Chennai at the Crossroads

Thinking about Vijaya helps us crystallize the real issue with poverty in India.  It is that of too-slow progress at the bottom of the spectrum combined with increasing inequality. In the words of  Angus Deaton, a professor of economics at Princeton,  the essential dilemma  is simply this:  poverty rates have declined steadily in India over the past 20-30 years. However, there is no evidence of a pick up in the rate of decline since the reforms of the 1990s, which allowed India to start growing much more rapidly. Thus, the data of the national income statistics tell us we are getting richer, while the National poverty statistics tell us we still have about a third of the world’s poor among us. Nonetheless, poverty reduction has gone on at a rate comparable to the pre-reform period, even as the richer half of India’s population has benefited dramatically from the liberalization process. But the more problematic side of the reforms has been not poverty, but rising inequality.

In the macroeconomic literature, several careful studies have been conducted to see whether the economic miracle that India has gone through has tricled down to the lowest economic classes. These are documented in papers by Sen and Himanshu (2004), Deaton and Dreze (2002), Jha (2002), and Ghosh and Chandrasekhar (2005), links to which I have included in the references at the back of this essay. The analysis is not comforting, and is summarized by the chart above, taken from Himanshu and Sen (2005). It shows two key trends. The first unsurprising conclusion, is that reform-led growth has greatly benefited urban rather than rural areas of the country, in contrast to the agricultural revolution in the 1960s that lifted the rural parts of India out of abject poverty. The second, and more disturbing, is that the era of increasing prosperity over the past 15 years has caused the top quintile of the population to sharply increase their per-capita income, while the bottom quintile has not seen a corresponding benefit.

Nowhere is the rise in inequality more apparent than in large metro areas such as Chennai, where abject slums coexist with world class opulence. If we take Vijaya’s individual example to illustrate, in 1970, a house servant in Chennai would have earned about Rs 150 per month, while my father, a senior government servant, earned Rs. 3300/- per month, which could be regarded a  middle class income. The ratio of the incomes was thus 22. In contrast, today’s middle class person earns, say Rs 40,000 per month against Vijaya’s Rs 1000, a ratio of 40. Overall, however, India’s income inequality is still quite low compared to other parts of world such as Latin America. It remains to be seen whether this rising inequality will be addressed through the social and political process.

 Lessons from Latin America

The experiences of other emerging countries with high degrees of inequality is quite instructive. For example, Latin America has, in the past decade, swung significantly towards leftist and socialist politics, partly as a result of rising inequality. For example, as the table above shows, although Peru has on average almost twice India’s per-capita income, Peru’s  lowest quintile are worse off than India’s – earning only about 2/3rds the per-capita income.  

In 2006, after following a seemingly exemplary macroeconomic policy during a period of global growth and peace, Peru  held presidential elections against a backdrop of strong economic growth. The country had grown strongly during the period, and virtually every economic indicator during the period was positive and stable. Yet the ruling party found itself lagging badly in the polls. The message of populist candidate Ernesto Humala, whose constituency consisted of rural and urban poor, was explicitly divisive, aiming to return the country to the native Peruvians, to drive out the “Spanish invaders”, and to follow redistributive policies that would reverse the pro-growth record of the sitting government. Ultimately, Humala was defeated narrowly after two rounds of voting by another opposition candidate, Alan Garcia.

Together with Hugo Chavez of Venezuela and Evo Morales of Bolivia, both of whom are sitting presidents, Humala represents a politics of divisiveness that threatens to drag down Latin America.  The source of their political power comes from the poor, their politics is reactionary, anti-global, anti-business, anti-west, anti-reform, and anti-middle-class. Their economic policies are, in a word, disastrous. Chavez and Morales have increased the role of government, appropriated the mineral wealth of their countries and used it to shore up their political popularity, nationalized their industries, and muzzled the press.

Population income inequalities are measured by the so-called Gini Coefficient, which is 1 for a perfectly equal population and 0 in a perfectly unequal one ( i.e., lower numbers are better). Latin American countries have coefficients above 0.5, indicating extreme inequality. India’s coefficient is about 0.36, having risen from 0.3 over the past decade. I don’t have up-to-date figures for rban Tamil Nadu, which has one of the highest levels of inequality in India, but it has historically shown a Gini coefficient about 0.10 higher than the Indian average. Could a populist anti-reform movement take hold in India or in Chennai? Frankly, I do not see any signs of it as yet. But looking at other parts of the world shows us what can happen when inequalities rise to the breaking point. It is a timely warning to Chennai’s and India’s citizens not to ignore the perils of social and economic inequalities.

There aren’t any easy solutions to these issues, however. And while we must continue to look for ways to improve the lot of the next generation of poor, primarily by giving them more opportunities, let us not forget what a boon overall the reforms of the past decade have been to all of society. Without that boon, we could not contemplate the necessarily expensive safety net that the poor will need. That safety net probably needs to start with healthcare, as we will discuss next.

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