Pursuit of Inclusive Growth – Shri P Chidambaram, Union Minister of Finance

P Chidambaram is the Union Minister of Finance

I’m very happy to be here to inaugurate the 38th National Management Convention. The subject is important. We are on the threshold of the 12th plan which will begin in April 2012. The theme of the 11th plan was faster and more inclusive growth and the theme of the 12th plan is also faster, more inclusive and higher growth. In the initial years of economic reforms and liberalisation, the emphasis was and I think rightly on growth. I think we need to get away from our belief that India can’t grow at more than 5% or so and that with reforms, with liberalisation with greater openness and competition India can grow at 8 or 9 % was something we had to believe in first before we could have achieved it. It took some time for the Indian people including the business community to believe that we have a capacity to grow at more than 8%.

Having demonstrated our capacity to grow at a higher rate, the emphasis rightly shifted to more inclusive growth.I think we need to define what inclusive growth is, inclusive growth can’t be measured in any one parameter. Higher per capita income can be achieved by small section shaving very high incomes while people at the bottom continuing to have low incomes; still statistically one can say we have a higher per capita income. Inclusive growth can’t be merely the GDP number.

The GDP number can be contributed by a few states leaving out half a dozen poor states. The GDP number can be contributed by a few sectors leaving out sectors which employ unskilled or low skilled people. I think it’s important in your convention to define inclusive growth, to understand the different aspects of an inclusive growth.

The approach document of the next plan makes an attempt and it lists the following as indicators of inclusive growth. First and more obvious one is lower incidence of poverty. Poverty must decline, and the rate at which poverty declined at the first years of liberalisation was about 0.8% a year. We believe that it’s now declining at about 1% a year. Poverty must decline at a higher rate. So lower incidence of poverty and rate of decline in poverty is an important indicator of inclusive growth.

The second is, growth must be reflected in day to day lives of ordinary people and one needs to have better standards of living or better quality of life. Only if the members of the family especially the children have access to school and higher education and it is reflected in better health outcomes particularly infant mortality rate and maternal mortality.

Another measure of inclusive growth is the quality of education. Twenty years ago we said that some districts in India had achieved 100% literacy and I was pleasantly surprised to read in one of the publications that my district was among them. Then we probed further we found that anybody who would sign his/her name in the local language is considered as literate.

Many of us still believe that a child who has completed 3-4 years of school education and can barely read or barely write is an example of a literate child or a literate human being. Nothing can be further from the truth. A child who has 3-4 years of school education and no education for 10 years after that will relapse into illiteracy. So it’s important that we measure inclusive growth by the quality and standard of education and by the skills a person acquires. Skill development is an important measure of inclusive growth.
And finally, we can’t assume that all people are equal, all people are born equal. Everybody is not equal in the manner they live or learn or they work. The schedule caste, the schedule tribes, they are not equal to more privileged sections of the society. Women and children who make up 70% of the population are not equal in terms of access to wealth or income or opportunity like men are. Minorities are not equal in the way they live, in the housing they have, in access to infrastructure. The disabled are not equal to those who are able bodied and therefore inclusive growth will mean special programs to address the requirements of the schedule caste, the schedule tribes, women, children, minorities, disabled and other disadvantaged groups.

The challenge therefore is enormous and my fervent plea to the business community is not to measure India’s growth in terms of GDP or incomes or tax revenues, but to look at India’s growth as an opportunity to convert that growth into inclusive growth and I think every business must address not only the challenges of growth but the challenges of inclusive growth.

There are some very happy developments in the last few years, firstly for many years a few states in India were classified as ‘bimaru’ states, a very quaint word but captured the fact that Bihar, Madhya Pradesh, Rajasthan, Orissa but the happy development is, that states like Bihar, Orissa, Assam, Rajasthan, Chhattisgarh, Madhya Pradesh, Uttrakhand and to some extent Uttar Pradesh  have demonstrated higher  growth rates in the 11^th plan period than ever before. In fact some of them have demonstrated a higher growth rate than the so called advanced states which is very good sign. It’s a sign that growth is spreading to parts of India which had not witnessed the benefits of higher economic growth.

As I said, reduction in poverty is still unsatisfactory. The rate at which poverty is declining will mean that we will take another 25-30 years to abolish abject poverty. So we need to address the issues that will accelerate the rate of reduction in poverty.

Real farm wages have improved tremendously. For example, across India the real wage rates have increased by 16% between 2007 and 2010 and in some states like Andhra Pradesh and Orissa they have increased at a faster rate. This is good. It is meant that unskilled labour in rural India can bargain for higher wages. The Mahatma Gandhi rural employment programme has been a major stimulus in this regard. We should welcome it.

Lastly, we know there is improvement in rural and urban infrastructure although the improvement is not entirely satisfactory. Especially in rural India the Pradhan Mantri Gram Sadak Yojana is made a huge difference. The villages which were never connected by road are now connected by all weather roads and these are very good quality roads, but even while we build a new rural and urban infrastructure we are allowing the existing infrastructure to decline or detoriate because we don’t pay attention to maintaining the existing infrastructure, but generally there is an improvement in rural and urban infrastructure.

Better primary health centres under NRHM, better school buildings under the Sarva Shiksha Abhiyaan, better roads under the Pradhan Mantri Gram Sadak Yojana, better highways under the National Highways program, better drinking water supply; I think we are adding to good infrastructure but the word of caution is we must learn to maintain our infrastructure and all this would require money.

In the pursuit of inclusive growth, there are a number of schemes. The major ones are well known to all of you and on the major ones, 13 in number, beginning with Mahatma Gandhi National Rural Employment guarantee to the Rashtriya Krishi Vikas Yojana, we will spend in 2011-12 One lakh eighty eight thousand five hundred seventy three crores. That’s not a small sum of money. The question is, do we get the outcomes that are expected when we spend Rs One lakh eighty eight thousand five hundred seventy three crores. Obviously there are leakages. Some programmes in some areas are poorly designed, outcomes are not measured, quality is sacrificed due to poor monitoring and poor supervision, accountability is not enforced and penalty is not imposed. If we can get the full value for the money we invest on these programs, I have no doubt we will be a step closer of inclusive growth.

Finally we need to sustain and continue to pursue inclusive growth, we need to raise resources and I have very serious questions and I have raised these questions about where will these resources come from. In the 12^th plan period, according to the approach paper tax revenues net to the centre are expected to rise from 7.4% in the current year to a high of 8.91% in the terminal year, a little less than 9%. Non tax revenues are expected to decline and worrying part is aggregate resources that includes tax revenues, non tax revenues, non debt capital receipts and borrowing, aggregate resources are expected to decline from 14% in the current year 2011-12 to 13.11 as an percentage of the GDP.

Now while the absolute number will be larger, the GDP will be larger in terms of percentage as percentage of GDP, aggregate resources will decline and I’ve raised this issue and said we must raise the tax revenue to the centre. I know many of you won’t like this but I can summon the courage to make this statement, I’m the finance minister who slashed your tax rates and therefore I’m advocating we must be prepared to pay higher taxes and rich must be prepared to pay higher taxes. In Europe there is movement that rich people are getting together to say please tax us more, certainly this is not the place nor am I the person what taxes to be raised but certainly  we need to consider how tax revenues in this country can be raised.

In the early years capital formation is important & tax rates were crippling and therefore we consciously in 1997 and then thereafter, after 2004 we reduced tax rates. We abolished the surcharges, in order to promote capital formation but I think capital formation is not such a great challenge and industry today can raise capital today not only locally but globally. What we need is non debt revenues to the state and that can only be tax revenues and these revenues are important if we have to achieve inclusive growth. Of course as taxpaying citizens you have a right to ask, are you spending my money properly and the government is obliged to answer and account to you that every rupee that you give to us is spent properly and punish us if we don’t spend it properly and but if we spend your money properly I think we are entitled to ask you that you should give more.

I think the only way we can sustain our dream and our pursuit of inclusive growth is to ensure that we are properly financed and financed by non debt creating revenues. The alternative is to borrow more, the alternative is advance the fiscal deficit and that is surely not a wise discussion. So while you debate these seminal issues today and part of tomorrow, I would urge you to define inclusive growth, you don’t have to take our definitions, you can tell us how to define inclusive growth,urge you to identify the measures of inclusive growth, how to measure inclusive growth and I would urge you also to consider how to finance the ambitious goal of inclusive growth. I have a great pleasure in inaugurating your national management convention.

P Chidambaram is the Union Minister of Home Affairs, Government of India . This is an excerpt from his key note address at AIMA’s 38th National Management Convention.