Inclusive Growth

Has India's economic growth in the last two decades been inclusive? What has been the impact of India's growth on poverty? In sharp contrast to the situation in 1950s and 1960s, the number of poor in India have declined steadily in the '90s and in the first decade of the 21st century, whichever definition of poverty line one might take. That indeed is the good news.

However, the pace of poverty reduction has been relatively slow in India. India's pace of poverty reduction has been significantly slower than that of China and even that of Indonesia & Vietnam. While 1 percentage point growth in GDP led to 0.8 percentage reduction in poverty in China, in India the correlation between GDP growth and poverty reduction has been far less - only 0.3 percent reduction in poverty for 1 percentage point growth in GDP.

There are several factors which can provide possible explanations to the weak link between GDP growth and poverty reduction in case of India as distinct from other emerging economies of South East Asia. In India, the GDP growth has not had any significant impact on nutrition, primary education, health services or sanitation which typically fall under the domain of public services. This is very unlike the experience in South East Asian economies. Even in India, the States which have been able to impact these services have had a better track record in poverty reduction as compared to States which have been laggard in these areas. The other factor has been that GDP growth in India has essentially been urban focused instead of being uniform across urban & rural areas. While majority of India's population still is based in rural areas, economic growth has been centered in urban areas much more than it has touched the rural heartland of the country. Finally, and arguably most importantly, the sectoral composition of India's growth has been such that it has generated far fewer productive employment opportunities for the relatively unskilled and has been completed tilted towards employment generation for the skilled & highly skilled employees. The sectors where bulk of the population is centered, namely agriculture and unorganized sector of industry, has seen diminishing contribution to GDP, whereas the sectors which have been contributing immensely to India's growth (like the organized service industry) is heavily reliant on skilled and highly skilled workforce. Again, while formal organized manufacturing sector has contributed to GP growth, but the employment elasticity of this sector has been rather low and according to some studies it is actually negative- which means that the growth in this sector actually results in employment going down.

Thus the lackluster performance of agriculture and unorganized sector of manufacturing, where bulk of the country's population is employed even till date, has meant that the reduction in poverty due to GDP growth in excess of 5% per annum over the last couple of decades has resulted in far lesser pace of poverty reduction than what would have been expected.

In order to ensure a more inclusive growth, it is essential that one of the two conditions or both are met: (I) there is a significant increase in productivity in the sector(s) where majority of the population is employed; (ii) there is a shift in population from the relatively less productive sectors to the more productive sectors.

The implications for the above are the following:

1. Emphasis on agricultural productivity needs to enhanced much more than what has been done thus far and there.
2. Significantly enhanced focus on skill development so that employment in organized manufacturing increases, though the lack of skilled manpower is not the only reason why organized manufacturing has been lagging behind in generating employment.
3. Simplification of labor laws to encourage employment of organized labor. With the current set of labor laws most organizations rely on engaging unorganized and contractual labor. A change in the labor laws may well lead to greater employment in organized sector.