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Gujarat growth: the trickle down myth

Bibek Debroy
By Rajiv Shah
Over the past few weeks, whenever I visited a senior state bureaucrat’s chamber in Gandhinagar Sachivalaya, I would invariably notice a coffee table book prominently displayed – “Gujarat: Governance for Growth and Development”, authored by Prof Bibek Debroy, an economist who shot into prominence after he was forced to move out of the Rajiv Gandhi Foundation several years ago. It’s a common knowledge: He had “researched” in a study report that Gujarat was No 1 in economic freedom index. This was his only fault. 
One of the bureaucrats proudly gave me a copy of the book, but not before telling me how Debroy had prepared the book after moving around Gujarat – of course, with every possible official help. Based on facts and figures in the book, this bureaucrat, just ahead of his retirement in October-end, made a presentation on Gujarat’s model of development at an evening get-together for state IAS bureaucrats called by chief minister Narendra Modi to mark his own 4,000 days in office. Why 4,000 days was difficult to understand, yet this bureaucrat made a strong case for Gujarat, declaring that the model was “viable enough” for other states to follow. The function, many participants told me later, was held with the political aim to woo babus ahead of the Gujarat state polls at a time when the state employees seemed to be in a threateningly belligerent mood.
Scanning through the book, which seemed well-written and well-researched, I stopped at Debroy’s observations on poverty. Quoting National Sample Survey (NSS) data, he says that there is no “enormous increase in inequality in Gujarat in the period of high growth”, and that “the inequality numbers are very close to all-India trends and as with all-India trends, have been almost flat overtime.” The period that he was referring to was almost the entire last decade. At another place he declares that in Gujarat, “in line with all-India trends, overall poverty and urban poverty have declined”, adding, “The real story is in rural Gujarat, where there has been a very sharp drop in poverty, significantly more than all-India trends.” Thus, the urban poverty went down from 20.1 per cent in 2005-05 to 17.9 per cent in 2009-10, rural poverty went down from 39.1 per cent to 26.7 per cent. “In rural Gujarat”, he insists, “the benefits of growth have trickled down.”
Convincing figures; but this forced me to do a little bit of talking. Prof Indira Hirway, an economist who heads the Centre for Development Alternatives in Ahmedabad, contradicting the claim, forwarded to me her paper on the same subject, again, based on the same NSS figures which Debroy quotes.
Hirway says in her paper, “Though the rate of decline in poverty during 2004-05 – 2009-10 in Gujarat was 8.6 percentage point, the state ranked 9th among the major 20 states in India in poverty reduction. The relatively slow growing states like Uttarakhand, Tamil Nadu, Orissa, Madhya Pradesh, Karnataka, Himachal Pradesh etc. have experienced much higher decline in poverty during this period. In fact, Gujarat, which stood 7th in the incidence of poverty among the 20 states in 1993-94, maintained its 7th rank in 2004-05 but dropped to 9th rank in 2009-10. In other words, in spite of being the fastest growing state during 2004-05 – 2009-10, Gujarat slipped in its performance in poverty reduction. This shows that growth alone does not count for poverty reduction, and something more is needed to translate growth into poverty reduction.”
Gujarat’s poverty reduction was 8.6 per cent, as against Himachal Pradesh’s 13.4 per cent, Karnataka’s 9.7 per cent, Madhya Pradesh’s 11.6 per cent, Maharashtra’s 13.7 per cent, Orissa’s 20.2 per cent, Rajasthan’s 9.2 per cent, Tamil Nadu’s 12.3 per cent, and Uttarakhand’s 13.7 per cent. Worse, while in rural poverty reduction Gujarat did much better than all-India average (12.4 per cent as against all-India’s 8.2 per cent), in urban poverty reduction the state flopped (2.2 per cent as against all-India’s 4.6 per cent).
I was wondering: If trickle-down growth, which Debroy strongly advocates, has succeeded in rural Gujarat, why has it failed in urban Gujarat? Debroy himself believes that Gujarat is No 1 in economic freedom index, and is, therefore, the best investment destination. Senior officials explain this by saying that there has been a “large-scale migration of the rural poor to urban areas” on account of unprecedented real estate and industrial activity taking shape all around major cities like Ahmedabad, Surat, Vadodara, Rajkot, Jamnagar and Bhavnagar, as also their periphery.
A friend in Delhi forwarded to me a Planning Commission note prepared on Gujarat development on the basis of papers prepared at a seminar held a few months back in Ahmedabad. It carries a synopsis of the paper by Prof Sebestian Morris, a faculty at the Indian Institute of Management, Ahmedabad, which says: “What is remarkable of Gujarat is it has been able to maintain and enhance its comparative advantage (in growth) despite a high level of per capita income, when all other highly industrialized (and high income) states have as expected steadily lost their comparative advantage with per capita growth. This is due to low labour costs in the state (repressed wages and poor quality of employment), the higher income inequality (for higher rate of savings), high tax concessions and other incentives to corporate investments, vast migrations to Gujarat and the increasing use of capital intensive machinery in Gujarat (low growth of employment and poor shift of labour from primary to non-primary sectors).” Hence the advice, “There is now a need for the state to shift to income distribution.”
I, too, decided to have a look at the NSS figures of 2009-10 which Debroy and others are quoting, and I found a very interesting picture, and where Gujarat stands. The purchasing power of the poorest 10 per cent of Gujarat, I found, was worse than several major states, though a little better than the national average. While rural Gujarat’s average monthly per capita expenditure (MPCE), which is the yardstick adopted for calculating purchasing power, is Rs 1,110, the purchasing power of the lowest 10 per cent is Rs 524. This is lower than eight other major states. The urban scenario is not very different, where average MPCE is Rs 1,909, and that of the lowest 10 per cent is Rs 702, which is lower than half-a-dozen major states.
A closer look showed me that, perhaps, inequality levels in Gujarat are lower than the rest of India because the purchasing capacity of the upper 10 per cent is worse than most Indian states, indeed worse than the national average, and not because the poor are less poor. The upper 10 per cent’s MPCE in Gujarat is Rs 2,362 in rural and Rs 4,592 in urban areas, as against the national average of Rs 2,517 and Rs 5,863, respectively. I haven’t come across any economist’s explanation, though Hirway told me once that NSS’ calculation on inequality is based on MPCE, which wouldn’t tell you the real picture. The poorer sections may be earn less but spend more by taking debt, while the richer sections may earning more but spend less. “One should, instead, look at income inequality, not MPCE inequality”, she said, adding, “If one were to see income inequality, it is much higher in Gujarat than all-India. This has been calculated by Dr Rajesh Shukla of the National Council of Applied Economic Research.”
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https://timesofindia.indiatimes.com/blogs/true-lies/gujarat-growth-the-trickle-down-myth/

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