India's economic report card

Given the huge positive press that India has received in recent times, it is sobering to discover that India's per capita income is just a shade higher than that of sub-Saharan Africa, and about one-sixth that of Latin America. Equally surprising is that 35% of India's population lives on less than $1 a day, which is comparable to Bangladesh's 36% and much worse than Pakistan's 17% and Sri Lanka's 6%.

What then is the basis of optimism for India? It has everything to do with change. To check this out statistically I pulled out WDI 1998 from my shelf. This gives data for mainly 1996 and so is unaffected by the East Asian crisis which started in 1997. In 1996, India had a per capita income of $380, Pakistan $480, Bangladesh $260 and Sri Lanka $740.

Compare these with the figures in the latest WDI (which pertain to 2004). India's per capita income has risen to $620 and has overtaken Pakistan's $600; and the relative gap with Sri Lanka, which now has a per capita income of $1010, has narrowed. Bangladesh which currently has a per capita income of $440 has grown reasonably well and so has lost out with India more marginally.

India's
Inequality

One worrying feature that could cause political instability and jeopardise this bullish forecast - and much of South Asia shares this anxiety - is the problem of poverty and inequality. Much has been written about this but again some statistical fact checking sheds new light. Inequality in South Asia is large but not as large as in much of the rest of the world.

Even smaller inequality means much greater hardship for the poor in South Asia.

Let us consider the ratio of income earned by a country's richest 10% and the poorest 10%. The ratio for India is 7.3. That is, the richest 10% of the population is a little over seven times as rich as the poorest 10%. All South Asian nations have similar ratios. This is a lot of inequality but not as much as in China which has a ratio of 18.4 or the United States 15.7. The problem with South Asia is that, being poor, even this smaller inequality means much greater hardship for the poor and this is what is feeding various kinds of rebellious movements in the region. This will be one of the most formidable challenges confronting India over the next decade if it is to live up to its promise.

The difficulty arises from the fact that the rising inequality is largely a concomitant of globalisation and, hence, for a single country to take action against this is to take the risk of a pathological backlash on the economy. To try to cap high-end income, as some have naively suggested, will cause the flight of skilled citizenry and capital to other nations and will exacerbate poverty. To wantonly subsidise the poor or to dole out largesse will cause fiscal bankruptcy, which will make the problem worse in the long run.

The focus will have to be on creating private-sector jobs with the complementary use of a few well-directed subsidies. This is not a matter of sloganeering and populist pronouncements but will require a combination of scientifically designed policy interventions that reach out to the poor without damaging market incentives and the entrepreneurial spirit.