CHALLENGES BEHIND INCLUSIVE GROWTH IN INDIA

Introduction
Inclusive growth entails responsible and sustainable creation as well as just distribution of both
wealth and welfare. Social cohesion and human dignity lie at its core. It requires extending
access to opportunities more widely; it is a key response to the rising inequalities undermining
the sustainability of the global market economy, growth and development.
Inclusive growth refers to the harmonious development of different industries; the sharing of
achievements in economic growth. However, Inclusive growth as per the literal meaning of the
two words refers to both the pace and the pattern of the economic growth. The idea that both
pace and pattern of growth are critical for achieving a high, sustainable growth record, as well
as poverty reduction, is consistent with findings in ‘Growth Report: Strategies for Sustained
Growth and Inclusive Development’ (Commission on Growth & Development, 2008).
Inclusive Growth approach adopts a longer term perspective and is concerned with sustained
growth. It focuses on ex-ante analysis of sources of, and constraints to sustained, high growth,
and not only on one group – the poor. The analysis focuses on ways to raise the pace of growth
by utilizing more fully parts of the labour force. The focus, here, is on productive employment
rather than on direct income redistribution, as a means of increasing incomes for excluded
groups.
IG has two mutually reinforcing strategic pillars:
1. Sustainable growth to unleash economic opportunities for those excluded from current
growth models, through creative enterprise and responsible leadership.
2. Inclusion to ensure the diffusion of opportunities, by way of investment in education, health
and infrastructure, through partnership between public & private sectors, and civil society.
As a Strategy of Economic Development
The ‘inclusive growth’ as a strategy of economic development received attention owing to a
rising concern that the benefits of economic growth have not been equitably shared. Growth is
inclusive when it creates economic opportunities along with ensuring equal access to them.
Apart from the issue of inequality, inclusive growth may also make poverty reduction efforts
more effective by creating productive economic opportunities for the poor and vulnerable
sections of the society. (Planning Commission, 2007)
Some Basic Challenges
The Indian economy is 12th largest economy in the world and the average annual growth rates
have exceeded 8% in last 5-6 years. Despite the sharp decline in proportion of Indians living in
poverty, more than one in four continue to live below the poverty line. Further, poverty varies
significantly across the country ranging from 5% to 46% and is concentrated in some regions and
social groups. The 11th Five year plan stresses on inclusive growth as a means to reduce poverty
and disparities across regions and communities. (UNDP, 2010)
The growth is far from inclusive. The Oxford English Dictionary gives four meanings to the
word ‘inclusive’, with the most appropriate for the purposes in this paper being, "not excluding
any section of society." We all know it, we see the beggars on the streets, about the biggest slums
in world and even closer home, we know of the cleaning lady who cannot afford treatment for
her ailing family, but still works for measly sums waiting for miracle to save her family.
Even the politicians know that the problem exists and that there needs to be some action, but they
will have none of it. They’re much too busy, travelling in their air conditioned luxury cars.
Political leadership in this country, as a class, scores very poorly on the scientific literacy scale.
They are mostly in their positions because of money and muscle power.
The ‘educated’ Indian is well aware of the condition of the poor, the apathy of the corrupt
politician and the flawed system, but is too self centred, busy in making the most of the ever
ballooning stock market to be bothered about changing the system or making an effort to be part
of the ‘dirty game’ that is politics. He will go to any extent to criticize the government, its
policies, policy makers and the fact that elections are fought on the wrong criteria of caste and
creed and that people vote for the same wrong reasons, but will do nothing more.

The social limits of Indian democratic politics

Does faster growth reduce poverty and generate the resources for progress on health and
education? The state of Gujarat has very high growth, in both industry and services and
agriculture, but little of this translates into poverty reduction or human development.
Of the eight richest people in the world four are Indian, but the irony still remains that there’s a
marginal farmer in the interior of Maharashtra, who is struggling to feed his five children, the
youngest of whom is a son, uneducated and unemployed, with four sisters, all of marriageable
age, whose marriage the farmer cannot afford. Try telling the farmer that the economy is growing
at a handsome 9% per annum, hardly consolation for the empty stomachs his children go to bed
with every night.1
Few would argue that the Indian economy is growing, salaries are going through the roof for
educated, there are jobs mushrooming in the IT hubs of Bangalore and Hyderabad, disposable
income for the ‘Call Centre’ crowd, that is egging on foray of several luxury goods never before

1
Malhi, Sanjot, “Challenges of equity & inclusive growth in India” Evian Group June 2008
seen in the nation, is becoming all the more accessible but the fact still remains, that the poor are
still poor even though the rich have become super rich.
There is a race amongst bureaucrats, politicians and entrepreneurs to enrich themselves at any
cost: corruption being a central tool in this game of enrichment. Corruption is definitely one of
the ills that prevent inclusive growth, rather, enabling the rich to get richer and keeping the poor
poor. Officials in India may be venal, but the private sector is also to be blamed for its
complicity.

Statements of prominent economists regarding inclusive growth2

Addressing the annual general meeting of the Confederation of Indian Industry (CII) earlier this
year, Prime Minister Manmohan Singh had urged Indian industry to make growth processes
both efficient and inclusive. He also draws up a ten-point social charter, to ensure that “our
growth process is both inclusive and broad-based.”
Finance Minister P. Chidambaram wants to take India from ‘a high rate of growth’ era to one
of ‘more inclusive growth.’ “Growth is necessary but not sufficient,” points out Chidambaram.
“Growth has to be inclusive. Growth with equity is the only road that India can take.” According
to him, growth is not an end in itself, but the means to an end – which is the participation of all
1.1 billion Indians in the growth story.
Montek Singh Ahluwalia, deputy chairman, Planning Commission, believes that if the reforms
process continues, India’s growth rate will touch the 10 per cent rate by the end of the 11th Five
Year plan (2012). “The Plan has a lot for those people living below poverty line, including
farmers and labourers,” he says. “We are confident that the growth process we are witnessing
today is more inclusive and will do more for the poor than in the past.”
Union Commerce and Industry Minister Kamal Nath warn that the high growth rates witnessed
in recent years would become unsustainable if growth is not inclusive and uniformly spread
across the country.
“Inclusive growth is necessary for sustainable development and equitable distribution of wealth
and prosperity,” says Sunil Kant Munjal, chairman, CII Mission for Inclusive Growth. The next
revolution that is waiting to happen in India is in agriculture, he says. This is a sector that poses
major challenges, but overcoming them would ensure all inclusive growth.

2
Rao, N.B. “Fostering Inclusive Growth” Published in Prospectus.
Review of literature
Deininger and Squire (1998) use land distribution as a proxy for asset
inequality and show that high asset inequality has a significant negative
effect on growth. He says asset inequality rather than income inequality may matter for
growth outcomes.
White and Anderson (2001) suggest that in a significant number of cases
(around a quarter) distribution has been as important as growth in explaining
the income growth of the poor. According to him, growth associated with
progressive distributional changes will have a greater impact in reducing
poverty than growth which leaves distribution unchanged.
Imbs and Wacziarg, (2003) shows that not a single country has been able
to achieve the significant income growth and poverty reduction without
structural transformation and economic diversification.
Kraay (2004) shows that growth in average incomes explain 70 percent of the variation in
poverty reduction (as measured by the headcount ratio) in the short run, and as much as 97
percent in the long run. Most of the remainder of the variation in poverty reduction is accounted
for by changes in the distribution, with only a negligible share attributed to differences in the
growth elasticity of poverty.
Lopez (2004) surveys the empirical literature and concludes that macroeconomic stability related
to inflation, as well as education and infrastructure related policies seem to be win-win or ‘super
pro-poor’ policies that have both a positive effect on growth and a negative effect on inequality.
He suggests that for a given inequality level the poorer the country is the more important is the
growth component in explaining poverty reduction.
Learning from a Decade of Reform (World Bank, 2005) concludes that although
the necessary fundamentals for growth, such as a stable macroeconomic
environment, enforcement of property rights, openness to trade, and
effective government, are key factors in the growth process, they are not the
whole story.
Prof. S. Mahendra Dev (2008) study the five elements of inclusive growth - Poverty,
agriculture, environment, employment and social inequalities and concludes that it is more
challenging to get inclusive growth for a country rather than to achieve 8% -10% GDP growth.
M.H. Suryanarayana (2008) says inclusion as an outcome on broad based scenario from the
three perspectives – production, income and consumption distribution.
Sambhit Mohapatre and K. Raghavendra (2010) have concludes that the growth in Indian
economy over long run can be achieved by the strong domestic focus rather than its dependence
on foreign trade. He focussed his study on backward states as well as backward castes.
Alistair Scrutton (2010) says that despite investing billions of amount on social schemes, there
is still a gap in income growth and health delivery in many states of India.
Arjan d. Hanni (Jan 2011) studies the relationship between labour migration and poverty in
India. He discusses general findings on link between poverty and internal labour migration. He
concluded that there is need to address the invisibility of migrant’s ad review common policy to
reduce the migration.

Need for inclusive growth

1. Inclusive Growth should be achieved in order to reduce poverty and regional disparities
and raise the economic growth of country.
2. Union Budgets and Five year plans provide for the inclusive growth.
3. The exclusion prevails in Indian Economy – Low agricultural growth, 25% people below
the poverty line, regional disparities, low employment growth and social inequalities etc.
4. To sustain and accelerate the course of poverty reduction.
5. For generating productive employment so as to increase the income of excluded groups.

Growth history of India’s GDP

Period Average GDP Growth Rate (%)
Ist 30 years after independence 3.5
1980-1990 5.4
1990-2000 4.4
2003-2010 7.6
2011 (estimated) 9.0
Source: Handbook of Statistics on Indian Economy (www.rbi.org/Publications)
World Bank, 2002
As from the above table it is clear that India’s GDP growth rate is increasing at a faster
pace in the lat decade due to various measures taken by the government. However, to sustain the
9% growth and progress to a double digit growth rate, inclusiveness of all the members of society
in India is required.

Constraints to inclusive growth

The Common Minimum Programme of the United Progressive Alliance (UPA) Government in
India has focused on inclusive growth, on making the benefits of growth and income
improvements available to all citizens. Yet, in the last few years, there is the worry that income
disparities are increasing. The growth of income disparity is a phenomenon that is being
witnessed in all countries, both developed and developing, but in a democracy like India, these
disparities are likely to lead to social unrest.
If the goal of inclusive growth is to be realized, there is urgent need for programmes that would
address the different concerns of the rural poor and the urban poor. The difference between the
rural poor and the urban poor is that for the latter, employment and wages are not a concern, it is
access to reasonably priced food, fuel and shelter. Failure to do so would make cities
uninhabitable, with pressures on water, transportation, fuel and power. Very little is being
planned in this direction.
For the growth process to be inclusive and sustainable, it is important that skills in demand are
matched by skills in supply, to ensure productive employment. In almost every sphere of activity,
construction, travel, hotel industry, manufacturing as well as IT, a shortage of skilled personnel
drives up labour and wage costs. It is important that relevant skill development takes place
quickly to ensure balanced growth.
Agriculture is the factor which also requires due concern. The rural income from agriculture is
going down even when the economy is growing at a faster rate of 9%. There is unequal access to
opportunities to improve agriculture productivity and to commercialise these activities.
Despite the progress in school enrolment rates in recent years access to education and vocational
training remains inequitable. Inflation, which is running today, affects the poor man the most
severally limiting the inclusiveness of growth.

Suggestions - What is required for inclusive growth?

We define inclusive growth as a process which entails sustainable and responsible creation — as
well as just distribution of – both wealth and welfare. The notion entails three main pillars that
should be mutually reinforcing:
1. Sustainable & responsible business where opportunities for those excluded from current
growth models are created and where self empowerment is generated.
2. Social progress and human well-being have to be a pivotal element of the model and should
be demonstrated by the right metrics.
3. Good Governance involves the provision and distribution of adequate public goods. It should
sustain and provide the necessary secure environment to protect livelihoods.
Enabling more inclusive growth requires improving access for the poor to participate in the
market either as entrepreneurs or employees, i.e. through economic opportunities. Education,
health and sanitation, ICT are all key enablers to more productive market participation.
There should be a clear role for government agencies, NGOs and development organizations to
help provide access to basic services, such as education, sanitation and infrastructure. Good
governance and political commitment is needed to achieve this. However, a major obstacle to the
poor moving out of poverty is a feeling of hopelessness that comes from social exclusion and
powerlessness.
There has to be action. Finding the means to inclusive growth will not be easy, but it must be
undertaken. There will inevitably be trial and error. In the case of India, where the Prime
Minister Manmohan Singh has made “inclusive growth” an explicit policy goal (Budget 2011), it
would seem appropriate that every government department and every major enterprise should
work out an inclusive growth strategic plan with specific measurable targets.
Inclusive growth can contribute considerably to reducing poverty and inequality and thereby also
contributing to erasing the vestiges of slavery and of ideological extremism.

References:
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Bank’s Approach to Poverty Reduction”. American Economic Review Papers and Proceeding,
87(2), pp 32-37.

Commission on Growth and Development (2008): Growth Report: Strategies for Sustained
Growth and Inclusive Development, the World Bank.

Dollar, D. and A. Kraay (2002): “Growth Is Good for the Poor.” Journal of Economic Growth 7,
pp. 195–225.

Deininger, K., and L. Squire (1996) “A New Data Set Measuring Income Inequality.” World
Bank Economic Review 10, pp. 565–91.

Dollar, D. and A. Kraay (2002) “Growth Is Good for the Poor.” Journal of Economic Growth 7,
pp. 195–225.

“Fostering Inclusive Growth” by N. B. Rao published in Prospectus.

Imbs, J. and R. Wacziarg (2003) “Stages of Diversification” American Economic Review 93(1),
pp. 63-86.

Khan, Muhammad Ehsan (ADB), Niimi, Yoko (ADB), “Constraints to Inclusive Growth’
Consultation workshop, Kathmandu (March, 2009).
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Mimeo. World Bank.

Mohapatre, Sambhit, Raghavendra, “Is Inclusive Growth necessary for survival of India
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Affairs, Vol. 2 No.1

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www.thaindian.com/newsportal/business/inclusive-growth-is-survival-imperative-for-indian-
economy

www.igidr.ac.in/pdf/publication/wp-2008-019.pdf

www.growthforall.org/category/inclusive-growth/