Times Now

Image not found
Current Issue
15th Aug 2011
Read Contents

Image not found
Suppliment IER
May-July 2011
Read Contents
The India Economy Review ISSUE DATE
15th Aug 2011
Click Me    Archives

Share |
The Road Map To Financial Inclusion
Sidharta Chatterjee, Independent Researcher, Economics    5/30/2011 1:11:12 AM

In his recent speech the IMF boss Dominique Strauss Kahn has raised some reservations as he seems to be quite puzzled by the nature of the post-recession growth — a growth characterized by joblessness where he feared that it might cost a lost generation. Well, this paradox seems to be quite unusual. Indeed, he has mentioned that the global recovery is not creating enough jobs for the younger generation. While the developing nations are now almost plagued by this dilemma of jobless growth, it becomes stickier for emerging economies particularly for those of the Arab States and in general for India, which is currently undergoing fast and radical changes with increasing rate of productivity following few generations of regime changes and policy-induced liberalizations. From a more agricultural depended economy, India has moved up the ladder to the forefront of a manufacturing and trading economy. The Indian economy posted on an average of 7-8% GDP growth from 2003-2007 where the per capita GDP growth has doubled from 3.7% in 1980-91 to 7.3%. Yet, the general consensus among some noted economists, including Amartya K. Sen, according to whom, this growth is not enough and chides those who excessively focus on growth. Indeed, there is some factual allegory about these premises. Despite having been inside the growth trajectory for the last couple of decades, the annual reduction in poverty level has just been -3.3% and if one is to go by some recent surveys by the IMF chills out that around 80% of India’s population lives under two dollars a day! Another study by Oxford University-group finds that around 410 million people in India live below the poverty line. As such, one may linger into one’s own mind and ask: Is this “growth enough”? If there is growth then why there remains so much “inequality”? These prominent economists, like Kahn, fears that this dark and gloomy side of growth may turn into some type of ‘growth fatigue’ if it fails to alleviate unemployment and poverty level at large- which is, perhaps, a common general outcome for which the true premises of growth is designed for. The visibility of this growth story would then, may dwindle into the tailbacks of unemployment and volcano of inequality. As Prof. Sen has pointed out in his seminal paper, that if such problems are not tackled in the short run, it may get worst in the long run. Thus, the impact of such high short run inadequacies cannot be justified even if there is high growth.
This background painting customarily calls for an alternative characterization of growth — in a sense, to broaden the perspectives of growth under the domain of economic theory. An “Inclusive Growth-Theory”, which answers queries related to unfairness and inequality in socio-economic issues. A growth which is aimed not just to fulfill the criteria of its definition, but to include in its definition, a certain level of embodiment and mellowness for the growing economy where the benefits of rising affluence levels are to be allocated efficiently among the masses. There has been a common notion that if there is growth, there are jobs, and reciprocally it is even factual that job creation supports growth. But it is even more realistic to note that growth is needed, which if not, would vilify all the notions of a dynamic economy. This has been echoed by the proponents of trickledown theory, who conceives that growth is all that is required. Thus so far, to generalize that inclusive growth is more than broad-based growth, which is a subset of economic growth basically a labor-intensive growth let us see how this fits our definition in the Indian context given that we have already been in the historical growth trajectory for the last two decades, but whether if it had been a real inclusive growth, might have had presented a scenario somewhat different than what it looks today.

Long-Term Growth Perspectives — Bhagwati’s View
Prof. Jagdish Bhagwati has painted a lucid picture about the long-term growth perspectives for the Indian economy by enumerating out several points of reference relevant to the current context. Although he has laid more stress on the “pure” growth aspects, it is imperative to point out several behavioral aspects of growth in the light of economic theory, which is perhaps, more highlighted by Prof. Sen. Post-independence, India evolved, although at a snail's pace, from a highly-protected and retracted economy to a more liberal one, from capital immobility to capital account liberalization that marked an end of depreciation era. Historical accounts of poverty show that the poverty level which peaked to near about 63% in 1953-54 and again to 65% in 1967-68 (Virmani, 2009) came down to 45% in the late nineties. This has been led by the innovation frontier lit by capital investment and mobility, product and process development and new investments in the old economy. In-fact, following crisis year (1990-91) reform initiation led to FDI and foreign investment liberalization aided by technology adoption and adaptation, that helped India’s growth trajectory change permanently, characterized by rising growth trend and rise in productivity. Growth accelerated on several frontiers as seen from increase in average income per capita, increase in average private consumption and doubling of per capita GDP growth from 3.7% in 1980-91 to 7.3% in 2003-2007. However, a deeper look into this paradigm is required for a thorough understanding of behavioral approach through “growth-inclusive growth” or managed growth.

Financial Inclusion: Push the Button Now
According to a recent Asian Development Bank (ADB) report, the Institution has set some strategic development objectives (SDOs) aimed at inclusive growth that would oversee growth strategies in the emerging economies. They have outlined three pillars of new strategy for 2020 as agendas in their comprehensive strategic development objectives: These are,
i.   Strategic growth
ii.  Inclusive growth, and
iii. Operational growth
The primary agenda thus, seems to circumvent around operationalizing inclusive growth (Klasen 2010) in the infrastructure, healthcare, transport, agriculture and the energy sectors, the sectors which are considered as implicitly contributing to the economic growth momentum. However, in need to operationalize such initiatives, the demand for investment capital remains high. The importance of such capital import can however, be justified since in emerging and fast developing countries, there occurs intense demand for funds to establish industry, infrastructure and transportation. Beyond this, in the long run, inclusive growth must endeavor the primary and higher education sectors by implementing youth oriented programs aimed at quality education to foster entrepreneurship and innovation for the future generations, which would in turn, may prove to be some kind of buffering; or, pre-emptive measures to counteract the cost of a severe recession, if any such strikes ever. The benefits of such inclusive growth can be accrued to;
i.   Decline in inequality
ii.  Increase in income among the poor and debt stricken
iii. Pro-poor growth programs to include those who are left out
Although the nature of economic growth has transformed in India, from being a predominantly agriculture driven growth in the 1950-1975, to service and manufacturing and trade driven growth onward 1992-2010, this would, nevertheless, throw open questions about India’s growth prospects and her commitment toward fast and inclusive growth in the coming years. Another challenge that remains of what in proper terms may be, in transforming India from an outsourcing to specialized manufacturing hub, since India have a large yet untapped base of talent pool still unexploited (Dey, 2010). This may well be possible through large-scale training and education of labor force to place them in jobs that they are suited for, to sustain the increased rate of productivity and hence, overall growth. In paper, however, India still lags behind China, South Korea and Singapore in investing in their people during economic boom times. It is thus evident that financial inclusion is the new buzzword and mantra for the new generation of policy makers who would provident on such essence to maximize welfare for its subjects.

Optimism Bias
The economic performance of India has a better shape as per statistics than her peer neighbors, excluding China, and the current drivers of economic growth seems to put her on the right track. From policy makers to “aam admi”, most of us are quite optimistic about the growth prospects that India presents to the world. According to a Citi research report Indian economy will reach a figure of nearly $85.97 trillion on PPP basis by 2050 as against the current size of $3.92 trillion. India is also expected to become the third largest nation in terms of GDP growth by 2040. But the current realities far outlay such grandeur prospects, and if India needs to achieve those targets and transform those visions into realities, several factors need to be highlighted at the present context. Most of us are well aware of the anti-poverty programs being initiated by the state functionaries, i.e., in terms of “Yoyonas”, and “Parisevas” through 5-year planned strategies1. But the present volatile global economic situation with periodic booms and busts with energy prices skyrocketing may act as a drag on demand due to high inflation and may further widen the gap of inequality, if ideological opinions are not left aside.

One may be able to foresee from the pace of innovation and technology growth of today how we may brace ahead of time in the next few decades. Along with that, there will also tend to be some real fierce competition among markets for resources which would virtually become too scarce, and hence, expensive. The world would perhaps have had exhausted some of her most valuable and potential resources by the mid of this century. However, the only resource that would be available widely and in common is, perhaps, information and knowledge; although, the cost of acquiring such information and processing of such may become highly competitive. In this regard, India needs to leverage her large talent pool to motivate and impart them with quality education and training to generate the largest pool of skilled professionals and thus, leave little room for any such “lost” generation, as feared by Kahn and others. This would only become reality in the realms of sustained inclusive growth (Chhibber et.al 2009) through continued policy reforms that would not only help sustain the current growth dynamics, but would further propel the growth engine. Suppose that even if Citibank’s assumptions are to go right, then, average income would need to grow by 3-4 folds in every ten years. Domestic consumption needs to be boosted given the fact that India has a large savings base, and thus needs to mobilize their savings into more productive investments. Favorable and ambient environment needs to be created to boost investment-led aggregate growth. In effect, investment growth rate has doubled in the last decade and there has been more participative roles being played by private consumption. The role of investment and savings are important, since these two are pillars of economic growth acceleration. This would contribute to demand since a rising income/investment would cause a rise in savings too, when considered that average income to double every 6-7 years.

However, there remain some existential threats or risks that may dampen the current mood if remedial measures are not sought for at this juncture. These may be summarized in the next sub-section.

Existential Risks
The primary form of existential threat or risks that may arise is due the enormity of such problems of inequality. This has two reasons; part political, and part economic. Political in the sense that policy reforms aimed at maximizing welfare lacked cognitive aspects, whilst, economic measures were aimed solely to promote growth, where, the inclusive aspects were long overlooked. Although India has virtually eliminated major famines since 1943 (Sen, 1997), perhaps, malnutrition has taken its place compounded by deplorable healthcare provisions in rural areas, particularly in most rural parts of India, where the gross family income above the subsistence minimum is still a luxury. Credibility for this stands on account of generalized apathy of the state functionaries in alleviating such miseries. Bhagwati clarifies that such inequality within states contributes much more toward national inequality, when compounded. Another aspect that compounds this problem is bureaucratic loopholes and the corruption woe. Actually, corruption further compounds the systematic crises of a public welfare state that tends to appreciate the erratic problems of inequality and social injustice.

Incidentally, a developing welfare state may face normatively a multitude of problems. The goal of policy makers in general, is to identify and remediate such problems. While unearthing some deeper challenges in terms of socio-politico dissensions entangling systematic crisis of class insurgency, it is evident that such dissensions were mounted and targeted toward the state machineries. Whether this is a crisis of fundamental nature requiring radical remedies or, crisis of structural nature calling for conservative treatment is, however, debatable. This is also evident from the fact that recent episodes of public dissensions in the form of mass movements against corruption runs the risk of spill-over effect of this danger into the deeper social masses that still remains sociably vulnerable and economically weak. In such parlor, policy makers should be able to diagnose fundamental disorders in state functionaries and prescribe appropriate structural remedies. Advocating such actions against symptoms of social inequality in advance as a preventive measure would do a lot good in the long run. What it calls for, is to oversee optimal wealth distribution and providing social security at the grass-root level. What is required is to identify the signals of these inculpated maladies as the socio-economic crisis of the state before it is too late. More stress should be laid on gender equality and empowerment of women (Murthi et.al., 1995) by encouraging greater participation (Boserup, 1970) in policy making thus, including them within the ship of inclusive growth with large-scale involvement. The malady of social injustice confining the female gender should be looked upon and dealt radically and this requires transparency in the social justice system. The society at large looks at law to fix unfair applications of law-which is but to offset corruption, and, this malady of corruption should be mooted out from its root altogether. Thus, according to Rachel E. Barkow, “When laws are fairly applied, legal cultures proliferate better”. One would expect that the last place there should be injustice is in the justice system. In India, there should not be a problem of enforcement of such since there is public mandate as well as non-interference policy of the government. These steps would invariably induce an ambient atmosphere for investment since it shall be noted here that if efficiency of investment allocation drops, it may reduce growth of the economy.

Meticulous Balance of Decision Making
It shall be born in mind that a welfare state is as much dependent on its subjects as its people on their government. This mutual interdependence is affirmative if, and only if, by virtue of trust and synergy that the state reforms and performs in the very best way that would empower its subjects with conscious thought and unconcealed endeavor to work amicably and harmoniously together for a greater cause. It would be pity for any democratic state to see that its vast body of productive resources, both men and women, lay idle and remain unproductive. In pretense, that would cripple the very art of governability and morality of the social forces. The word and deeds of the welfare state shall be and as always has been, to empower and equip its inhabitants to compete with equity in both domestic and international markets and redeem their share of respective fruits of hard labor and practice in a more equitable vanity. Meticulous balance in the choice of strategic decisiveness on the part of the policy makers would help overrun such tactical difficulties of optimal allocation of resources. Hence, there should be optimum balance between social expenditures and economic growth, yet, these two are interrelated. Share of national income spent on social services in the impoverished regions should be optimum so that it does not invite dissensions, and state functionaries should take frontal initiatives in development by charting a roadmap of inclusive growth as well, avoid allocations which are suboptimal with respect to welfare accrued.

Growth Vs Inclusive Growth: Which (is) Rational?
Before concluding this article, I would like to invoke the main theme of this subject-growth vis-a-vis inclusive growth; of, which is correct or at least rational. Well, the quandary is that, and there is at least a general consensus that, growth is important, not only, but vital, and essential. Yet, if growth does not benefit or outreach to those who are in need, indeed, it becomes elusively formless and insignificant. Consider an example, that a farmer sows her harvest of banana plantation and when they are fully grown, does not yield the fruit! And then consider if there is no growth, the farmer cannot even conceive to think about any fruits. Hence, growth creates expectations and but those expectations would be realistically true when such growth is managed, nurtured and supervised. In these times when business is globalized with continued integration, resource specific regions are likely to benefit from the development of secondary industries (Datta-Chaudhuri, 1967) and such regions would directly participate on the world map of resource-based pricing. This would also regiment the complementarities of labor shortage in a balanced-economy advocating platforms to alleviate income distribution problems. In this scenario, unemployment reduction is an explicit avenue of poverty alleviation in developing nations and one should find positive correlation between employment growth and literacy rate, investments and output, and income growth and industrial growth rate (Bhagawati, open economy, India or China). Prof. Bhagwati also stresses that neoliberal market reforms could further boost India’s growth rate while triggering down on competition between India and China. But here again, he stress more on the growth aspects, whilst in much analogous tune, Prof. Sen (1997) acknowledges the importance of stocks of educated manpower and how knowledge dissipation eradicates illiteracy-induced class struggles and class bitterness among the social masses and empowers them with inestimable boon. The reason why knowledge dissipation is of paramount importance is because of a sense of intellectual decency that it empowers in the mind of its learners (Houthakker, 1959) and also prevents the society from fractal degeneracy. Borrowing this concept from Prof. Sen (1997) who elucidated the benefits of equality, it can be enumerated that the greatest burden of a civil society is perhaps not ignorance, or even if, then yet, an empty stomach that cannot feed the needy brain and the brain cannot seek in proper terms remain guided to its path of rational morality if impoverished for too long.

Developmental Paradigms, Ideation and Implementation: Summary
In concluding this article, I may propose some common minimum agendas which may be summarized as;

  • Social protection of agricultural worker, education and information drive among them
  • Subsistence farming and income from its production
  • Fairness and equity in global trade through multilateral trade negotiations
  • Empower with inclusive education and training using mass media
  • Extend some degree of social security services and enhance health standards of all
  • End of political subjugation and deceitful acts
  • Use of violence to be justified pre-sense before it is applied, since more violence is required to suppress violence which compromises the social cost of enforcing equality
  • Raise the moral standards and rekindle inherent state of intellectuality through independence in research and development
  • Stop commercial exploitation and political zeal
  • Increase the role of media
  • From outsourcing to Hitech manufacturing hub
  • Reverse outsourcing, where, India will be in a position to outsource to other smaller economy, in a much two-sided self-supportive way.

Let not the “Lingua franca” of the less educated be the 3Ds (dissension, dissident and discord), but a sense of understanding with bestowed responsibility that, “they need to perform tasks that are necessary to the state’s existence”— literally, meaning the 3Cs (consent, conformist and consensus) of social and economic integration rather than political subjugation. Hence, an all encompassing inclusive growth in which the larger and the isolated find subsistence is the suo motto.
If these advocacies are well accommodated, we may remain optimistic about Citigroup’s projected target of achieving $85.47 trillion by 2050. 

1 The Eleventh Five Year Plan Strategy is ‘Towards Faster and More Inclusive Growth’. See M.H. Suryanarayana, IGIDR  “Inclusive growth: what is so exclusive about it?”

References and Additional Thinking

  • Mishra, P., and Parikh, A. (1992): Household consumer expenditure inequalities in India: A decomposition analysis, Review of Income and Wealth: Series 38, Number 2
  • Murthi, M., Guio Ann-Catherine and Dreze, J.; (1995); “Mortality, fertility and gender bias in India”; Population and Development Review, 21.
  • Sen, K. Amartya;(1997): “Hunger in the Contemporary World”, Discussion Paper DEDPS/8
  • Sen, K., Amartya; (1966); “Economic Approaches to Education and Manpower Planning”, The Indian Economic Review, Vol. 1, No. 1 New Series
  • Houthakker, H.S.; (1959): “Education and Income”. Review of Economics and Statistics, February 1959.
  • Datta-Chaudhuri, M.; (1967), “Regional specialization in metallurgical and machine-building industries in India in the framework of a planning model for optimum use of national resources”, The Indian Economic Review, Vol II, No.2 oct. 1967 New Series.
  • Virmani, A.;(2009) “India’s growth acceleration: The Third Phase”, OECD
  • Klasen Stephen; (2010), “Measuring and Monitoring Inclusive Growth: Multiple Definitions, Open Questions, and Some Constructive Proposals”, ADB Sustainable Development Working Paper Series.
  • Bhagwati, N. Jagdish; Anatomy and Consequences of Exchange Control Regimes, NBER Book
  • Ajay Chhibber and Thangavel Palanivel: (2009); “India Manages Global Crisis But Needs Serious Reforms for Sustained Inclusive Growth”, Stanford Center for International Development (SCID).
  •  Bhagwati, N. Jagdish and Srinivasan, T.N.: “Trade and Poverty in the Poor Countries”
  • Dey, Dipankar:(2010) “Inclusive Growth and Sustainable Development in India — A Case of Internal Colonialism”, Frontier Weekly Vol 42, No 52, July 11-17.
  • Esther Boserup: “Women’s role in Economic Development”, London, Allen and Unwin, 1970.
  • Barkow, E. Rachel: “ The Ascent of the Administrative State and the Demise of Mercy.”

(Sidharta Chatterjee is an independent researcher with interest in economics, cognitive sciences, behavioral sciences, behavioral economics, neuroeconomics, statistical finance, strategic management and decision making. The author has been invited as Chair of Finance Session in the last concluded GABER Conference held in Bangkok, 2008. He is also the proponent of Global “Topographic Volatility Mapping”, a project conceived by him to study cross-sectional volatility across different markets using topographic schemes (TVM).
The views expressed in the article are personal and do not reflect the official policy or position of the organisation.)


Share |

Display Email:
Enter Image Text: