India Vision 2020: Growth and Welfare

Introduction

   Elections are a few months away and the election battle has been joined.  Parties are formulating their manifestos and trying to refine a vision that they can present to the voters.  It is therefore timely for those of us with a national (as against party) perspective and some knowledge and experience of economic development, growth and governance, to put forward our views for the consideration of the contending parties.  In the first of a series of notes, we start by putting the critical importance of economic growth to people’s Welfare in historical perspective.

Social Welfare

History

 The welfare of the average Indian was about the same as the welfare of the average inhabitant of the World at the peak of the Pala (Northern) and Chola (Southern) empires (1000-1200). This was followed by a period of invasion, wars and political consolidation (Sultanate, Mughals), during which the real income of the average Indian fell to 80% of the average World inhabitant by 1820. The gap between the welfare of the average Indian and the World widened dramatically during colonial rule, reducing the average Indian to pathetic poverty by the time of Independence.  In 1950 the real income of the average Indian (per capita GDP at PPP) was reduced to a quarter (1/4^th) of that of the average inhabitant of the World. The British colonialists ensured through a combination of neglect and design, that the industrial revolution did not revolutionize India’s economy.  The fruits of the industrial revolution, which originated in Great Britain and propelled it to global super-power in 19^th century, were denied to India.[i]

Socialist Decline

      The gap continued to widen during the first 30 years of Independence, to reach its widest point of 85 per cent points in 1980.  During this period economic policy was driven by the ‘Indian version of socialism,’ sometimes incompletely referred to as “Fabian” or “Nehruvian Socialism”, as Shrimati Indira Gandhi contributed to its negative development from 1966 to 1977. This misplaced approach continued the Indian people’s descent into abject poverty, to 14.5% of World average.  In 1980s Mrs. Indira Gandhi abandoned her failed policies, accelerating India’s per capita income growth above the World average and began to close the Welfare gap.

Reforms and Catch UP

   The economic reforms and liberalization of the Indian economy, first in the 1980s and then further in the 1990s, has had unambiguous benefits for the Indian people.  The welfare of the average Indian had increased to about a third (1/3^rd) of that of the average World inhabitant by 2010.  The rate at which the welfare gap has been closing has accelerated over this period (1980 to 2010), with the rate of catch up during the 2000s being about three times that during the eighties.  The highest average 10 year growth rate of per capita GDP at PPP was 6.2% in decade 2002 to 2011. These facts contradict assertions based on selective use of comparator countries and time periods. However, this acceleration had within it the seeds of its own hubris. Because of widespread growth complacency and consequent mismanagement, growth collapsed in 2011 and the welfare gap has started widening again. Unless the new government formed after the election, takes decisive corrective action, the gap may continue to widen in 2014.

Social Indicators

It is very important to understand that it is this gap between our per capita GDP (at PPP) and the World, that, (a) categorizes us as a (relatively) poor country, (b) results in our having much greater ratios of poor and near-poor people than other countries, and (c) Is the primary cause of the gap between our social welfare indicators and those of better off countries. In 2012, Vietnam with a per capita GDP at PPP of 30% of the World average was two ranks below India at 32% while Pakistan with 24% of World average is 8 ranks below.  On the upper side are Philippines (37%), Indonesia (42%) and Sri Lanka (52%), still poor, but with their “Aam Admi” much better-off than ours.

Conclusion: Objective

The fundamental objective of any Indian government must be to close the welfare gap of the Indian people with the rest of the World, in the shortest possible time.  This objective is inseparable from the objective of sustaining fast growth. What is a realistic target to aim for by 2020-2025?  The next Indian government should aim to raise the per capita GDP level of India to 43% of global average by 2020 and 54% by 2025 (from 32% today). This will require a restoration of per capita growth to 6.5% within three years and a sustaining of this growth rate till 2025. This will generate economic opportunities and jobs for youth and begin to restore the welfare and dignity of the average Indian to the level of the average World inhabitant.  We will explore other elements of the broad vision in subsequent articles.

[i] Arvind Virmani, "Fall and Rise of India", Working paper No. WsWp 1/2013, October 2013 at https://sites.google.com/site/drarvindvirmani/growth or https://sites.google.com/site/drarvindvirmani/working-papers

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A version of this note appeared under the same title at:

http://blogs.economictimes.indiatimes.com/PolicyAnalysis/entry/india-vision-2020-growth-and-welfare.