Growth vs equity debate revisited

By Manoj Pant,ET Bureau

In the last month or so, there has been a fascinating debate on the internet (largely among non-resident Indian economists and some India watchers) about the age-old issue of growth vs equity. The inspiration seems to be a media statement by Prof Amartya Sen that in India we should end our "obsession with growth". Expectedly, the riposte comes from the 'Prof Jagdish Bhagwati group' (for want of a better term) stressing the importance of high growth.


There is some truth in Prof Sen's statement about "obsession with growth" as, for some reason, the ruling party managers trumpet the high growth rates of the last decade or so as their trump card whenever confronted with other issues like inflation, corruption, governance, etc. Yet, the interesting feature of the debate (which at the current level could continue for the next 50 years without any conclusion) is that none of the protagonists in this debate seem to have moved on to micro issues. Specifically, what are the sectoral implications of the debate and how does this impact on the future pace of economic reforms in India?


First, are growth and poverty in conflict? This seems absurd. It is difficult to argue that high growth of GDP (except in an exploitative non-democratic feudal society) has no impact on bringing at least some people above the poverty line. It is even more difficult to argue that, say, a 15% growth rate of GDP, ceteris paribus, will not automatically reduce poverty more than a 10% rate. After all, it is clear that with a 15% growth, government measures to redistribute income (say, via higher tax incomes) will meet with less political resistance. One has to be a communist to argue that a high growth rate does not matter.


What about growth and income distribution? Here the arguments are not so clear-cut. It is almost certain that a 15% growth rate will probably be accompanied by greater inequality of incomes than a 5% rate. This is simply because capabilities (except by in a rare utopian world) are unequally distributed and this is not only because of unequal educational opportunities. Any growing economy will find some sectors grow faster than others and hence, the incomes of those best suited to production in the faster growing sectors will grow proportionately more than in the other sectors. This is also independent of the political system so that even communist China has seen income inequalities (measured by the Gini coefficient or whatever) increase over the last decade or so.

So, what is the Indian problem? This lies in the fact that high growth rates do not seem to be impacting the agricultural sector. So, understanding why this is so is crucial to understanding why so many worthy economists are still debating the issue of growth vs equity. The issue of economic reforms in agriculture has both political and economic dimensions. It is interesting to note that industrial reforms find little resistance today. Since 1991, industry has gone through delicensing and greater exposure to foreign competition which even the Left does not want to reverse. Yet, any attempt at reform in agriculture is met with fierce opposition. This is mainly because legislators can blame the Centre for trade and industrial reforms. On the other hand, agriculture being a state subject, reforms in agriculture are a political hot potato. So deferring agricultural reforms is the safest political strategy. Economics may demand this, but who will bell the cat?


Look at some statistics on the agricultural sector. For one, the productivity in the major crop, cereals, has remained around 1,600-1,800 kg per hectare since about 1995 or so. Second, the average size of operational holdings in agriculture is around 1.3 ha. Barring states like Punjab and Rajasthan, the average size over the country lies between 0.5 and 2 ha. If one excludes the large landholdings, the average size would fall to around one ha. Hardly the kind of holdings on which major productivity changes can be built using better inputs and technology. At the same time, opening up of inter-state trade in foodgrains is still stuck in bureaucratise which is paradoxical, given that both retail and wholesale trade are largely in private hands. Similarly, many attempts to reform the state agricultural produce marketing committees (APMCs) to end the state monopoly in procurement have still not succeeded fully. What this failure does is to strengthen the monopoly of large traders in wholesale trade.


It is well known that the farming today is the least profitable occupation, particularly for small farmers. But in the absence of employment opportunities outside agriculture, the low productivity low per capita income trap will continue. With 50% of population still viewing agriculture as the principal source of income, these debates on growth vs equity don't take us anywhere.
(Source: Economic Times; 21 Jan, 2011)