Focusing on domestic growth -Krishnamurthy Subramanian

-Livemint.com

One of the key trends underlying huge concentration of wealth and incomes is the increasing return to capital versus labour

Given the demonetisation undertaken by the government in November 2016, the current budget was presented at a historic moment in the Indian economy. To understand the government’s emphasis on the rural economy, we have to understand a key narrative that must influence economic policies in democratic countries.

As several governments in developed countries become more protectionist, the export-driven growth models followed by China in manufacturing and India in IT and IT-enabled services will produce diminishing returns. Unlike the smaller economies such as those of the East Asian nations, a large economy such as ours can shift away from export-oriented growth to domestic-consumption-based growth. However, for this to happen, rural demand and demand among the poorer sections of society has to be increased significantly. This can only happen if productive jobs and productive enterprise increase significantly for the poorer sections of society and thereby enhance disposable income among the domestic population. This will need “Make in India” to combine with “Make for India”, “Skill India” to combine with “Work gainfully in India” and “Startup India” to combine with “Feed, clothe, house and serve India”.

Given the current levels of inequality, such a boost in domestic consumption cannot happen in the immediate future. India not only has one of the highest levels of inequality in the region, it also shows very large increases in inequality since 1990. Its net Gini index of inequality (based on income net of taxes and transfers) rose from 45.18 in 1990 to 51.36 in 2013. Thanks to the high growth achieved since liberalization, India has made great strides in reducing poverty. While 80% of the rural population was poor in 1990, this percentage was less than 30% in 2011. Also, while about 40% of the urban population was poor in 1990, this percentage was less than 20% in 2011. Yet, these impressive figures look discouraging when compared to even Vietnam and Indonesia, which all started with higher poverty levels than India in 1990 and have been able to do better than India in reducing poverty. A more equitable distribution in the gains from growth is required to boost the consumption capacity of the Indian economy.

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