Growth and Social Outcomes in India: Part Two

Op-ed in the Business Standard, New Delhi

July 26, 2012

Suppose this UPA (United Progressive Alliance) government had privileged growth as its preeminent economic policy objective. Would that strategy have compromised the attainment of social objectives? Yesterday's column suggested that, in the long run, the answer to that question is negative. But in the long run, politicians, even if they are not dead, are out of office. Can they afford to favor growth even over shorter horizons?

Evidence from the states—over the controversial reform period—can provide some guidance in answering that question. Consider state-level data on three key social outcomes—poverty, life expectancy, and inequality. To assess the impact over the reform period, the three figures (attached [pdf]) show how changes in each social outcome are related to changes in the standard of living, the latter measured as the growth rate of state per capita GDP. The changes are calculated between the early 1990s and late 2000s (for poverty), or the mid-2000s (for life expectancy and inequality), with the precise dates dictated by data availability.

The line in the charts depicts the average relationship between changes in social outcome and changes in income (the flatter the line, the less strong the association). All these figures depict simple associations, not causal relationships, but they are nonetheless suggestive.

Not surprisingly, the short-term relationships between growth and changes in the various social outcomes are less strong than the corresponding long-run relationships illustrated in yesterday's column. That is just a feature of economic data: It is easier to account for long-term patterns than short-term ones.

That said, however, the pattern of the long-run relationships seems to be replicated over the reform period: Broadly, across Indian states, higher growth over the reform period is associated with better social outcomes.

Consider poverty and life expectancy. States which grew faster during the reform period experienced larger reductions in poverty (figure 1). This association is strong—and, excluding either Delhi or Jammu and Kashmir, which are outliers—makes the poverty reduction-growth relationship even stronger. Thus, Andhra Pradesh (AP), which grew at 5.8 percent per capita between the early 1990s and late 2000s, reduced poverty by a staggering 24 percentage points. In contrast, Uttar Pradesh grew at 2.7 percent per capita and reduced poverty by only 11 percentage points. But the most striking exception is actually Himachal Pradesh, which reduced poverty by 25 percentage points even though its growth was not as high as AP, Tamil Nadu, or Kerala.

The association between growth and changes in life expectancy is weak but positive (figure 2). The figure shows that if one excludes a few outliers such as Karnataka and Orissa, there are clearly two groups. The first group comprises Uttar Pradesh, Bihar, and Madhya Pradesh which grew more slowly and posted smaller improvements in life expectancy. The second group comprises the traditionally fast-growing peninsular states (Tamil Nadu, Kerala, Gujarat, and so on) that grew faster and witnessed bigger improvements in life expectancy. Rajasthan is one of the unsung miracle performers on health achievements, registering over a 15-year period the biggest absolute (nearly six years) and proportionate (10 percent) gains in life expectancy.

An important point to note is that assessments of changes should take account of the convergence effect. For example, it is more difficult for states that start off healthier to make the same improvements as states whose residents are less healthy. For that reason, the achievement of the peninsular states is particularly impressive. Although they had less room for improvement, they still made greater progress than the others.

On inequality, the pattern over the short run corresponds to the longer run pattern (figure 3). Faster-growing states tended to become more unequal. Kerala stands out for being most un-Scandinavian: Not only did inequality rise sharply during the reform period (the Gini coefficient for consumption inequality increased by eight percentage points) but did so even more than it should have, reflected in how far Kerala is off the line. And, yet again, Himachal Pradesh over-performs: Despite growing rapidly, it posts a very small increase in inequality.

Thus, it seems clear that within India social achievement is positively associated with growth, both over shorter and longer horizons. The policy conclusion is that a government that pursues growth is and should be less vulnerable to the charge that it is neglecting social objectives. This conclusion is reinforced if the alternative of pursuing social objectives directly via additional government spending can have the extra costs of leading to leakage (as the experience with subsidies and the rural employment guarantee scheme shows) and of compromising the growth objective by aggravating macroeconomic risks. The UPA government is embracing the growth objective, albeit belatedly, but it can do so in the knowledge that growth and social objectives go hand in hand.

Beyond the policy implications, across-state (and across-region) comparisons show that India is endlessly fascinating as a crucible of experimentation and learning about policy, both when it produces general patterns and especially when it throws up exceptions and anomalies.

Supposedly reform-resistant Kerala has been one of the most dynamic states. The very same Kerala, touted as a Scandinavian arcadia, is also India's most unequal state and has experienced the greatest increase in inequality since 1991. Rajasthan, the archetypal BIMARU (Bihar, Madhya Pradesh, Rajasthan, and Uttar Pradesh) state, made the greatest strides in addressing bimari. And, least noticed of all, over the reform period, large, urbanized, coastal and trade-oriented states such as Tamil Nadu, Maharashtra, and Gujarat have been out-performed—against a broad metric that combines income and social outcomes—by tiny and overwhelmingly rural, landlocked, and hill-hobbled Himachal Pradesh. If Gujarat is India's China, and Kerala its Scandinavia, might Himachal be its Switzerland?

A more technical note [pdf] elaborates on this column.