By Raghunath Nageswaran
The following article is focused on a major theme that has captured the imagination of many development economists, that is, convergence. It attempts to understand the rationale and relevance of the concept of convergence to India, by reviewing the following chapter in Indias Economic Survey 2016-17: Income, health and fertility. Research on economic convergence can illuminate our understanding of the factors that cause countries to grow rapidly and understand the headwinds that stall such convergence.
Rodrik’s view on convergence
As per development economist Dani Rodrik’s account of convergence, the neoclassical growth theory establishes a presumption that countries with access to identical technologies should converge to a common income level. Countries that are poorer and have a higher marginal productivity of capital should, therefore, grow faster in the transition to the long-run steady state.
However, empirical work has not been very kind to this proposition. There was no tendency for poor countries to grow faster than rich ones, over any chosen time period for which the data was available. Whatever convergence one could find was conditional, as it depended on policies, institutions, and other country-specific circumstances. The only exceptions to the rule seemed to be states or regions within a unified economy, such as the United States.
Economic convergence in India
The trend of convergence in economic outcomes among the Indian states was one of the most elaborately discussed themes of the Economic Survey 2016-17. It looked at convergence along two metrics: Economic indicators, along with health and demographic outcomes. Economic indicators involved real Gross Domestic Product (GDP) per capita and real consumption figures, while the health and demographic indicators involved life expectancy, Infant Mortality Rate (IMR) and Total Fertility Rate (TFR).
The survey noted that in the first metric, there continued to be divergence within India or an aggravation of regional inequality and in contrast, on health and demography, there was strong evidence of convergence amongst the states in the 2000s. From this inference, one could conclude that health and demographic outcomes tend towards unconditional convergence (due to the numerical limits they embody) and income and consumption outcomes correspond to conditional convergence, the condition here being the quality of governance.
It was encouraging that the most authoritative economic document of the government was concerned about regional inequality, the inequality among states in various economic outcomes (divergence). While this was a genuine concern, what was conspicuous by its absence was the discussion on income and wealth inequality (divergence) among individuals belonging to different economic classes.
Divergence and wealth inequality
Pundits were pleased with the reduction in inequality among countries, especially as the two most populous countries, China and India, were growing at an unprecedented pace, lifting many people above the line of poverty. With the Occupy Wall Street movement beginning a renewed focus on inequality within countries, there was a greater focus on the one percent versus the 99 percent of people.
The World Inequality Report 2018, published by the World Wealth & Income Database alerted us to the deepening of income inequality in India over the last three decades. According to the report, the income share of Indias top one percent rose from approximately six percent in 19821983 to above ten percent a decade after, then to 15 percent by 2000, and further still to around 23 percent by 2014 and inequality trends continued on an upward trajectory throughout the 2000s and by 2014, the richest ten percent of the adult population shared around 56 percent of the national income.
With respect to wealth inequality, the figures were even more stark and alarming, as the richest one percent of Indians now owned 58.4 percent of the countrys wealth while the bottom 70 percent of the Indians together now owned just 7 percent of the countrys private wealth, according to the Global Wealth Report 2016, released by the investment bank Credit Suisses research wing.
The official policy circles could dispute the robustness of methodology or data sources and could come out with better-researched studies if they disagreed with these findings, but the refusal to acknowledge the enormity of the problem was a cause for concern. The sharp rise in inequality was, without doubt, a global phenomenon and the developed countries were experiencing it too. While this had initiated a crucial debate on global wealth tax, the ruling dispensation in India signalled its unwillingness to participate in it by abolishing wealth tax altogether.
IMF’s take on inequality
What was more important and revealing was the International Monetary Funds (IMF) newfound interest in inequality. One would remember that the IMF was the staunchest advocate of economic reform packages that favoured deregulation in a very big way. The overarching ideology under which such packages were unveiled came to be known as ‘neoliberalism’ and it curtailed the activist or interventionist role of the state, thereby giving the market forces greater leeway and leverage.
Such a strategic reorientation of the role of the state had resulted in lopsided development outcomes, as economic opportunities were more unequally distributed than before. So, when the IMF ponders whether neoliberalism has been oversold, it should be fairly evident that the problem of inequality is only reaching gigantic proportions. The IMF’s paper, Causes and Consequences of Income Inequality: A Global Perspective categorically admits that the benefits did not trickle down.
Distribution of resources: The elephant in the room
Surely, something must have gone terribly wrong on the income and wealth distribution front to warrant ideologically divergent institutions to crunch relevant data and publish reports whose findings converge on the same point. This was the convergence that the economic survey must be talking about but it conveniently ignored the elephant in the room, which was inequality in the distribution of resources and productive assets. The surveys bewilderment over why the states were not converging on economic outcomes despite freer movement of capital, labour and goods had to be located in the context of skewed resource distribution among the states.
Dani Rodrik stated that unconditional convergence happened only within the regions of a unified economy. However, as seen earlier, this unconditional convergence in income and consumption had not been happening in the Indian states. The concentration of income and wealth in the hands of a few, particularly in regions that were miles ahead in economic progress, led to the creation of huge investible surplus zones that acted as magnets attracting labour from other regions. So, the labour migrating to more prosperous regions in search of employment only aggravated the existing divergence, the quantum of remittances notwithstanding. To verify the soundness of the hypothesis that the labour moved to economically better-off states, one did not have to look for evidence elsewhere. The Economic Survey 2016-17 provided the necessary evidence.
Revelation made by the economic survey
As per the survey, the largest recipient was the region of Delhi, which accounted for more than half of the labour migration in 2015-16, while Uttar Pradesh and Bihar, taken together, accounted for half of the total out-migrants. Maharashtra, Goa and Tamil Nadu had major net in-migration, while Jharkhand and Madhya Pradesh had major net out-migration. States like Delhi, Maharashtra, Tamil Nadu, and Gujarat attract large swaths of migrants from the Hindi heartland of Uttar Pradesh, Bihar, and Madhya Pradesh.
This phenomenon was in complete contrast to the standard assumption underlying the convergence thesis: Capital flows to poor countries or regions with a higher marginal productivity of capital. India had only witnessed a free flow of footloose labour from the poor states towards the capital. Clearly, if the mountain won’t come to Muhammad, then Muhammad must go to the mountain.
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