Economic Policy: Growth Trajectory V/S Social Spending

Context 

“Two roads diverged in a wood” is often the case for India’s economic policy decisions. It is a delicate gamble between uncharted growth trajectory and social welfare schemes. The dilemma of a 21st-century economist demands striking a balance between the two. In 2013, ahead of the general elections, an intriguing debate erupted: whether to focus on Gross Domestic Product (GDP) or social welfare like health, education, inequalities, and so on. Economists Jagdish Bhagwati, and Arvind Panagariya, advocated for a higher growth trajectory to raise resources for redistribution, while Jean Drèze and the Nobel Laureate Amartya Sen endorsed higher social spending for the economic upliftment of India’s poor.

Social Spending

Amartya Sen and Jean Drèze make a strong case for higher investment in social infrastructure. Social spending is the expenditure on welfare schemes that are usually meant for low-income households and marginalised groups. Sen and Drèze in their book 'An Uncertain Glory: India and its Contradictions' highlight that having a healthy and educated population boosts growth and ensures that inequalities narrow down. Sen and Drèze were not against growth and agree with Bhagwati and Panagariya that growth is a prerequisite for prosperity. But they claim that despite the fact the Indian economy grew at a robust 10 percent annually (second only to China) for a decade before the global financial crisis, this sustained high growth rate failed to lift everyone (Sharma, 2016). They also asserted that employment growth has been inadequate to accommodate the young population of the nation and did not accompany the GDP growth.

Sen and Drèze highlight the plight of healthcare, food security, and education. They make a fierce point that India is falling behind its neighbours in terms of various developmental indicators. This can also be witnessed in recent rankings of the Global Hunger Index (India: 94th, Sri Lanka: 64th, Bangladesh: 75th). The pandemic elevated the existing levels of hunger, stunting, and malnutrition (Saha & Singh, 2021). While social spending increased to 8.8% in 2020-21 (from 7.5% in 2019-20 as a percent of GDP), cuts can be observed in various social sectors like pensions, aid for widows and education (Beniwal & Chaudhary, 2021). 

Since 2013, the world has changed drastically. The Covid-19 pandemic demonstrated the fallibilities in our economic system. It left millions without a social net to fall on when the pandemic hit its peak. While the economy is hammered, climate change is likely to wreak havoc with the risks it poses on the economy. Housing, agriculture, manufacturing, and all known aspects of the economy are bound to dwindle. Even though Sen and Drèze do not focus much on the environment and climate change, it is affecting parameters of the Human Development Index (Nanda, 2020). In 2019, economist Prabhat Patnaik mentions that India has predominantly followed the 'Gujarat Model of Development' (Newsclick Report, 2019) which was also endorsed by Bhagwati and Panagariya.

The Kerala developmental model takes up its space in the debate and was well-liked by Sen and Drèze. Primarily it entails investment in public education and healthcare systems. When such avenues are accessible and affordable to the people, they tend to have higher disposable income to spend on other needs. This leads to higher demand resulting in higher growth (Newsclick Report, 2019). The crippling healthcare and education system has been worrying since public expenditure has been scanty for decades. While the nation is 'rebuilding' itself from the devastating consequences of the pandemic, social spending must take precedence since "Growth cannot lift all boats." 

Growth Trajectory and Development

On the flip side of the Sen-Dreze duo, stand Jagdish Bhagwati and Arwind Panagariya with their confidence in Economic growth (increased GDP and private entrepreneurship) as a way of reducing poverty. Bhagwati consecutively quotes “It is necessary to argue forcefully that efficiency and growth are important, indeed given our immense poverty, the most important instruments for alleviating poverty.” as the baseline of his stance (Majumdar, 2018). Economic growth refers to the process by which a nation’s assets and wealth increase over time by improving the factors of production (labour, land, capital, and entrepreneurship) through, say, investment in the infrastructure of productive sectors.

 In their book “Why Growth Matters: How Economic Growth in India Reduced Poverty and the Lessons for Other Developing Countries” the authors explain how increased trade and foreign direct investments in India serve as a way to increase both economic growth and welfare (Bhagwati And Panagariya, 2013). Bhagwati- Panagariya side believes in the precedence of sustained growth as a way to reinforce redistribution and job creation. The underlying essence of this unabated debate is primarily the issue of sequencing and deciding India’s policy priorities. Economic development serves as a means to increase welfare, formally called the “pull” effect of growth (Ashok Gulati, Chairman of CACP). Unlike popular opinion, focusing on growth and development does not mean ignorance of societal welfare, rather it helps create a sustainable model for redistribution without driving up the social debt of a country that is taxed with poverty. Focusing on growth yields enough resources to invest in welfare schemes and strengthen the social net of equality. The trend in the agriculture sector over the decades further shows how increased growth followed by higher construction wages played a major role in driving up farm wages rather than the government-funded employment guarantee efforts in rural India. 

Bhagwati and Panagariya point out how all major industrial countries have increased growth through expenditure on trade and infrastructure, and consequently their standards of living. While acknowledging the short-run widening of the economic divide due to growth prioritization, they have addressed how sustained development can make up for it in the long-run. Bhagwati stands his ground on social sector spending being counter-productive and redundant without a strict focus on growth. According to Bhagwati (2013),  By arguing for redistribution to precede growth, Sen is putting the cart before the horse. Social inclusion according to them can only be achieved through job creation and fostering entrepreneurship because unemployment in India is but a major driver of poverty. Although the last word on what works for the Indian policy landscape hasn’t been given yet, this debate views the Indian economy in a fairly non-holistic way and offers a two-dimensional perspective of the policy-making grounds with little room for “externalities” which significantly affect choice (Bhattacharya, 2013).

Gujarat's example is often drawn into the debate since its strategy involved hiking corporate infrastructure, increasing governance of corporate units, and incentives (subsidies) to attract investment, all of which led to a quantum jump in the state’s growth rate in 2011-12 (Hirway, 2017). Bhagwati’s ideology closely aligns with our Prime Minister in this context and he had gone on record to side with his politics citing the success of the Gujarat Development model and its massive achievements. The Covid-19 pandemic was disastrous for every section of the society, witnessing a record drop in GDP by 24.4 % in the May- July quarter and further by 7.4% towards the end of 2020 with a bleak recovery of 0.5% and 1.6% respectively. Currently, for the April- June quarter of 2021, GDP levels shot up by 20.4% as compared to the same time last year (Dhingra and Ghatak,2021). The economy is said to be on a ‘V-shaped’ recovery which was initially fueled by public expenditure, necessary in the wake of a global health crisis caused by the virus. But despite speculations about the RBI to keep the stimulus package in the social sector spending intact, as was done by other major economies, India is likely to prioritize investment in growth and infrastructure (privatization of state-owned businesses and tax reforms) which circles back to the sequencing of growth before welfare schemes as proposed by Bhagwati and Panagariya. 

References

1. Beniwal, V., & Chaudhary, A. (2021, February 10). India’s spending on growth to bring the economy on track leaves little for its vulnerable. The Economic Times. https://economictimes.indiatimes.com/news/economy/indicators/indias-spending-on-growth-to-bring-the-economy-on-track-leaves-little-for-its-vulnerable/articleshow/80778896.cms

2. Nanda, P. K. (2020, December 16). India slips two spots to rank 131 in the global Human Development Index. Mint. https://www.livemint.com/news/india/human-development-index-india-drops-two-spots-to-rank-131-11608118179579.html

3. Newsclick. (2019, May 1). Faster Growth With Gujarat Model is a Myth: Prabhat Patnaik. https://www.newsclick.in/kerala-vs-gujarat-model-prabhat-patnaik

4. Sharma, S. D. (2016). Which Way India? India Quarterly: A Journal of International Affairs, 72(2), 192–199. https://doi.org/10.1177/0974928416637928

5. Saha, S., & Singh, R. (2021, April 15). Child malnutrition in India: A systemic failure. DownToEarth. https://www.downtoearth.org.in/blog/health/child-malnutrition-in-india-a-systemic-failure-76507

6. Np, U. (2013, July 18). Academic brawl: Bhagwati-Panagariya pitch for Modi while Amartya Sen backs Nitish. The Economic Times. https://economictimes.indiatimes.com/news/politics-and-nation/academic-brawl-bhagwati-panagariya-pitch-for-modi-while-amartya-sen-backs-nitish/articleshow/21133902.cms?from=mdr 

7. Majumdar, S. K. (2018, March 12). Bhagwatinomics vs Senology. @businessline. https://www.thehindubusinessline.com/opinion/bhagwatinomics-vs-senology/article20642136.ece1

8. Bhattacharya, P. (2013, July 25). Everything you wanted to know about the Sen-Bhagwati debate. Mint. https://www.livemint.com/Politics/zvxkjvP9KNfarGagLd5wmK/Everything-you-wanted-to-know-about-SenBhagwati-debate.html 

9. Cooper, R. N. (2013, August 12). Why Growth Matters: How Economic Growth in India Reduced Poverty and the Lessons for Other Developing Countries. Foreign Affairs. https://www.foreignaffairs.com/reviews/capsule-review/2013-08-21/why-growth-matters-how-economic-growth-india-reduced-poverty-and 

10. Dhingra, S. (2021, July 9). The pandemic in data: How Covid-19 has devastated India’s economy. Scroll.In. https://scroll.in/article/999275/the-pandemic-in-data-how-covid-19-has-devasted-indias-economy

11. Hirway, I. (2017). The Truth Behind the Gujarat Growth Model. The Wire. https://thewire.in/economy/the-truth-behind-the-gujarat-growth-model