Credibility of Economic Advisers is on the Block
The swift economic growth of India over the past 25 years has an interesting paradox; while India has reduced the number of destitute, the growth mostly benefited the wealthiest 10 per cent of its population.
The absolute number of people living in extreme poverty in 1993-94 was above 36% of the total population of India. For the country as a whole, the poverty ratio declined to 29% in 2011-12 and further to about 26% in
2016-17. These percentages mean that there were about 340 million, 365
million and 345 million people from out of a total population of about
940 million, 1260 million and 1320 million in 1993-94, 2011-12 and
2016-17 respectively. This is incredible in the sense that India has
definitely succeeded in pulling a lot of people out from states of
destitution.
Data available from the World Wealth and Income Database at the Paris School of Economics shows that at 2016 prices, the average income for an Indian in 1990 was about Rs. 69,000 which rose to Rs. 159,000 by 2013. Contrast this with the average income for an Indian belonging to top 10% which moved from Rs. 213,000 to Rs. 775,000 while for the middle 40% people this movement was from Rs. 70,000 to Rs. 104,000. For people from the bottom 50% in the income category the growth was from Rs. 28,000 in 1990 to Rs. 42,000 in 2013.
Putting it simply, while the Indian Economy as a whole was growing at 5.6%, income for 90% of the citizens grew merely at 2.0% while income of the top 10% people grew by 11.5%.
Liberalising the economy appears to have triggered a drastic divergence in incomes and wealth. With the economy hitting a rough patch in recent months, the government is under pressure to do something and the advisers are likely to play a major role in shaping the Executive Actions. The Governmental machinery has no shortage of expertise for advising them about what needs to be done. There are at least six distinct sources of advice –
- NITI Aayog is the premier policy 'Think Tank' of the Government of India, providing both directional and policy inputs for national development. The Vice Chairman and three of the four full time members are Economists.
- The Economic Advisory Council to the Prime Minister (EAC-PM) is an independent body to give advice on economic and related issues to the Government of India, specifically to the Prime Minister. EAC-PM, a five-member body which was reconstituted last week, has four economists as members.
- The Chief Economic Adviser (CEA) is the economic advisor to the Government of India who advises the Government on matters related to finance, commerce, trade, economy. The CEA reports directly to the Minister of Finance. The CEA heads the Economic Division under the Department of Economic Affairs (DEA). The Economic Division undertakes research studies focusing on economic policies and management of the economy. Based on the research it provides advice to the Government of India.
- Office of the Economic Adviser (OEA) in the Department of Industrial Policy & Promotion (DIPP) of the Ministry of Commerce & Industry renders advice relating to formulation of Industrial Policy, Foreign Trade Policy with respect to industrial sector in general with thrust on manufacturing, issues relating to bilateral and multilateral trade, as well as taxes and duties related to industry, including anti-dumping duties. The office is staffed with career economists belonging to the Indian Economic Service.
- A large number of economists of varying caliber offer free and unsolicited advice through research journals, TV shows and media articles. They may be working for the government, for business, or in the banking, brokerage or financial industries. They may hold positions in academia or work as journalists. Each of these employers may have objectives or agendas which colour the opinions of such economists. Their advice may thus suffer from data-inadequacy, indoctrination or personal bias.
- Perhaps the most vocal are a set of educated and articulate people who seem to have an opinion on most subjects as to what is going wrong accompanied by an advice in real-time as to the way to correct that wrong. These arm-chair experts shape public opinion and discourse besides a fueling a lot of anti-institutional propaganda. Majority of these disagree with economists on every issue. When informed of the consensus position of economists, they are more likely to agree with them.
Agreement among experienced and knowledgeable economists is atypical. The principal disagreement is a matter of economic philosophy. Besides, economics is not a completely empirical science. The unpredictable, including unintended consequences may occur in the complex world of economics, thus surprising the experts and defying their forecasts.
The widening gap in incomes and wealth has been accompanied by a gap in opinions about how to tackle it and the challenge before the Economic Advisers is to make it possible for the government to deal with the real economic situation besides helping shape the public-opinion and voters-perceptions.
Labels: National Policy
posted by Mukul Gupta @ October 01, 2017
10 Comments
10 Comments:
Such a well articulated reckoner for the government to listen, discuss, debate and evaluate plausible economic strategies.
Totally agree.We don't have dearth of talent and intellect who can suggest What is to be done.But the problem is.....how is to be done.Self Interest comes first....country later.
The Government must start reading this
Super informative and extremely well documented. Thanks for sharing.
Sad.. That for 90% growth is just two percent.. Too drastic reforms are needed.
Awesome piece Doc ! Very well crafted. Would love to read your thoughts on the challenges faced (last para) by the Government and the solutions possible.
In my view, the real challenge for the Government would be to level the playing field for all folks - i.e., make education, health care and basic infra (power, communication and connectivity) - available to all. Post that, the enterprise of the Indian people will flower !
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No denying the observation. Radical intervention required as this is emergency.
Thanks for your words of appreciation. They are precious. Majority of economists have argued that macro economic growth must be pursued and the disparity in growth of individuals will level out over time due to market forces. It is akin to a trickle down model. But sadly, that has not turned out to be true at least in case of India.
Your suggestion endorses the argument of Amartya Sen wherein he disagrees with the idea of a trickle down in the absence of an equality of ability of people to benefit from the opportunities. He recommends major public investments in health, education, sanitation and social infrastructure to enable people to compete for opportunities and grab them.
Leaving the philosophical debate aside, it is interesting to understand the demographics of the top 10% and the other 90%. Top 10% are wealthy, educated and highly skilled. Poor earners are not wealthy, less educated and lack skills. Liberalisation has created earning opportunities for the highly educated and skilled.
In my opinion, therefore, it is not an either-or solution. The government needs to focus on a capacity build-up model to reduce disparity in opportunity grabbing capability of people. The macro-economic growth should be pursued concurrently to keep expanding the size of the pie. This would likely result into a trickle-down. Unfortunately, this is a very long term solution and we seem to have already missed the bus some 25 years back. Well we need to run and catch up for the benefit of next generation.
This brings us to the very fundamental question – so what do we do NOW? Focus on agriculture – for job creation and income generation. Invest in social infrastructure in the rural areas. Globalisation and Liberalisation meant increased integration with the world economy at the macro-level leading “reverse brain drain” and increased gross national income. We need to focus on increased integration between the urban and the rural economy within the country and see a “reversal in urban migration.” The social infrastructure for the rural people should be developed within the rural areas. We should stop creating urban area based solutions for rural problems. This way, besides the challenge of income disparity, we would be addressing the issues of health and sanitation, transport, pollution, slums, cleanliness, and may be even the erosion in values and ethical conduct.
Skills-development is not the same as vocational education. Understanding of this difference is the way forward for increasing economic growth and decreasing income disparity.
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