ultimately depends’ (p. x). That is, economic growth is entirely determined by the growth of aggregate supply, without considering the problems which can arise from aggregate demand deficiency (such as a fall in wage income or decrease in government spending). Without getting into the details of the argument, it appears that their conception of economic growth and development sits more comfortably with the economics of the classical economists (such as Adam Smith, David Ricardo and Karl Marx) combined with the effective demand theories of Michal Kalecki and John Maynard Keynes.

The surplus generated from economic growth can be utilized for societal needs which is further determined through socio-political movements and economic considerations of the entrepreneurs as well as the state. To put it differently, ‘the fruits of growth’ need to be allocated intelligently – based on our physical, economic, environmental, social and cultural needs (p. 9; cf. p. 14, p. 18, p. 38). There are two very different kinds of distribution that takes place – income distribution between wage-earners and profit-earners and the expenditure of the government from the revenue they collect as taxes and duties. They also observe,

The impact of economic growth on the lives of the people is partly a matter of income distribution, but it also depends greatly on the use that is made of the public revenue generated by economic expansion. (p. 37)

They mention the importance of collective bargaining (p. 141) and point out that the NREGA ‘strengthened the bargaining power of rural workers’ (p. 201). But their focus in the book is how to utilize public revenue in improving the quality of life (p. 269). Since this public revenue can be utilized in a variety of ways, Drèze and Sen assert ‘the constructive role of the state for growth and development’ (p. 39; italics in original). Hence, the organs of the state need to be made more accountable (ch. 4).

Since democracy offers ‘significant opportunities’ for improving the quality of life as well as its pace, the authors are ‘contingently optimistic’ (p. xii). In fact, the issues addressed by the authors are intended to be a contribution to a wider debate on how to construct a better society. Thus, the book aims to provide ‘reasoned solutions to the problems’ (p. 3). They also write that ‘economic reforms, even when appropriate, require informed public debate’ (p. 28). In sum, there ought to be a ‘greater use of informed reasoning in the practice of democracy’ (p. 181). As they observe, and correctly, I think, that daily troubles are ‘less spectacular and less immediate – [and hence] provide a much harder challenge’ to politicize (p. 14). The book is primarily about these issues and since they cover a vast terrain, there have been some omissions. Two very varied issues come to my mind: the influence of public debt on economic growth is only addressed briefly (p. 18) and the gap between English and non-English speakers get barely one paragraph (pp. 215-6). In addition, there is no mention of freedoms relating to sexuality. To conclude, the book is an excellent contribution in so far as it provides an accessible introduction to several social concerns such as armed conflicts, child mortality, corporate power, corruption, land ownership, minimum wages, nutrition, open defecation, pollution and sanitation.

What Can Indian Economists Learn From Sismondi?

Although J.-C.-L. Simonde de Sismondi (1773-1842) lived in Geneva and wrote on economics, history and public policy, his concerns about the role of political economy is valid even today, especially for India. Marx considered Sismondi to be the last classical economist. Sismondi engages with the economics of Adam Smith, David Ricardo and J B Say in his 1819 work New Principles of Political Economy: Of Wealth In Its Relation to Population. This work has been translated into English by Richard Hyse in 1991 (available at Google Books). According to Sismondi, the objective of Political Economy is to ensure that majority of the population live a happy life.

Indian realities

Sainath informs us that India has seen over a quarter of a million farmers’ suicides between 1995 and 2010. The total figure according to National Crime Records Bureau (NCRB) is 256,913. And, since 1998, at least 15,000 farmers have committed suicide very year. More unsettling is that fact that the total number of farmers have been declining significantly. In Andhra Pradesh, it is alleged that 90 farmers committed suicide, that too, in rain-fed areas, in the last few weeks.

The inflation of food articles has reached double digits. Food inflation doubly affects the actual cultivators. Since, the prices are fixed by the Government (minimum support prices), the price rise does not benefit the actual cultivators. Secondly, their ability to purchase their usual consumption basket also falls when price rise. It is in this context that M S Swaminathan’s reminders need to be understood. He rightly asserted: “If agriculture goes wrong, nothing else can go right for this country.”

Very recently, Dreze and Sen pointed out the nature of the asymmetrical growth that is driving India with a majority of the population living without access to basic amenities. They concluded their article in the Outlook by stating that one of the ways forward is to have a “radical broadening of public discussion in India to development-related matters—rather than keeping it confined to simple comparisons of the growth of the gnp, and naive admiration (implicit or explicit) of the high living standards of a relatively small part of the population. An exaggerated concentration on the lives of the minority of the better-off, fed strongly by media interest, gives an unreal picture of the rosiness of what is happening to Indians in general, and stifles public dialogue of other issues.” In other words, how much has the socio-economic condition of majority of the Indian populace (who happen to be farmers and weavers) improved?

Sismondi

In the hurry to build sophisticated DSGE models and while working out monetary and/or fiscal solutions to inflation and economic growth, it is often forgotten that actual human livelihood is at stake. How can Indian agriculture not be a necessary component of the curriculum in economics? Within economics, steep walls which cannot be crossed exist between agricultural economics, macroeconomics, monetary economics, labour economics, development economics, etc. The so-called specialization in these fields (to be understood as literature which is not easily accessible or comprehensible to an economist from another field) has reached alarming levels. Sismondi says the following on the nature of economic inquiry:

However, I believe I should protest against the manner, so often superficial, so often false, in which a work on the social sciences is judged in the world. The problem which they offer to resolve is tangled in quite another way than those that arise from the natural sciences; at the same time it appeals to the heart as well as to reason. The observer is called upon to recognize unjust sufferings that come from man, and of which man is the victim. We cannot consider them coldly and pass them over, without seeking some remedy (Sismondi 1819: 13).

Maybe, the idea of modern science does not allow investigators to be moved by the ‘object’ under study. Nevertheless, as Sismondi reminds us, economic problems and their solutions affect people (who are not ‘objects’) in a significant manner. The state of Indian farmers and weavers is certainly to be given attention, especially in terms of livelihood building, through providing employment and incomes in a dignified manner.

The following lines from Sismondi echoes what Dreze and Sen recently pointed out as regards Indian growth:

If they find a tremendous accumulation of riches, an improved agriculture, a prosperous business community, manufactures which multiply without end all products of human industry, and a government that disposes of almost inexhaustible coffers, as in England, they call the nation opulent that has all these things, without stopping to inquire whether all those who work with their hands, all those who create this wealth, are not reduced to mere subsistence; whether every tenth member among them must not apply each year to the public welfare; and whether three-fifths of all individuals, in a nation that is called rich, are not exposed to more privation than an equal proportion of individuals in a nation called poor (Sismondi 1819: 22).

In India, the wealth creators, the farmers, are forced to live below even ‘subsistence levels’ as Sainath’s commentary on farmer suicides indicate. Even though we have 53 agricultural universities in India, their contribution to the farming population is circumspect. Three to four decades before, working on agricultural economics and debating issues related to agriculture was fashionable and ‘important’. Today, it is even more important but, perhaps, not very attractive. In fact, the Government admits that the farm sector has been neglected.

Admitting that the government is neglecting research in the farm sector, the agriculture ministry has sought more funds in the next Five Year Plan (2012-2017) for significant jump in food grain production.

But, focussing on aggregate food grain production is clearly insufficient. One needs to look at the ‘production conditions in Indian agriculture’. As Sismondi points out very clearly

Commercial wealth is augmented and distributed by exchange; and even the produce of the ground, so soon as it is gathered in, belongs likewise to commerce. Territorial wealth, on the other hand, is created by means of permanent contracts. With regard to it, the economist’s attention should first be directed to the progress of cultivation; next to the mode in which the produce of the harvest is distributed among those who contribute to its growth; and lastly, to the nature of those rights which belong to the proprietors of land, and to the effects resulting from an alienation of their property (Sismondi 1819: 133).

In 1974, Krishna Bharadwaj published a book Production Conditions in Indian Agriculture. In the same period, economists such as Amit Bhaduri, Ashok Rudra, Amartya Sen, K N Raj, C H Hanumantha Rao, Pranab Bardhan, etc wrote extensively on various aspects of Indian agriculture. The issues Sismondi pointed out were discussed and debated. Bharadwaj points out the significance of examining property relations, technology, local patterns of power, etc. Moreover, she notes that non-economic variables such as tradition, customs, caste and religion determine the economic position of a farmer and thereby determines their income and asset levels. The rise in food inflation has prompted many commentators to hold employment guarantee schemes (NREGA) responsible. If agriculture generated adequate incomes (to maintain a decent and dignified life) employment guarantee would not be necessary. In other words, employment on and off farm cannot be treated as independent of each other. Further, in India, markets are interlocked through both price and non-price links (with the Government playing an ambiguous role). These interlocked markets are exploitative as it denies the following freedoms to the agricultural farmer, who is very much an entrepreneur.

(1)   What to produce?

(2)   How much to produce?

(3)   For whom to produce?

(4)   When to sell the produce?

Conclusion

As Sismondi reminds us, we cannot ignore the majority of the Indian population who do not have access to the basic necessaries of life. Agriculture provides livelihood to more than half the Indian workforce. A farmer is an entrepreneur who produces food, the most basic of all commodities. Although, it might not be academically fashionably and profitable to study Indian agriculture but as Sismondi notes: “We cannot consider them coldly and pass them over, without seeking some remedy.”

Economics: The Study of Commodities

The study of commodities has been central to economic theory. Mercantilists considered gold, a commodity to be wealth. Later economists argued that an increase in commodities, both agricultural and manufactured, implied an increase in wealth. The increase in the production of commodities is still the most widely used indicator of economic growth/progress. This indicator is none other than the real GDP. In 1985, Amartya Sen published a book titled Commodities and Capabilities. In this work, Sen challenges the dominant view in economics regarding the role of commodities, i.e. he maintained that an increase in commodities cannot be taken as the sole factor in assessing economic development. Sen emphasised the importance of examining capabilities, which subsequently led to the creating of the Human Development Index (HDI). This post discusses the rationale behind economists’ obsession with commodities. It also examines Sen’s critique of commodities and how his (Aristotelian) concept of capabilities differs from it. This post concludes by arguing for a strengthening of classical economics, which studies the production, distribution, exchange and consumption of commodities, for the considerations of ethics can be easily integrated into this approach.

Economics as a distinct form of inquiry begins with the works of Sir William Petty in the 17th century. Petty was interested in assessing the comparative wealth of England and Ireland. Some of the indicators he chose were the number of houses and population. The idea behind this being that a surplus of food results in more population and therefore more houses. Having a large population was considered to be beneficial to the state. His successor, Richard Cantillon, an economist par excellence, pointed out that wealth of a state is reflected in the quantity and nature of commodities it produces – necessities, comforts and luxuries. This brief historical excursus is to point out the nature of economic inquiry, which is essentially an analysis of quantities and prices. Examples of quantities are employment, income, exports, investment, money supply, etc. Examples of prices are WPI, interest rates, foreign exchange rate, commodity prices, share prices, etc. That is, an analysis of commodities is an examination of quantity and price at the same time. Therefore, an analysis of commodities subsumes an examination of their production, distribution, exchange and consumption. Production includes the structure and relations of production; distribution pertains to the process and mechanism through which the incomes/surplus from production is divided among its participants; exchange refers to the mode and institution through which commodities are sold; finally, consumption illuminates the channels through which consumption of commodities aid production in the next period and how production in the current period aids current consumption. Thus, classical economists such as Petty, Cantillon, Quesnay, Smith and Ricardo were interested in the theory of production, distribution and exchange of commodities. Their interest was motivated by the need to find out ways of improving the general well-being of their respective societies.

According to Sen, the kind of analysis posited above looks at opulence as the sole indicator of economic development. A shift in economic analysis came about in the 1870s with the emergence of marginal analysis, independently developed by Jevons, Walras and Menger. Terms such as utility, choice, scarcity, margins, etc made inroads into economics. In fact, standard microeconomics texts are nothing but a combination of Walrasian and Marshallian economics. In any case, the maximization of utility began to be seen as the objective of individuals, for attaining economic progress. The internal justice of free markets was imbued to this form of economic analysis. Based on utilitarian principles, the maximization of utility by individuals was seen as a way to improve human well-being and welfare. This conception of development, according to Sen, emphasised the role of utility.

Both the above mentioned analyses, according to Sen, deal with “the relation between commodities and people” (p. 1). The former approach argues for more commodities which leads to more production, which raises the incomes of the people and hence their consumption. The latter analysis points out that “more is better” and hence availability of more commodities imply more utility. The idea of “more is better” is intricately connected with their idea of economics, as a science of choice. Economics, for marginal/neoclassical economists, refers to the allocation of scarce resources amongst alternative uses, as Lionel Robbins points out. For Sen, both these analyses are limited, since they do not address the heterogeneity in the capabilities of different people, which leads to “a confounding of the state of a person with the extent of his or her possessions” (p. 16). It is precisely this argument of Sen developed in his 1985 book which widened the scope of mainstream economics. I write mainstream economics because for classical economists, economics or political economy formed only one way of looking at growth/progress/development. For classical economists, as pointed out earlier, an analysis of production included the state or condition of the producer. The best example of this form of theorising can be found in Marx, the last of the early classical economists. However, with the advent of marginal analysis, the analyses of the structure of production took a backseat. The sphere of exchange came to the forefront and along with it the explanation of the formation of all kinds of prices and quantities through the apparatus of demand & supply.

It is interesting to note that the idea of capabilities has been intrinsic to classical economics. As mentioned earlier, an increase in the production of commodities translates into an increase in income generated. In contrast with neoclassical economics, the economic processes is visualised in a circular way as opposed to a one-way street. One needs to look into the structure of production to find out to whom (which class) this increase in income accrues (theory of distribution). However, the manner in which Sen develops his capabilities approach is rooted in mainstream/neoclassical economics – via the sub-domain of welfare economics (See Benicourt 2002 and Omkarnath 2007). Although, Sen deserves credit for bringing back humanitarian concerns into the discourse of neoclassical economics. Omkarnath further points out that the capabilities approach rooted in the Walrasian tradition is static in nature, for it mainly concentrates on the formation of capabilities. Whereas, classical economics has numerous insights on the relation between capabilities and commodities. This sort of analysis calls for a careful examination of the structure of production, distribution and exchange present in various economies in the classical political economy tradition, which has more scope for including social, cultural and political factors as well as ethical concerns.

References

Benicourt, E (2002), “Is Amartya Sen a Post-Autistic Economist?”, post-autistic economics review, issue no. 15, September 4, 2002, article 4. http://www.paecon.net/PAEReview/issue15/Benicourt15.htm

Omkarnath, G (2007), “The Formation of Capabilities”, Indian Journal of Human Development, Vol. 1, No. 2, pp. 389-399.

Sen, Amartya (1985) [1999], Commodities and Capabilities, Oxford University Press: New Delhi.