Target education and health

Income generation must be the focus of policy

On Wednesday, a report examining the state of inequality in India, prepared by the Institute for Competitiveness, was released by the Economic Advisory Council to the Prime Minister. The report is firmly grounded in the economic literature on inequality and poverty in India, as well as in the multi-dimensional nature of inequality. It clearly explains how inequality is subject to considerable social and geographic variation, and that there are specific marginalised groupings that require greater attention. The main thrust of the report’s policy recommendations, however — that any solution to inequality “lies in redistributive measures and building economic resilience among the poorest of households through social protection schemes” — leaves out certain vital and important facets of the problem.

A welfare system and deep social security net that ignores fundamental questions about work, livelihood, and productivity is doomed to fail. It will not receive sustained political support and it will rest on weak economic and fiscal foundations. The report points out that “equitable access to education and the creation of more jobs with long-term growth is vital for triggering upward mobility among the poor”. This is unexceptionable, but not helpful. The question is how these two processes — upward mobility and growing productivity — can be made to reinforce each other, and what scarce fiscal and administrative resources can be applied so that they grow in tandem. The report mentions in passing that foundational learning and numeracy — very basic skills in arithmetic, reading, and writing — must become universal. That this has to be stated at all is a sad reflection on India’s primary education system more than seven decades after independence. No productivity growth or poverty reduction is possible unless these foundational skills are accessible to all.

Another concrete recommendation in the report is that an urban equivalent of the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) be considered. The stated reason for this suggestion is a divergence in the labour force participation rate (LFPR) between urban and rural areas. Of course, the LFPR — like headline employment — depends upon the subsistence level of the population. Dropping out of the workforce can increase as incomes do; some individuals forced to work by poverty stay home when they get richer. This will hardly be addressed by an urban MGNREGS. The report’s analysis itself demonstrates that unutilised labour increases with education levels. The large pool of unemployed graduates is unlikely to take up the demand-based hard labour, which is the stock-in-trade of the MGNREGS. The report also mentions the possibility of a universal basic income (UBI). This recommendation, though it has been around for a while and is supported by many economists of renown, is nevertheless problematic in terms of its fiscal and administrative implications. It would be very difficult to target a UBI at the poorest Indians; and unless it is targeted, it would become unaffordable.

While inequality is certainly a problem, and unless steps are taken to manage extreme disparities there may well be social problems as a consequence, the fact is that economic policy must continue to focus on growth and poverty alleviation. Inequality is best addressed through tax and competition policy. The emphasis must be on education, health, and job-related skilling. Income generation is a bigger problem than distribution at this stage of India’s development.