Change economic growth strategy to banish poverty faster

NOW that India, the world’s fifth largest economy, has established itself as the fastest-growing major economy in a world beset by economic uncertainty, interest has grown on finding ways in which it can banish poverty quicker than by following the conventional route. So, here are the contours of an alternative pathway, but before we go into that, let us delineate the conventional route.

Conventional economic wisdom holds that poverty will be abolished in a generation if per capita income goes up by six times during the period. For this, the economy must keep growing at 7 per cent for 25 years. That, in turn, will require an annual investment of 30-32 per cent of the GDP. This is not beyond reach as last year, the gross fixed capital formation, a proxy for total investment, reached 29.2 per cent of the GDP.

However, the need to shift to renewable energy requires fresh investment, which will likely take away resources from the amount available for investment to raise output. This will slow down growth even as India has a long way to go. In terms of per capita income, it ranks a lowly 149th among 194 countries.

The first point about the alternative strategy is that it moves away from specific focus on per capita income. The present healthy aggregate growth in per capita income is enabled by a K-shaped recovery. The rich are getting richer, but the poor are not making much headway. So, such growth is not doing much to eliminate poverty by raising income at the lower levels.

This is tellingly illustrated by the trend in the sale of smartphones. Lately, the sale of cheap and middle-level smartphones costing up to Rs 30,000 has actually been falling and that of phones costing over

Rs 30,000 is doing nicely.

If the per capita income is not a good number to go by in measuring poverty, what is? In the alternative growth strategy, the need is to focus on the entire range of human development indicators. If a country does well by this measure, then it does not matter so much if it does poorly by one indicator — per capita income. A country can suffer from income poverty even as it does well in terms of indicators like life expectancy, infant and maternal mortality, fertility rate, average years of schooling for girls, stunting among children and out-of-pocket health expenditure.

Significantly, Bangladesh scores better than India on most of these indicators but is behind it in terms of per capita income measured in purchasing power parity terms. As per the International Monetary Fund’s 2023 figures, India has a PPP per capita income of $9,070 compared to Bangladesh’s $8,660. But in terms of the 2021 Human Development Report ranking, Sri Lanka (73), China (79) and Bangladesh (129) are ahead of India (132), whereas Pakistan (161), Nepal (143) and Myanmar (149) are behind.

So, where does India go from here? What strategy should it follow to rapidly reduce the level of poverty? There is a need to focus on food availability, schooling, healthcare (particularly reducing out-of-pocket expenditure) and women’s empowerment, and let the overall growth rate take care of itself. If high growth mostly leads to higher income by the already well-off, which results in, among other things, buoyant sales of SUVs, then that is of not much help to the poor.

The government’s focus till now has been on public investment in infrastructure, which, it is expected, will crowd in private investment. A robust infrastructure lays the foundations for future growth, but in the short run, it does not lead to much job creation. Currently, the private sector has been far behind in capital investment, waiting for demand to pick up before deciding to add to installed capacity.

The quickest impact on poverty can be made by creating enough jobs. This can be done in two ways. By helping raise farm incomes, demand for rural services and hands needed to deliver them will increase. In the urban areas, the most powerful job creators are the micro, small and medium businesses, which should be able to access enough working capital. When these businesses run robustly, they create more jobs, enabling their workers to earn and consume more. The resultant rise in consumption expenditure will translate into higher sales volume for the FMCG companies.

The link between out-of-pocket health expenditure and poverty is too obvious to need explaining, with serious health episodes often driving families into destitution. As for adequate schooling and post-school skills training, these help young workers enter the job market with better skills and ability to earn more, which will take them out of poverty quicker.

Few will have any quarrel with the logic of the foregoing ideas to beef up social services, except that the resources for such an action plan have to come from somewhere. The government has to maintain a fiscal balance as otherwise, it will be risking inflation. This will, in turn, lead to the central bank tightening the money supply and a rise in interest rates, which can do serious damage to growth and the fight against poverty.

Right now, elections and promises of freebies are setting the tone of Indian politics. The Congress is popularly believed to have come to power in Karnataka by promising a lot of goodies, not the least of which is free bus travel for women. The ruling Congress in Rajasthan, with elections approaching, has just passed a legislation that assures a basic minimum income to all, particularly the elderly and the specially abled. It will not be surprising if the ruling NDA at the Centre unveils its own bagful of giveaways as next year’s General Election get closer.

In sum, the conventional growth strategy will take longer to remove poverty. The alternative strategy will do the job faster, provided it can keep inflation at bay. Measures which will help boost farmer-producer organisations to raise farm incomes or making available more working capital to micro, small and medium businesses are essentially non-inflationary.

These can top the to-do list for those adopting the alternative growth strategy. Free bus travel for women can come next as it is self-selecting. Better-off women don’t travel often by bus. As for the rest of the list, action on every item will have to carefully weigh the welfare gains against the inflation risk.