Document(s) 14 of 16

The book is concerned with the impact of growth on poverty reduction and inequality. The experience of India in the post-reform years of 1993–2000 – in the period covered by the 50th and the 55th rounds of the NSS – has been examined in detail against the backgrounds of trends in earlier periods. As in studies in other countries and periods, growth is the key factor in poverty reduction. The growth rate of mean household income (or expenditure) – which is the more proximate factor in poverty reduction – can be expected to be less than growth rate in GDP in periods of expansion since savings and investment typically increases in such periods. The other factor is the trend in inequality. An increase in inequality not only slows down the growth of income of the poorer groups, but it might have an adverse impact on growth itself. Quite apart from increasing social tensions, a growth pattern that exacerbates inter-regional, inter-sectoral as well as intra-regional inequality create bottlenecks which put a drag on sustainable growth.

The post-liberalization period in the nineties saw a continuation of the trend in poverty reduction – at about the same rate as the previous six-year period. It was accompanied by an increase in inequality, particularly in the urban sector. The evidence for the rising inequality came both from the data on household expenditure per capita (household welfare level) as well as those on wage earnings. This scenario is no different from that of China (although the magnitudes are much larger in China), and perhaps several other newly developing countries of Asia, though it differs markedly from the 'East Asia model' of growth with equity.

The increased inequality in the urban sector has exacerbated rural – urban dualism, which was already a feature of Indian development, in spite of the marked tilt of urban growth towards smaller towns. The share of the urban sector in poverty reduction, however, has gone up, not because of increased rural-to-urban shift of labor, but because of the higher rate of growth in this sector. An interesting difference was found between states which had a greater FDI inflow and the others – in spite of the generally low level of FDI in India compared with China, for example. FDI seems to have had two opposite effects on poverty reduction: it enhanced the process through higher growth, but seemed to have less of a 'trickle-down effect' as its impact was felt disproportionately on metro towns, Thus some states with higher than average FDI inflow appears in the list of high poverty decline states like Karanataka and Tamil Nadu, but others like Andhra Pradesh and Madhya Pradesh are not.

The higher return to education – particularly in college education – is a major cause of the rising urban inequality, but other features of the evolution of the employment structure are also of importance. Particularly significant is the extreme dualism in the manufacturing sector – with the striking phenomenon of the 'missing middle' which has been highlighted in this study as a distinguishing feature of Indian industrialization.

It is only to be expected that a big country like India has vast regional differences. Although the degree of inter-regional inequality is not as great as in China the evidence suggest a certain inertia and persistence of spatial differences. Labor-market outcomes are widely different – in terms of earnings levels, employment rates and female participation – across the major states and regions of India. The econometric exercise presented in Chapter 5 has a strong message that state-level GDP and economic growth has significant impact on employment rates, particularly of females. While higher incomes might lead to some withdrawal of females from labor-market activity, regions that can provide greater economic opportunities have significantly higher participation rates.

In Chapter 6 a novel attempt has been to demarcate India into seven 'broad regions' based on agro-ecological differences – an attempt which goes beyond the political demarcation of 'states' to more meaningful regions distinguished by factors which have a persistent effect on land productivity in particular. Our analysis of the components of the difference in mean consumption per household across regions, and in the trends over time, do bring out the quantitative importance of inter-regional differences in land productivity. It was seen that the low-poverty region of the North-West (region 1) was in fact losing in advantage over the other regions in terms of the growth of land productivity in the period 1983–1993, but that this equalizing trend has been reversed in the post-reform years of 1993–1999. Over the entire 1983–1999 period the maintenance of the leading role of region 1 in poverty reduction has not been entirely due to differential growth in land productivity (relative to the offsetting trend in land – man ratio). The growth of off-farm employment, both in the rural and the urban areas of this region, has contributed at least half of the differential growth in rural income (household expenditure) relative to regions 2 and 3. While the process of cumulative growth, in which agricultural growth seems to stimulate non-farm growth, is the dominant scenario in much of North India, somewhat different outcomes are observed in the South. The rural non-farm and urban sectors played a larger role in determining the level of rural incomes in the Southern regions in the 55th round. These sectors grew at a relatively high rate over our period not because of, but to compensate for, the low growth of land productivity.

Part III of the book turns to an examination of the issues in the major industrial sectors of the economy. Agricultural productivity, as we have just mentioned, holds the key to growth of incomes. The reform process has not gone very far in the agricultural sector, and it is a matter of concern that agricultural growth actually slowed down in the post-reform years. Major breakthroughs in this sector, like the green revolution of the sixties and the seventies, are not yet in the horizon. While accelerating growth in agriculture remains a key concern of policy, it would be wrong to assume that such growth would increase the gainful absorption of labor in agriculture. The evidence analyzed in Chapter 7 suggests that employment elasticity is higher in regions of low agricultural productivity, implying that the greater degree of labor absorption is really due to agriculture serving as the sponge for labor with no viable alternative. The role of high agricultural growth is to stimulate off-farm employment – both in the rural and the urban sectors – through the process of cumulative development. Our econometric work in this chapter confirms that this relationship of complementarily between agricultural productivity and off-farm employment (and incomes) for All-India, although, as we have mentioned, some land-poor regions in the South have succeeded in developing off-farm employment as an alternative to agriculture. One other important result from the chapter on agriculture is worth re-emphasizing. There is some disturbing evidence supporting the widespread concern that the post-reform years has seen a deterioration in the conditions of smaller and landless farmers relative to larger farmers. The warnings about 'distress inducing growth' given in the literature with respect to some cash crop oriented districts in Andhra Pradesh do seem to have some validity at the all-India level.

Employment growth outside agriculture in the Indian economy has been led in recent decades not by manufacturing but by the tertiary sector. This is a pattern historically observed in today's developed countries at a much later stage of their development. On the other hand, the relatively larger role of the tertiary sector in labor absorption in the nineties have been observed, not only in the more developed countries of Asia like Korea and Taiwan, but also in Thailand, Indonesia, Malaysia and the Philippines. But the other developing Asian counties, with the possible exception of the Philippines, have not shown the dominance of the tertiary sector in the absorption of labor in non-agriculture that India does. The pertinent question from the employment angle is to ask: is labor being pushed or pulled into the tertiary sector? Our detailed exploration of this issue in Chapter 9 shows that the marginal absorption of labor in the tertiary sector has been taking place at the two ends of the earnings spectrum – the first and the last quintiles.

Comparing, however, mean income per worker in the major sectors for a number of Asian countries we find that India is an outlier in terms of a higher productivity of the tertiary sector relative to the industrial. Furthermore the productive differential in favor of the tertiary sector in India seems to have increased between 1960 and 2002, while it has fallen in all the other comparator countries. It shows that service-sector growth in India has been productivity led and not employment led contradicting views of some economists that employment grew in services because this sector has been a repository of low income labor "pushed out" of agriculture. The heart of the employment problem in India would thus seem to be not an excess absorption of labor in the tertiary sector, but the low productivity of the manufacturing sector, and its persistence over time. It is this low performance of manufacturing which has prevented it from being the dynamic sector – playing a central role in productivity growth as well as the reallocation of labor as in other countries in the history of successful economic development. It has been argued that this disappointing role of the manufacturing sector can be traced, at least to a significant part, to the persistence of dualism in the sector. It is this which perpetuates the tremendous difference in relative labor productivity between the small and large size groups. The very low level of labor productivity in the manufacturing sector can be traced to this dualism.

Chapter 8 analyzed the various factors explaining the low employment elasticity in the high-productivity formal sector of manufacturing. Thus, in spite of a healthy growth of output in this sector, employment growth has been very low. Much of the labor in Indian manufacturing has been absorbed in the informal and the small-scale part of the modern manufacturing sector – the so-called DME sector employing between five and ten workers. It was shown in Chapter 10 that, quite apart from the informal sector, the distribution of employment in formal manufacturing is bi-polar with strong modes at the 6–9 and 500+ size groups, and a marked "missing middle". It was also seen that this is very much a peculiar phenomenon of Indian manufacturing development – and not seen in other comparator countries in Asia. The relatively low productivity of the Indian manufacturing sector – even if we look specifically at the formal part of it – and its lack of dynamism can be traced in a significant way to this problem. Historically this problem arose partly from past policies, particularly the way the policy of reservation for the small scale was handled, and the bias in education policies towards the development of tertiary education at the cost of more general development at the lower end of skills. The problem of the missing middle, however, continues even after reforms have mitigated the more adverse effects of these policies. Apart from the persistence of labor and capital market segmentation, trade and infrastructure links which have supported the older system are slow to change.

A relevant set of considerations on this point is the complexity and rigidity of labor legislation protecting workers in large factories. The low employment elasticity of the large-scale manufacturing sector (the so-called ASI sector), analyzed in detail in Chapter 8 demonstrates the prevalence of an effective tax on increasing the number of workers employed per unit of output. Chapter 11 examined the issue of labor legislation. While it is sometimes argued that this set of legislation cannot be that important for it affects only a small portion of India's total labor force, the pertinent point to emphasize is that it is a serious impediment to the entry of new workers into the protected sector, and ultimately is detrimental to the process of raising income levels of workers outside the protected sector. It is, however, recognized that reforms of labor laws in the formal sector is not likely to be acceptable politically unless more attention is paid to labor institutions that might affect the conditions of workers in India's vast informal sector. Recent initiatives on this point, which are very much in the forefront of public discussion in the country, are critically reviewed in the last chapter of the book.

Document(s) 14 of 16