Country Study: India

UNRISD UNITED NATIONS RESEARCH INSTITUTE FOR SOCIAL DEVELOPMENT Country Study: India Edited by R. Nagaraj Commissioned for the UNRISD Flagship Report on Poverty Project on Poverty Reduction and Policy Regimes June 2010 ▪ Geneva The United Nations Research Institute for Social Development (UNRISD) is an autonomous agency engaging in multidisciplinary research on the social dimensions of contemporary development issues. Its work is guided by the conviction that, for effective development policies to be formulated, an understanding of the social and political context is crucial. The Institute attempts to provide governments, development agencies, grassroots organizations and scholars with a better understanding of how development policies, and processes of economic and social change, affect different social groups. Working through an extensive network of national research centres, UNRISD aims to promote original research and strengthen research capacity in developing countries. Research programmes include: Civil Society and Social Movements; Democracy, Governance and Well-Being; Gender and Development; Identities, Conflict and Cohesion; Markets, Business and Regulation; and Social Policy and Development. A list of the Institute’s free and priced publications can be obtained by contacting the Reference Centre. UNRISD, Palais des Nations 1211 Geneva 10, Switzerland Tel: (41 22) 9173020 Fax: (41 22) 9170650 E-mail: [email protected] Web: http://www.unrisd.org Copyright © United Nations Research Institute for Social Development (UNRISD). This is not a formal UNRISD publication. The responsibility for opinions expressed in signed studies rests solely with their author(s), and availability on the UNRISD Web site (www.unrisd.org) does not constitute an endorsement by UNRISD of the opinions expressed in them. No publication or distribution of these papers is permitted without the prior authorization of the author(s), except for personal use. ii India UNRISD Project on Poverty Reduction and Policy Regimes Edited by R Nagaraj iii Contents Introduction 1 1. Development Strategies and Poverty Reduction 22 R Nagaraj 2. Economic Development and Inequalities 55 M H Suryanarayana 3 Social Protection Policies, Experiences, Challenges 79 Gita Sen and D Rajasekhar 4 Rethinking Reforms: A New Vision for the Social Sector in India P S Vijay Shankar and Mihir Shah 113 5 Organized Interests, Development Strategies and Social Policies Vivek Chibber 163 6 State and Redistributive Development in India Atul Kohli 182 iv Contributors Vivek Chibber New York University, New York, USA Atul Kohli Princeton University, Princeton, New Jersey, USA R Nagaraj Indira Gandhi Institute of Development Research, Mumbai, India. D Rajasekhar Institute of Social and Economic Change, Bangalore, India. Gita Sen Indian Institute of Management, Bangalore, India. Mihir Shah Member, Planning Commission, Government of India, India. M H Suryarayana Indira Gandhi Institute of Development Research, Mumbai, India P S Vijaya Shankar Samaj Pragati Sahayog, Bagli, Dewas District, Madhya Pradesh, India. v Preface This volume consists of six essays on India, as part of a multi country study on poverty reduction and poverty regimes, under the auspices of United Nations Institute for Social Development. The central question addressed in these studies is to the following: Is there an identifiable relationship between policy regimes and the record of poverty reduction in a country. More specifically, the project aims to (UNRISD, 2005): • Assess the contribution to contemporary approaches to poverty reduction, including the Millennium Development Goals (MDGs) and Poverty Reduction Strategy Papers (PRSPs); • Identify key institutional, policy and political issues that are not being addressed in current poverty reduction strategies; and, • Examine the contradictions, complementarities and synergies between different components of “policy regimes”, including social, labour market and macroeconomic policies, and political and regulatory institutions. The project seeks to achieve the aims following the approach of “policy regimes”. In other words, seeking to understand how different policy regimes have influenced the outcome of poverty reduction. The underlying assumption of such an approach is that poverty reduction is not simply a positive function of economic growth; macro policy environment and social policies also have significant bearing on poverty reduction. The project seeks to illustrate the value of such an approach by detailed case studies of selected countries. The countries selected are expected to illustrate how poverty reduction has been achieved under diverse economic conditions and social policy regimes, to debate the viewpoint that growth alone may explain poverty reduction, and to propose that a variety of policy regimes and institutional conditions can yield the desirable outcome. The approach implicit in all the studies in this volume is broadly social democratic, meaning, where authors perceive the advantages of selective yet decisive state intervention in securing the social development goals, and poverty reduction. vi Introduction: Understanding the Indian Experience R Nagaraj Overview Since the industrial revolution, the world has come to accept a steady rise in income per head as the “natural” state of an economy. Following Kuznets’s hypothesis, inequality is expected to rise initially and then fall with growing income levels – known as the “inverted U” hypothesis. It is also believed that social development would improve in some proportion to the rise in per capita income, as the demand for social services increases. As governments acquire a rising share of output as taxes, their ability to augment supply social services and public goods would also go up. In reality, however, none of these propositions can be taken for granted as “natural” or “automatic”. Recent experience shows that not many countries have witnessed uninterrupted growth for long periods; growth reversals and stagnations are perhaps more common than perceived (Pritchett, 2000).1 While the developed western economies have followed the Kuznets hypothesis, evidence with respect to income distribution from developing countries is mixed at best (Kanbur, 2000). Similarly, the relationship between growth and poverty reduction is not unambiguous and proportional; the association between growth and social development is perhaps even more tenuous. Thus, empirically, one gets a rich mosaic of relationships between these fundamental aspects of growth and development (Fields, 2001). How does, then, one understand these patterns? As economic theory does not provide unique or unambiguous relationship among these variables, we often fall back on the “stylized facts” from modern economic growth. Perhaps, there are social and economic institutions and policy environments that “mediate” between economic growth, its distribution and their consequence for social development. The nature of the policy regimes, historical antecedents (or initial conditions) of modern economic growth, and a variety of institutional arrangements could influence the development outcomes. In liberal policy regimes, social development and poverty reduction is perhaps relatively modest, compared to the experience in social democratic regimes in which state has played a much greater role in steering the economy. As Amartya Sen has shown, public action can be an important factor in better educational and health outcomes in the state of Kerala in India, even in comparison to African Americans in the US (Sen, 1999). Similarly, democratic institutions have prevented famines in India compared to China, which witnessed large-scale deaths due to famine in the early 1960s. More recently, health outcomes in the US are widely known to be inferior to Europe, despite spending a 1 Very few countries have experienced consistently high growth rates over periods of several decades. The more typical pattern is that countries experience phases of growth, stagnation, or decline of varying length (Pritchett 2000). Examples of countries that have sustained long term growth during the second half of the 20th century are Botswana, China, India, Indonesia, Korea, and Mauritius. Hausmann et al, 2005. 1 much larger share of GDP – an outcome clearly related to better and public provision of social services in Europe. In light of these, what have been the relationships between growth, policy regimes, poverty reduction, and social development in India? What are the political and economic factors that might encourage (or hinder) the process of social development? How does India’s development experience measure up in a comparative perspective? This volume, consisting of six essays, offers detailed answers to some of these questions. An over view of the issues addressed and the perspectives of their broad answers are included in the first part of the introduction; the second part briefly summarizes the findings of the essays. India’s development strategy and poverty reduction: India’s economic development centered on rapid industrialization to produce capital and intermediate goods (or, “heavy” industry) to maximize long-term growth – in a world that was deemed to offer limited scope for trade, and to sustain an independent development path in a politically polarized world after the second World War. With a low domestic savings rate, weak capital market, and nascent indigenous entrepreneurship, the public sector assumed the role of the biggest entrepreneur to acquire “commanding

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