Special articles

Indian Economy since 1980

Virtuous Growth or Polarisation?
It is widely believed that India's economic growth in the 1990s accelerated - in response
to the orthodox economic reforms initiated in 1991 - mainly on account of a faster growth
in the tertiary sector. There is also a growing consensus that (i) the improved growth
since 1980-81 reduced poverty, and (ii) the reforms in the 1990s increased the growth rate
further, without dampening the process of poverty reduction. This study seeks to verify
these propositions. Further, it examsines some dimensions of income distribution - a
neglected issue in the recent times - to assess if the developments during the last two
decades led to a diffusion of growth - or a polarisation in the economy.
R NAGARAJ

trendthat appearsto have continuedafter accelerated reforms" [Kelkar 1999:2326,

Introduction therecoveryfromthe 1991crisisandreform 2329].
[T N Srinivasan, The Financial Times, Thus, the emerging consensus is:
September 27, 99)9]. (1) Improved economic growth since in.
P icture the economic discourse in the
That the (orthodox) economic reforms 1980-81 has reduced poverty significantly.
early 1980s. There was widespread initiated in 1991 have
improved economic (2) The growth rate improved as a result
gloom aboutIndia's macroeconomic with a continued positive effect in
- growth of the economic reforms initiated since
performance perhaps, best captured in reducing
the words of Raj Krishna: poverty has made scholars opti- 1991, without affecting the trend decline
mistic that accelerating the growth further in poverty.
A review of the economic developmentof
will banish poverty very quickly. Partici-
India in the last three decades reveals an (3) Therefore, more reforms - popularly
pating in the same debate, Deepak Lal called the 'second generation reforms', or
astonishing fact: a large number of the
indicatorsof developmenthave remained argued: 'completing the reform agenda' - will
stuck at very unsatisfactorylevels...The ...dispute about thc poverty numbers in further improve the growth rate, and re-
stability of numerous parameterswould India merely reflects the fact that rapid duce poverty.2
not be a matterof concernbut for the fact growth has not occurredor has not been More recently, there is a growing view
that their stable values epitomise a large sustainedto make a markeddent on pov- in popular writings that Indian economy
and a growing mass of unrelieved erty. The stalled reformlshave failed to is increasingly driven by services, as the
suffering...For32 years the rateof growth raise growth rate appreciably.Some esti-
of national income has been stagnating mates that...l have made...showthat if the tertiary sector now accounts for close to
one-half of GDP. Therefore, India is per-
arounda miserablemean of about 3.5 per growth rate rises to 9-10 per cent that
cent. This rate keeps India as low as 71st China has seen, by 2006 the poverty ratio ceived as a post-industrial society - a
in the list of 104 countriesorderedaccord- can fall from its currentrateof over 30 per 'knowledge' based economy. Such opti-
cent to just over 5 per cent [Deepak Lal, mism is perhaps largely based on the recent
ing to the rate of growth of income per
capita [Raj Krishna 1984:62-63). The Financial Times, October 8, 1999]. spurtin software exports and the perceived
Now, consider the discourse, one and half These views reflect the dramaticchange potential of trade in services such as in-
decades later. Intervening in a popular in the professional perception about the formation technology, communications
debate on the T N Indian economic performance and pros- and. entertainment.
development policy,
Srinivasan illustrated his arguments with pects - especially in the internationalcircles The foregoing views and perceptions
an assessment of India's recent economic - over the last two decades., Vijay Kelkar have considerable significance, both for
also echoed a similar view recently: "FThere the current policy initiatives in India, as
performance:
is, in fact, some evidence that during the well as for the'development discourse in
During 1980-90, the rate of growth in- nineties the
creasedto 5.8 per cent and was exceeded growth rate in India has shown general. Therefore, there is a need for a
some acceleration". He furthercontended, careful examination of these propositions,
by only eight out of 113 countries.During
1990-98, the growthratefurtherincreased "As we enterthe new century, the economy both for their analytical soundness and
to 6.1 per cent and was exceeded by only stands at the crossroads. It can take either empirical validity.
9 out of 131 countries...Only after the the 'business as usual' road which means Whether the reforms - as 'defined by
growthacceleratedin the 1980s, was there continued poverty and the low-growth trap stabilisation and structural adjustment
a significantdeclining trendin poverty, a or the high road to prosperity through programme, or as popularly called the

Economic and Political Weekly August 5, 2000 2831

Economic and Political Weekly, Vol. 35, No. 32 (Aug. 5-11, 2000), pp. 2831-2839
'Washington Consensus' - result in a
superior economic performance has been
seriously questioned in the literature.
Dornbusch had warned a decade ago;
"Stabilisation may be inevitable but is not
a ticket to prosperity...One should not
presume that the market automatically
solves the coordination problems..."
[Dornbusch 1990:42-43].
More recently, there has been consider-
able rethinking on the neo-liberal ortho-
doxy (Washington consensus) within the
mainstream economics.3 This is perhaps
best illustrated in the writings of Joseph
Stiglitz. According to him,
The goal of the Washington Consensus
was to provide a formula for creating a
vibrantprivate sector and stimulate eco-
nomic growth. In retrospect, the policy
recommendationswere highly risk-averse
-- they were based on the desire to avoid
worstdisasters.Althoughthe Washington
Consensus provided some of the founda-
tions for well functioning markets,it was
incompleteand sometimes even mislead-
ing IStiglitz 1998:30].
Empirically, there is little unambiguous
positive association between the reforms
and economic growth. The 1999 annual
reportof the World Bank OperationEvalu-
ation Department has reported some star-
tling facts. In its assessment of the World
Banklendingfor28 countriesbetween 1981
and 1997, the annual report came to the
followN;ingconcluisions.Toquote the report,
The facts of growthand poverty in the 28
countries between 1981 and 1997 are
sobering:
- In40 percentof thecountries,percapita
income eitherfailed to grow or shrank.
-- In 25 per cent, the shareof population
in absolute poverty increased.
- In23 percent,life expectancydeclined.
- In 54 per cent, the people experienced
stagnatingpercapitaincome,risingpov-
erty and declining life expectancy, or
a combination of these events.
- In 85 per cent, per capita income grew
I per cent a year or less in the 1990s.
- In 59 per-cent,gross savings as a per-
centageof GDP were low (less than 10
per cent) or declining.
- In 67 per cent, investment efficiency
was less than 10 per cent or declining.
These findingsconfirmthe view...that the
battleagainstpovertyis being lost andthat
business as usual will not accomplish the
objectivesof the developmentcommunity
[World Bank 2000:17].
In a careful assessment of the structural
adjustment in Latin America since 1980,
Agarwal and Sengupta (1999), conclude
2832
that there is no evidence of a positive of causationgoes from high initialincome
association between reforms and growth. inequality to high taxes and from large
In addition to growth and poverty, there redistributionsto low growth. An alterna-
is a considerable evidence of growing tive argumentis thattherichin veryunequal
societies have the political and economic
inequality among countries that have sys- resourcesto escape taxationby exiting the
tematically followed the reforms. Grow-
economy with capital flight or by tax
ing inter-regionaldisparities in China after evasion. Thus, demand for redistribution
market-oriented reforms were initiated in
policies with a vanishingtaxbase may lead
1978 is, by now, a well-accepted p'ropo- to large budget deficits.
sition [Tsuui 1996]. Inthe context of similar A second channel linking inequality and
reforms in the 1980s in Thailand, John macroeconomicperformancegoes through
Lewis and Devesh Kapur (1990) had political instability. Income inequality
warned of a growing rural-urbandivide. fosters social discontent and unrest. The
Quite apartfrom the question of how the associatedthreatsto propertyrights,policy
reforms affect income distribution, recent volatilityandgovernmentfragilitydepress
economic literature has witnessed a re- productive investment, promote capital
newed interest on the effects of growth on flightandultimatelyreducegrowth[Alisena
inequality, from a variety of analytical 1998:301].
perspectives. Empirically, it has been found that in the
OECD countries, in the post-war period,
Bringing Income Distribution economies with less unequal income dis-
Back In
tribution have performed better.5 Simi-
In the Keynesian literature,income distri- larly, comparing the performance of the
bution is central to the pace and pattern east Asian economies with those of Latin
of economic growth in terms of its impli- America, Jeffery Sachs contended, "...high
cations for aggregate demand. Within the income inequality...[In Latin America]
mainstream economic discourse, micro- contributes to intense political pressure for
economic arguments are increasingly macroeconomic policies to raise income
brought in to understand how greater of lower income groups, which in turn
equality is conducive to faster economic contributes to bad policy choices and weak
growth.4 Yet another strand in the recent economic performance" [Sachs 1989:9].
years, following the public choice theoretic Seen in this background,a neartotal lack
literature, has shown how income distri- of interest in how the gains of the improved
bution influences economic growth as it growth in India since the 1980s are dis-
affects voting behaviour in a democracy tributed is surprising.6 Perhaps, it is im-
[Tanzi andChu 1998]. In this genre of lite- plicitly believed that the problem of ab-
rature, there are several chains of causa- solute poverty is more acute in India, and
tion, in which initial level of inequality that a decline in it implies an improvement
affectseconomicoutcomes.Theseare perhaps in income distribution. Since there is a
best described in Alberto Alesina's words: widespread consensus on the positive
Several channels imply an inverse rela- effects of growth on poverty reduction
over the last quarter century or so, con-
tionship running from initial income in-
to
equality growth. A fiscal channel sug- cerns of income distribution seem to have
gests that income inequality creates a taken a back seat.
demandfor redistributivefiscal policy. In The brief discussion above on growth,
a medianvoter model, the key measureof reforms and inequality - both from ana-
inequalityis the level of income or wealth lytical andcomparativeeconomic perspec-
of the medianvoterrelativeto the average. tives - provides a meaningful background
The poorer the median voter, relative to to formulate working hypotheses to exam-
the average, the larger the amount of re- ine the recent Indian
experience. In light
distributionthat a majorityof voters will of the we will examine the
foregoing,
favour. More generally, a large, impover-
ished fraction of the population creates - following propositions:
Has GDP, or any of its major compo-
political pressure for redistributivepoli-
cies. The pressuremaytakedifferentforms nents, shown a statistically valid change
in different institutionalcontexts but it is in its growth rate since 1991?
both democracies and - How valid is the postulated association
generally feltin
dictatorships.In fact, in orderto survive, between economic growth, poverty and
even dictatorscannot totally ignore popu- the policy reform. Does the inverse re-
lar demands.Redistributivefiscal polices lationship between growth and poverty
lead to high levels of taxation, which reductionhold at the disagregatedlevel?
negatively affects growth.Thus, the chain - How has the improved growth ratesince
Economic and Political Weekly August 5, 2000
 the 1980s been distributed across rural private corporate sector since the mid- the primary sector as well, at 3.2 per cent
and urbanareas, between the organised 1980s, as systematic accountsfor this sector per year.
and unorganised sectors, across the are available. Though modest, there is a statistically
major Indian states, and between the In analysing growth rates, we use semi- significant slow down in the growth rate
factors of production in the private log trend analysis; and employ a dummy of the secondary sector, after 1991-92.
corporate sector? variable to test for statistically significant Thus, the widely held view that there has
breaks in the trends. We use as long a time been acceleration in the GDP growth rate
II series as possible to minimise problems since the introduction of the reforms is not
DataSourcesandTheir caused by the omitted years. Where data statistically correct. The same holds true
Limitations are available for discrete time points, we for the tertiary sector as well. However,
have computed implicit growth rates using since the secondary sector growth rate has
This study mostly uses the National compound growth rate principle. modestly slowed, the tertiary sector has
Accounts Statistics (NAS). Recently a new become the fastest growing sector in the
series of NAS has been introduced with III 1990s - but not because its growth rate
the base year 1993-94, replacing the earlier Findings has improved in that decade, statistically
one with the base year 1980-81. As the new significantly.
series are available only from 1993-94, Trends in GDP A furtherdisaggregationof GDP suggests
and the old series stopped with 1996-97, Table *1(i) provides estimated growth thatnone of the industrygroup (at one digit
we had to use a chain index to convert the rates for GDP, and'its main sectors, be- level) show a statistically significant im-
data for the recent years to the old base tween 1980-81 and 1999-2000; and tests provement its growth rateafterthe reforms.
year. To this extent, the findings report of significance of the dummy variable. However, (i) total manufacturing and
here are tentative. As the data for 1998-99 Evidently, there is no statistically valid (ii) public, social and personal services -
and 1999-2000 are based on quick and break in the series at 1991, implying that, constituting around 30 per cent of GDP
revised estimates respectively, they are so far, on a trendbasis, GDP has continued in the 1990s - have witnessed a statistically
subject to revision. Hence our growth to grow since 1991-92 at the same rate as significant slow down since 1991-92.
estimates are tentative on this count also. it did during the previous decade - at
Growth and Poverty Reduction
State domestic product (SDP) data, 5.7 per cent per year.8 This result holds,
though available in time series, have many even when the year 1991-92 is excluded. Figure 1, describes the official estimates
limitations for comparability across states There is no change in the trend growth of poverty levels (right-handscale) and the
[Nagaraj 1998]. Planning Commission rate between the 1980s and the 1990s for absolute number of persons below the
computes 'comparable estimates' of SDP Table 1(i): Trend Growth Rate of GDP and Its Principal Sectors, 1980-81 to 1999-2000
that are used for the finance commission
(Per cent per year)
awards.7 Apparently, these estimates,
Sector 1980-81 to 1980-81 to DummyVariable
though comparable across states, are not 1990-91 1999-2000 Sign Significance
comparable over time. Therefore, in prin-
3.4 3.2 - Not significant
ciple, it is difficult to be sure, which series Primary
7.0 6.8 - Significant**
is superior. Thus, it would be useful to Secondary
Tertiary 6.7 7.1 - Not significant
check if the two series give similar results. GDP 5.6 5.7 - Notsignificant
However, such a question will remain GDP# 5.6 6.2 + Notsignificant
hypothetical,as the 'comparableestimates' Notes: Datafor 1999-2000 representsthe revised estimates, released in June 2000.
are not made public. # Excluding1991-92.
Data on poverty and employment are ** Statisticallysignificantat 99 per cent confidence interval.
Source: NAS, variousissues, and the officialpress releases.
based on the widely used five-yearly sur-
veys conducted by the NSS. We avoided Table 1 (ii): GDP Growth Rates - Disaggregated Trends, 1980-81 to 1999-2000
using the results based on the yearly 'thin (Per cent per year)
sample' surveys, which are found to have Industry(1-digitNIC) 1980-81 to 1980-81 to DummyVariable
a large variance, and hence unreliable. We 1890-91 1999-2000 Sign Significance
have followed the official definition of - Notsignificant
1 Agricultureand allied 3.1 3.1
poverty and used the head count ratio. 2 Mining 7.7 5.8 - Notsignificant
Since the unorganised sector accounts 3 Manufacturing 7.4 7.0 Significant**
3.1 Reg Mfg 8.3 7.7 - Significant
for over 60 per cent of NDP and over 90 6.1 5.8 -
3.2 Unregd Mfg Significant
per cent of workforce, 'mixed income' 4 Electricity,gas and water 8.9 8.3 + Notsignificant
forms a large share of India's national 5 Construction 4.6 5.1 + Notsignificant
6 Trade,hotel and restaurent 6.1 7.3 -Not significant
income. As mixed income is a composite 7 Transport,communication 7.3 6.2 + Not significant
of wage income and property income, it 7.1 Railways 4.1 3.4 - Not Significant
is difficult to study factor incomes system- 8 Financeand real estate 7.4 8.1 + Notsignificant
8.1 Bankingand Insurance 13.0 13.1t + Notsignificant
atically. Therefore, we examine the distri- 9 Services 6.5 6.2 - Significant
bution of income across broad structural 9.1 Publicadminand defense 7.7 6.2 - Significant
GDP 5.6 5.7 - Notsignificant
categories like rural and urban, organised
and unorganised and across regions. t - These estimates are forthe period, 1980-81 to 1997-98, based on the NAS.
However, we study factor incomes in the Source: NAS, EconomicSurveys, variousissues, and the officialpress releases.

Economic and Political Weekly August 5, 2000 2833

 Figure 1: Poverty in India, 1973-74 to 1993-94 Figure 2: Poverty Ratio
335 .. ..... 60 78
76-
330 -50
0 74-
325 o 72-
E 320- 40 0
70 -
0
315 - 30 2 68-
I 310 - .66-
20
- .64
o 305 _ 62 -
z 300 60
295 - ----0 58
1973-74 1977-78 1983 1987-88 1993-94 1972-73 1983 1993-94
Year Year
Q Number Q Poverty Ratio D Poverty ratio

povertyline (left-handscale) since 1973-74,
for all-India combined for rural and urban
areas (Economic Survey, 1998-99). It
shows that the proportion of population
living in poverty has steadily come down
- from55 percent in 1973-74, to 36 per cent
in 1993-94. Evidently, the widely believed
poverty reduction started in the 1970s,
quite a few yearsbefore the economy got on
to the higher growth path after 1980-81.
Thus, Srinivasan's propositions that pov-
erty began to decline only after the growth
rate improved and, that the growth accel-
erated in response to the reforms in 1991
- as we have seen above - are not sustainable.
Admittedly, the official estimates for
all-India do suggest an inverse relation-
ship between growth and poverty, at least
since the 1980s. But does it hold across
the states? To find it out, we estimated two
kind of correlation: one, between the
levels, and two, between the growth rates.
This we did for the years since 1973-74
across 13 major states for which data are
available - 5 for the levels, and 4 for the
growth rates. There is an unambiguous,
statistically significant, inverse relation-
ship between per capita SDP and levels
of poverty across the states, for all the years
(Table 2 (i)). But, no such relationship was
found between growth in per capita SDP
and change in poverty for all the four
periods (Table 2 (ii)). This is true, both
with simple correlationcoefficient, as well
as with the rank correlation coefficient.
Thus, our finding provides a basis to
question the widely believed virtuous
association between output growth and
poverty reduction at a disagregated level.
However, since the bulk of poverty is
in ruralareas, with agriculture as the main
source of livelihood, we estimated the
association between growth in SDP per
capita in the primary sector and poverty
reduction in rural India across the major
Indian states (Table 2 (iii)). The associa-
tion is negative and statistically significant
in only one out of two cases. Thus, it seems
reasonable to infer that the suggested and other complementary items, and
inverse relationship between primary sec- (ii) an increase in 'overhead' cost of
tor growth and poverty reduction in rural acquiring the same level of nutrition.
India is at best a weak one.9 In other words, changes in the cropping
As officially reported, if poverty has pattern and the institutional setting in
indeed declined by about 20 per cent in rural India seem to have wiped out the
the two-decades after 1973-74, it would be potential benefits of improved - albeit
reasonableto expect a steady improvement modest - average consumption growth
in average per capita consumption, espe- in value terms.
cially of the bottom half of the population. Thus, when measured in terms of nutri-
Expectedly, as Suryanarayana(2000) has tional status there is, in fact, a definite
shown, the monthlypercapita consumption evidence of an increase in poverty in India
expenditure in ruralIndia has increased by (Figure 2). The proportion of the rural
32 per cent during the two decades, from population not getting adequate nutrition
the level of Rs 18.40 in 1973-74.
Table 2 (i): Correlation between Levels of
However, on a closer examination, the Poverty and Per Capita SDP across
whole process largely appears a statistical Major Indian States
mirage. If one takes a longer period since (No of observations= 14)
1960, as Suryanarayanahas documented, Year SimpleCorrelation RankCorrelation
there was a drop of about 20 per cent in Coefficient Coefficient
the average consumption during 1960-65. 1973-74 -0.683* -0.535*
And, it took over a decade (ending in 1977-78 -0.525* -0.341
1977-78) to recover this consumption loss. 1983 -0.722* -0.605*
1987-88 -0.702* -0.627*
Nevertheless, during the subsequent 16 1993-94 -0.596* -0.682*
year period,between 1977-78 and 1993-94,
the average consumption grew annually at *Statisticallysignificantat 95 per cent confidence
level.
0.9 per cent. More significant, the average
for the bottom half of rural population Table 2 (ii): Correlation between Growth
increasedannuallyat 1.5 percent. 0Though in Per Capita SDP and Change in Poverty
modest, these trends indeed suggest a Level across Major Indian States
(No of observations= 1.3)
process of growth with redistribution in
rural India. Change Over Simple Rank
the Years Correlation Correlation
But the growth in per capita consump-
Coefficient Coefficient
tion did not result in any improvement in
the nutritional status of the poor, mainly 1977-78 over 1973-74 -0.043 -0.007
1983 over 1977-78 -0.254 -0.118
for the following reasons.
1987-88 over 1983 -0.493 -0.350
- Since the 1970s, to acquire the same 1993-94 over 1987-88 -0.493 -0.484
level of nutrition, the poor had to sub-
Source: EPWRF(1998),EconomicSurvey(1998-99)
stitute expensive cereal like rice and
wheat forjowar, bajraand other millets Table 2 (iii): Correlation between Growth
whose production has fallen sharply in in Per Capita SDP in Primary Sector and
per capita terms. Change in Rural Poverty Level across
- The decline in the institution of perma- Major Indian States
(No of observations= 14)
nent farm servants and an increase in
casualisationof ruralworkforceresulted Change Over Simple Rank
the Years Correlation Correlation
in monetisation of the rural economy.
This required (i) a 'diversification' of 1987-88 over 1983 -0.738* -0.654*
1993-94 over 1987-88 - 0.273 -0.375
consumption of the poor to include fuel

Economic and Political Weekly August 5, 2000 2835

 Figure 3: Ratio of Rural-Urban Per a sustained growth in per capita income
Capital Income for nearly two decades since 1980-81, there
44 - ...........-........
has been no real improvement in the
'a 43 nutritional status of the poor. Intuitively,
8o42- one could arguethata large-scalesubsidised
co41 food distribution could have, in principle,
40--
improved the nutritional status. In the
absence of such a programme,perhapsone
39 should look at how the labour market has
1970-71
1980-81 1993-94
Years performed, since it is only through gainful
E Ratioof rural-urban
per capita income employment on a large scale that demand
for food could go up, and thus improve
Figure 4: Ratio of Unorganised to the nutritional status of the poor. As Amit
Organised Sector NDP Per Capita Bhaduri rightly reminded us,
20 It is throughthe labour marketthat both
the stimulus to economic growth and the
process of social justice could largely
operate' And, the extent of increase in
12* ... gainfulemploymentopportunitiesprovides
thecrucialbridgebetweeneconomicgrowth
10
and efficiency on the one hand and social
a. 8
justice on the other...Economicreforms,
6
4 no matterlabelled 'capitalistor socialist'
2 - areboundto falterwithoutenoughpopular
support,unless they meet this latter test"
1970-71
1980-81 1993-94 [Bhaduri 1996:15].
Years
2 Ratioof unorganisedto organised sector NDP Trends in Employment
percapita
Since the incidence of poverty and
Figure 5: Coefficient of Variation of unemployment as highly correlated, one
SDP Per Capita would expect that if poverty has really
50 declined, then it would have reduced
40 unemployment andunderemployment.But
we find is that since 1973-74, there has
been an economywide decline in employ-
ment elasticity of output (Table 3).11 For
. 20
instance, the elasticity for the economy as
10- a whole has declined from 0.61 between
oI
0 1972-73 and 1977-78, to 0.47 between
1987-88 and 1993-94. The fall is more
0 C i)
_ I"r- c(D O Co
O COa) ea ) a>05 0 C
a) pronounced in the secondary and tertiary
sectors. Although there has been a modest
Yearending
- Coefficientof variationof SDP per capita decline in the proportion of population in
agriculture since the 1970s, and there has
has gone up by 10 percentage points from been some diversification of rural
65 per cent in two decades after 1972-73. workforce into non-farm activities espe-
Admittedly, a nutrition-based measure cially in the 1980s, there is no evidence
of poverty has limitations [Lipton and of a sustained reduction in unemployment
Ravallion 1995]. But considering the prob- levels, however measured [Ghose 1999]. 12
lems of measurement when changes in the
Table 3: Employment Elasticity of Output, by Industry
ruraleconomy and the cereal output mix
significantly affect consumption patterns, 1-DigitIndustryGroup 1977-78 Over
it may nevertheless be valuable to know 1972-73
how a nutrition-basedpoverty measure has 1 Agriculture 0.54
2 Mining 0.95
performed.Therefore, a simple yet robust 3 Manufacturing 1.05
nutritionbased measure perhaps has some 4 Electricity 1.67
merit. This is particularly so, since food 5 Construction 0.35
still accounts for about 80 per cent of the 6 Transport,storage and comm. 0.76
7 Trade,hotel and restaurants
consumption basket of the bottom half of 8 Services 0.80
the rural population. 8.1 Services includingtrade
If the above finding is valid, then the 9 Total 0.61
question arises, how is it that in spite of Source:Bhalla(1997:217).
2836 Economic and Political Weekly
On the contrary,there is a distinct deterio-
ration in the quality of employment. Be-
tween 1977-78 and 1993-94, the share of
- the organised sector in total workforce
declined from 8.7 per cent to 8.1 per cent;
- wage employment in the unorganised
sectorwentupfrom6.6 percentto7per cent;
- self-employed in total work force de-
clined from 56.5 per cent to 51.7 per
cent; and,
- casual wage employment went up from
28.2 per cent to 33.2 per cent.
Some of these changes, in principle, could
have improved labour marketflexibility.13
However, they could have been equally
responsible for the changes in the level and
composition of aggregate demand that
could have adversely affected the con-
sumption growth of the unemployed.14 If
the suggested implications for the labour
market have any value, then the observed
growth process is likely to have been
inequalising. In other words, since the
improved growth since the 1980s did not
result in a proportionate increase in em-
ployment (and poverty reduction), it is
very likely that the growth has helped only
those persons, regions, or segments of the
economy thatarealreadyemployed orbetter
off. To test this proposition, we now look
at some dimensions of income distribution.
Trends in Income Distribution
As in most developing economies, there
is no information on personal income
distribution since over 9/10th of the
workforce is in the unorganised sector
where the majority of the population is
self-employed. As a proxy, the consump-
tion distribution is widely used. As noted
earlier, there has been a modest improve-
ment in the per capita consumption of the
bottom half in rural India in value terms,
since 1977-78. But it has not improved
their nutritional status mainly as they have
been compelled to consume costlier cereal
like wheat and rice, since the output of
inferior cereals has fallen sharply.
1983 Over 1987-88 Over 1993-94 Over
1977-78 1983 1987-88
0.49 0.26 0.54
0.67 0.81 0.36
0.68 0.35 0.39
0.74 0.74 0.53
1.00 3.43 0.01
0.92 0.39 0.62
0.76 0.59
0.90 0.52 0.68
0.39 0.76
0.55 0.32 0.47
August 5, 2000
 Figure 6: Per Capita SDP of Top and Botton Three States
5.4 - .-
x
v
c 4.8
o no
4.6-
0
_J
4.4
4.2 I I
cO o c) I-O Cc\J
CC OD OD CD c a)
o C C) O)
a) a)
Year
-- Average of top 3 states -- Average of bottom 3 states
However, there is evidence to suggest
that the distribution of income measured
in other structuraland institutional catego-
ries has deteriorated over the last two
decades. Figure 3 shows the rural (nomi-
nal) per capita income as a proportion of
urban per capita income. Evidently, the
ratio, which improved in favour of rural
India between 1970-71 and 1980-81,
deterioratedduringthe subsequent 14-year
period. The per capita rural income has
declined relative to urban per capita in-
come, from 42 per cent in 1980-81 to 38
per cent in 1993-94.15
A similar comparison of (nominal) per
capitaincome in the organisedandunorgan-
ised sectors is even more revealing (Figure
4). Over the decade since 1983, the per
capita NDP in the unorganised sector as
a proportionof that in the organised sector
has steadily gone down by 3 per cent. This
decline is notjust because of a faster growth
in employment in that sector, but its output
growth has also been slower.
Anotheraspect of income distribution in
a heterogeneous country like India is inter-
regional inequality. This inequality, mea-
sured by the coefficient of variation in per
capita SDP across the major states, has
nearly doubled in 25 years since 1970-71,
from about 0.2 to 0.4 (Figure 5). However,
more significantly, the divergence in per
capita income between the top three and
the bottomthreestates has widened sharply
since 1986-87 (Figure 6). In 1980-81, the
average per capita SDP of the bottom three
states (Bihar, Orissa and Assam) was 43
per cent of that of the top three states
(Punjab, Haryanaand Maharashtra).This
ratio fell to 27 per cent in 1995-96.
Moreover, in absolute terms, the per capita
SDP of the bottom three states was lower
in 1995-96, compared to 1988-89.16
Finally, we look at the distribution of
value added between wages and profits in
Economic and Political Weekly August 5, 2000
Figure 7: Wages and Profits in Private Corporate Sector
40
- 35
, 30- - - __--
_
> 25- -
0 20
- .
15 -*-^- M---^-^ ^ ------..
00
O ---.---,--,--,---I--.--.---.--.--.---.
S CD co
a) a) ) co cc co cc cc cc cc c' cc cc cc
) C)
Year
Share of wages in GVA - Share of PBT in GVA
the private corporate sector.17 Although crisis as well as the recent east Asian
this sector accounts for roughly about a contagion, without any slow down in the
tenth of GDP in the 1990s, it uses a much growth momentum.
greater share of domestic savings and It is widely believed - especially among
attracts a disproportionately large atten- the policy-makers and in the development
tion of policy-makers. As Figure 7 shows, profession - that India's economic perfor-
the share of wages in value added, in mance during the last quarter century or
currentprices, has fallen from about 35 per so has been a virtuous one: growth with
cent.in 1985-86 to about 20 per cent in poverty reduction.Moreover, the economic
1996-97. Duringthe same period, the profit reforms initiated since 1991 arebelieved to
share (measured by profit before tax, after have improved the growth rate further,
depreciation and interest) has gone up by without adversely affecting the trend re-
about 15 percentage points- roughly equal duction in poverty.The findings reportedin
to the fall in the wage share. Although such this study question these stylised views of
a simplistic comparison may have analyti- therecenteconomic performance.We found:
cal limitations, perhaps the sharp changes (1) There is, at least as yet, no statistically
in factor incomes, in just over a decade significant acceleration in India's growth
does indicate, however crudely, a distinct rate after 1991-92. This holds excluding
change in income distributionin favour of 1991-92 as well, the year of external
owners of capital, and against workers.18 payment crisis. Thus, on a trend basis,
In a highly diverse and heterogeneous GDP growth rate between 1991-92 and
economy like ours, perhaps one can docu- 1999-2000 is the same as it was between
ment many more dimensions of economic 1980-81 and 1990-91.
inequality. But perhapsour limited inquiry (2) The secondary sector growth rate
does suggest an unambiguous increase in witnessed a modest, statistically signifi-
inequality in Indian economy over the last cant, slow down after 1991-92.
two decades or so. (3) Contrary to the popular view, there is
no statistically significant acceleration in
IV the growth rate of the tertiarysector in the
Conclusions 1990s. On a trend basis, the primary and
the tertiarysectors, like GDP, have grown
What does all this add up to? Between at the same rates as in the 1980s.
1980-81 and 1999-2000, on a trend basis, (4) As the widely believed decline in
the domestic economy has grown annu- poverty started before the growth rate
ally, at about 5.7 per cent. The growth is improved in the 1980s - and the reforms
likely to have been faster in per capita in 1991 - there is no association between
terms in the 1990s, when the population the widely believed poverty reduction with
growth rate is said to have declined no- the improved growth rate, or with the
ticeably. The growth is laudable in a economic reforms.
comparative perspective as well, as (5) There is no statistically significant
Srinivasan noted. While debt and inflation association between the growthin percapita
ravaged large partsof the developing world income (SDP) andpoverty reductionacross
in the 1980s, India improved its growth the major India states. Further,the corre-
rate, with a greater stability. Moreover, lation between the growth in primarysector
India withstood the 1991 external payment SDP per capita and poverty reduction is
2837
found to be ambiguous. This evidence
contests the widely held view of an inverse
relationship between growth and poverty
reductionin India, at a disaggregated level.
(6) Moreover, the widely believed poverty
reduction is probably a statistical mirage.
The nutritional status - a contentious yet
robustmeasure of poverty - of the average
(as well as that of the bottom half) in rural
India has not improved at all in the entire
period since the early the 1970s. Recent
research cited, in fact, suggests that rural
poverty, measured in terms of nutritional
deficiency, has gone up by 10 percentage
points since 1972-73, from 65 per. cent.
The absence of an association between
growth and poverty reduction across the
major India states - contrary to much
popular and scholarly writing - is perhaps
not surprising (or intuitively understand-
able), if one looks at the labour market
performance. After all, if the growth is
poverty reducing, it should then, in prin-
ciple, work through a large-scale rural
employment creation, especially in poorer
states, as the unemployed and under-
employed form the bulk of the poor.
The study shows that while the growth
rate improved since 1980-81, there is no
sustainedreductionin unemploymentrates,
however measured.Although employment
growth roughly kept pace with the growth
in workforce - as has been widely docu-
mented - there has been an economywide
decline in employment elasticity of output
since the mid-1970s, suggesting that the
fruitsof highergrowth arelargely restricted
to those-already employed. Further, the
quality of employment has deteriorated
during the 16 years since 1977-78. For
instance, there has been (i) a declining the
share of regular wage employment in the
organised sector, (ii) an increase in the
share of wage employment in the
unorganised sector, (iii) a decline in self-
employment in rural India, and (iv) an
increase in casualisation of the workforce.
While these changes may have reduced
some of the widely perceived rigidities in
the industriallabour market, they have not
resulted in greater labour absorption - as
anticipated in the mainstream economic
theory. Considering these, the widely held
inverse association between growth and
poverty reduction in India, during the last
two decades or so, seems suspect.
In recentyears, attentionhas been mainly
focused on the widely believed virtuous
effects of growth on poverty reduction,
overlooking how the improved growth
since the 1980s is distributed.Such a neglect
2838
of concerns of equity is surprising, since
there has been a renewed interest in this
question in the recent economic discourse,
both from analytical and comparative
economic perspectives. There is an in-
creasing appreciation- both in theory and
experience - that greater equality is con-
ducive for growth. Further, recent evi-
dence suggests that the economic reforms
have, more often than not, accentuated
inequalities since the 1980s across the
developing world. It is with this concern
that we looked at some aspects of inequal-
ity in India over the last two decades. The
results, though limited to a few dimensions
of the problem, appear quite startling:
- The ratio of rural to urban (nominal)
per capita income, which improved
during the 1970s, deteriorated during
14 years after 1980-81.
- There is a secular deterioration in the
ratio of the unorganised to organised
(nominal) percapitaincome since 1982-
83.
- Since 1970, there has been a steady
increase in inequality across the major
states, as measured by the coefficient
of variation in SDP per capita.
- The ratio of per capita income of the
bottom three states, as a proportion of
that of the top three states, has widened
significantly since 1986-87. Further,the
level of per capita SDP of the bottom
three states is lower in 1995-96, com-
pared to seven years earlier.
- In the decade since the mid-1980s, in
the private corporate sector, the share
of (nominal) gross value added accru-
ing to labour has steadily declined by
about 15 per cent, while that of capital
(profit before tax, afterdepreciationand
interest) has gone up correspondingly.
These changes in income distributiondo
seem to indicate that the growing inequal-
ity - as in the case of poverty - represent
long-term tendencies in India. However, it
may be reasonable to infer thatthe increas-
ing market orientation of the economy
since the early the 1980s probably hastened
the process of widening of disparities.
If the above findings and inferences are
valid, then the gains of faster economic
growth since 1980-81 have been unequally
shared by different sections of the Indian
society. Growth has favoured urbanIndia,
organised sector, richerstates andproperty
owners - against rural India, unorgansed
sector, poorer states and wage earners. To
answer the question posed in the title of
this study: India's growth process during
the last two decades does not seem to have
Economic and Political Weekly
been a virtuous one - it has polarised the
economy. It has been a period of growth
with inequality. 9
Interestingly, such an inequalising pro-
cess of economic growth has occurred at
a time when there is a distinct diffusion
of political power towards the erstwhile
disenfranchsed classes and castes, which
broadly represent those left behind in
economic development.20To quote Pranab
Bardhan's recent assessment of the politi-
cal changes in India:
Along with political power drifting from
the centre to the regions, there is an as-
sociated drift towards the backwardand
lowercastes.This is clearlya sign of demo-
cratic progressionin an unequal society.
The numerical strength and increased
assertiveness of some of the historically
subordinatedgroups have compelled the
upperclasses andcastes to formdownward
alliances and broughtto the fore political
actors from backward communities and
regions.These playersmay notbe initiated
in the etiquette of parliamentarydemoc-
racyandsocial graceof modernity,but are
quite astute in pursuing the interests of
their constituencies (and, of course, their
own self interest) [Bardhan 1988:132].
If such an iniquitous growth process is not
corrected - and corrected quickly - Indian
society may have to pay a huge political
price for it. [nZ
Notes
[Following the usual disclaimers, I thank Errol
D'Souza, Veena Mishra, K V Ramaswamy,
C Rammanohar Reddy, S L Shetty and
M H Suryanarayana for their comments and
suggestions on earlier drafts of this study. Jayan
Jose Thomas's computational assistance is
gratefully acknowledged.]
1 Reviewingbookson Indiain the Tines Literary
Supplement, Jagdish Bhagwati wrote,
"...india's liberal and outward oriented
economic reforms, began in earnest after the
external-paymentcrisis of 1991, have been
accomplished by a sustained increase in a
growthratethathadremainedstuckat a drama-
tically low level of around3.5 per cent over
nearly three decades of illiberal and autarkic
policies. The 1980s, treated to only a small
dose of such reforms,were alreadyregistering
higher growth rates..." (March 31, p 28).
2 The meaning of the term, 'second generation
reforms' is far from clear, except to broadly
mean a continuation of the market-oriented
changesinpolicies initiatedearlier.Reportedly,
Sebastian Edwards coined the term in an
unpublishednote in 1996 to mean (i) central
bank independence, (ii) budgetaryconstraint
on all levels of government, (iii) creation of
an efficient civil service, (iv) improvementin
citizens' security, and (v) judicial reforms to
strengthen the rule of law.
3 This is best illustratedby the deliberationsof
a groupconstitutedby the United Nations "to
review some of the key questions that arise
in formulatingstrategies for development in
the contemporaryworld", in the forward by
Edmond Malinvaud and Amartya Sen
August 5, 2000
 [Malinvaudet al 1997:v].
4 For a fine set of recent essays on this issue,
see Solimano(1998). Also, see Osmani(1996)
for a lucid review of variousstrandsof thought
on the relationshipbetween economic growth
and income distribution.
5 There is a large literatureon this issue. See
Persson and Tabellini (1994).
6 One could contend that our emphasis on
inequalityis misplacedsince what mattersin
India is not so much inequality as much as
the need to focus on human development.
Since there has been a steady improvement
in human development, one could argue for
improving it further rather than focus on
inequality.Such a view can be contested both
on empirical and analytical considerations.
Empirically,improvementin humandevelop-
ment across the Indian states depend on
public expenditure,and not on GDP growth
[Duttaetal 19971.Analytically,whetherpublic
spending is used for improving human
development or for providing subsidised
services forthebetteroff would in turndepend
on income distribution.Therefore, inequality
would be centralto how public resourcesare
raised and the patternof their spending.
7 These estimates are not made public. Uma
DuttaRoy Chaudhary(1993) publishedthese
estimates for the years 1966-76 to 1985-86.
As the data for more recent years are not
available,we couldnotcrosscheckourfindings
with the another data source.
8 Unless mentioned otherwise, all estimates
reportedin this study arc at constant prices.
9 Ahluwalia's(1978)evidenceon therelationship
between ruralpoverty and agriculturegrowth
was ambiguous.Recently, Ravallionand Dutt
(1999)havesoughtto addresssomewhatsimilar
questions.However, they seem to have over-
looked simple yet robustassociations that we
have reported.
10 I gratefullyacknowledgeM H Suryanarayana
for providing these estimates.
I1 Thereis a sharpfall in the elasticities between
1983and 1987-88,andan improvementduring
the subsequent5-year period. This is due to
the severe droughtin 1987-88. However, this
does not vitiate the long-term decline in the
employment elasticities.
12 Undoubtedly, during this period, there has
been a significant growth in real wages in
agriculture,bothformenandwomen. Between
1977-78 and 1993-94, real wage rate for men
and women rose at 2.9 per cent and 3.1 per
cent peryearrespectively. However, since the
absolute level of wages are so low that wage
growth did not enable rural poor to acquire
adequateconsumptionto come out of poverty.
13 Robert Solow has recently argued that the
much discussed employment elasticity with
respect to labour market flexibility may be
modest.To quote him, "...the issue is whether
lower wages, on average, will more or less
automaticallyprovide new jobs...I think it is
fare to say that the measured responsiveness
has been disappointedly small" [Solow
1998:30-311.
14 Further, as Bhaduri explained, "...a more
flexible market permitting lower real (more
exactlyproduct)wage rateswouldinduceprofit
maximising firms to produce more through
greater employment, until the diminishing
marginalproductequals that lower wage rate.
This neo-classicalview in which the economic
transmission mechanism operates from the
'active' labourmarketto the 'passive' product
market may be contrasted against the
'Keynesian'view, which claims the opposite.
(Bhaduri 1996:15).
15 A decade ago, in a popularlecture, K N Raj
(1990) hintedatthegrowingrural-urban divide
- a caution that was largely ignored.
Economic and Political Weekly August 5, 2000
16 One of the reasons for it could be the sharp DevelopmentEconomics, 1990, World Bank,
fall in public investment - much of which Washington, DC.
is in infrastructure-- as we know it has a Dutta,Bhaskar,ManojPandaandWilima Wadhwa
dampening effect on increase in equality (1997): 'Human Development in India' in
(Nagarajetal 2000). Significanceof inadequate S Subramanian (ed), Measurement of
in
public infrastructureinvestment absolute Inequality and Poverty, Oxford University
declineof stateslikeBiharis beingincreasingly Press, Delhi.
appreciated among the policy-makers. Ghose,Ajit(1999): 'CurrentIssuesin Employment
Recently, Raja Chelliah (1999) advocated a Policy in India', Economic and Political
special development programmefor Bihar. Weekly, Vol 24, No 36, September 4-10.
17 This is based on CMIE data. Kelkar,Vijay(1999): 'India'sEmergingEconomic
18 Roughly during the same period, a similar Challenges', Economic and Political Weekly,
patternis evident in Europe as well. Oliver Vol 24, No 33, August 14-20.
Blanchard(1997) found a steady rise in profit Krishna, Raj (1984): 'Stagnant Parameters',
share in Europe in the 1980s. I am grateful Seminar, January.
to Kaushik Basu for this reference. Lewis, Johnand Devesh Kapur(1990): 'Updating
19 One may neverthelessdrawcomfort from the a Country Study: Thailand's Needs and
fact that the observed growth process is fol- Prospects in 1990s', World Development,
lowing the Kuznetsian inverted U. Alter- Vol 18, No 10, October.
natively, one may defend the process as being Lipton, Michael and Martin Ravallion (1995):
Paretosuperior.These argumentsare of ques- 'Poverty and Policy' in Jere Behrman and
tionablevalidity.Evidenceduringthe last half TN Srinivasan (eds), Handbook of
a centuryof developmentexperiencedoes not Development Economics, Vol 3B, North
supporttheKuznetshypothesisunequivocally. Holland, Amsterdam.
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ignoresinitialincome distribution.As Frances Strategy and Management of the Market
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