As development inevitably creates both winners and losers, this generates, at least in the early stages, economic disparities in society. This is much in evidence in India today. Real income inequality is many times more than what official statistics reveal. Many economists theorise that the Gini co-efficient, the economists’ measure of inequality; is over 0.65 and among the highest in the world.
The economic results of Narendra Modi’s first term have been quite dismal. The Modi government abjectly failed on the job creation front and has been trying to fig leaf it with the spurious logic of Mudra loans picking up the slack, higher EPF enrolments and other huge exaggerations. The simple fact that the share of agriculture is now about 13 per cent of GDP and falling, while still being the source of sustenance for almost 60 per cent of the population reveals the stark reality. A vast section of India is being left behind even as India races to become a major global economy.
The realities are indeed stark. The savings/GDP ratio has been in a declining trend since 2012 and Mr Modi has so far been unable to reverse it. Consequently, the tax/GDP ratio and investment/GDP ratio have also been declining. The rate of economic growth has been suspect and all objective indicators point to it being padded up. The drivers of economic growth such as capital expenditure are dismal. Projects funded by banks have declined by over half since 2014 to less than `600 billion in 2018. Projects funded by the market have dropped to rock bottom. Subsequently, the manufacturing/GDP ratio is now at 15 per cent. Corporate profits/GDP ratio is now at a 15-year-old low at about 2.7 per cent. You cannot have adequate job creation if these are dipping. Declining rural labour wage indices testify to this. Low food prices testify to demand contraction and have added to farmers’ distress.
But yet Prime Minister Modi won the election hugely. In over 200 Lok Sabha constituencies, the BJP took more than 50 per cent of the votes cast. So what is happening here?
In 1973, Albert O. Hirschman, the celebrated University of California Berkeley economist, published The Changing Tolerance for Income Inequality in the Course of Economic Development, and with it the “Tunnel Effect” came to be an integral part of the sociologists’ and economists’ lexicon. In the paper, Hirschman argued: “In the early stages of development, when income inequality among different classes, sectors, and regions tends to rise, society’s tolerance for this inequality will be substantial. The reason people can tolerate this inequality is that they hope and expect that this disparity will fall at one day or another. However, if this disparity does not narrow, there comes a point when people will no longer endure it.”
He illustrated this by using the behaviour of car drivers in a two-lane tunnel enduring a traffic jam. When one lane starts moving, the drivers in the still stalled lane feel hopeful and wait patiently. But when their lane remains stalled for a long time, they lose their patience and try to jump the lane, and soon chaos ensues. We see this happen every day in our lives in India when people are quick to jump lanes and traffic chaos results.
It is very clear now that one lane has been moving and doing well in India. Indeed, so well that an Oxfam study revealed that that as much as 73 per cent of growth during the last five years accrued to just one per cent of the population. This does not mean it is just the tycoons of Mumbai and Delhi who are cornering the gains. The government now employs close to 25 million people, and these have now become a high-income enclave. The number of persons in the private and organised sector is about another 10 million. In all, this high-income enclave numbers not more than 175-200 million (using the thumb rule of five per family).
Much of the consumption we tend to laud is restricted to just these people. The challenge is now to expand this high wages enclave. This is easier said than done, when we realise that over four-fifths of the labour force is in the unorganised sector, and the vast majority of these are unskilled and uneducated. Income transfer schemes will only put many of these in the consumption loop, but without addressing the problem of low productivity that blights the Indian economy.
The only realistic solution is creating jobs for these millions and that can only come from labour-intensive sectors like construction of housing and rural infrastructure. For this, government capital expenditure needs to be raised dramatically. This is directly related to increasing the savings/GDP ratio. I would recommend that the PM give a special focus to critical ratios like taxation/GDP, capital expenditure/GDP, investment/GDP and income inequality.
Our problem gets even more compounded by the fact that this segment of India, where most of the growth is accruing, tends to live in urban areas and in certain regions. The in-country inequality is now a matter of grave concern. We are now witnessing huge in-country migrations. Earlier the migrations were to fill in labour shortages in states like Punjab and Haryana, where disproportionate recruitments into the military and paramilitary created rural labour shortages that got filled in by migration from Bihar, West Bengal and even Bangladesh. We are now witnessing migrations from eastern UP, Bihar, Odisha and the Northeast into South India, where the population growth has dramatically slowed down and ageing is becoming an issue to contend with. This is now causing considerable disquiet, now quite palpable in the social media chatter. This time it cannot be palmed off on “ghusbaitis”.
The migration from Bangladesh has incidentally become a focus of upper caste and class Hindu ire. Thus, when we hear the RSS, BJP and their affiliates rage and rail against “ghusbaitis”, they are actually targeting Muslims. The irony now is that it is forecast that between 2025-30, the per capita income in Bangladesh might exceed India’s. This is also something we need to ponder over instead of just parroting the line that we are the fastest growing “major” economy.
One of the notable programmes of Modi Sarkar 1.0 was the Swachchh Bharat Abhiyan, to popularise toilet usage by embarking on a massive rural construction programme. But there is now increasing evidence that a majority of toilets have fallen into disuse due to a lack of sewage and water shortages. This is because there is no local government worth the name in the entire country. No local government usually means no local infrastructure for water supply and sanitation. I have been an early proponent of a nationwide water supply and sanitation programme, but I have always said that without local government, and that means decentralisation, these programmes will fail. Prime Minister Modi needs to make this a priority in his second term.
The job of leading India must easily be the toughest job in the world. Knowing where to start adds to the complexity. But the starkness of the issues makes this somewhat easier to discern. The focus now needs to expand to add jobs creation, reduction of income inequality to growth. One lane has been moving since 2000 when India entered the high-GDP growth trajectory. The patience of the stalled lane in the tunnel is now reaching the end of its endurance. The question is how much time does Prime Minister Narendra Modi have left to get the stalled lane moving?
The writer, a policy analyst studying economic and security issues, held senior positions in government and industry. He also specialises in the Chinese economy.
