India: Globalisation, Growth and Inequality

India has seen unprecedented growth in per capita incomes in the last two decades, particularly from around the beginning of the 21^st century, even though it (per capita income growth) has slowed down somewhat as a result of the global financial crisis of 2008. The increase in per capita incomes has been associated with an increase in the levels of investment and savings as well as integration into the global economy in terms of both goods and capital flows. If integration with the global economy has been associated with rising per capita incomes, there have been more worrisome outcomes as well: sustained increases in current account deficits during economic upturns; low levels of employment generation; distorted structural change and rising levels of inequality.

This paper is an exploration of how distorted structural change has becomes a driver of increasing levels of inequality. Structural change is distorted in the sense that the share of agriculture in GDP has come down significantly faster than in employment as a result of continuing divergence rather than convergence between agricultural and non-agricultural labour productivities.

In India, agricultural growth and productivity had begun slowing down by the late 1980s. This slowdown was accentuated as a result of globalisation and the related liberalisation of financial markets, producing a pervasive agrarian crisis out of which agriculture has only recently begun climbing out. Today agriculture accounts for less than 12% of GDP while it accounts for more than 45% of total employment. Therefore even though there has been some increase in the momentum of agriculture shedding labour, given that underlying sectoral labour productivities still continue to diverge, relative surplus labour in agriculture continues to increase rather than decrease.

The increase in relative surplus labour not only means that poverty declines very slowly, which is an established fact, but also that through rural-urban migration, it affects the market clearing wage in urban areas. This taken in conjunction with formal sector outsourcing of output and employment means that it is possible to keep urban wages from growing slower than the rate of growth of productivity. Therefore distorted structural change and specifically the continuing divergence of sectoral productivities becomes one of the drivers of rising inequality.

Within this overall narrative, regional growth patterns with differing quality-of-life outcomes suggest a more nuanced reading of institutional mechanisms and inequality outcomes. Therefore Tamil Nadu, like Gujarat a middle income state with similar levels of per capita income growth, has better developmental outcomes than the latter: higher participation of women in the workforce; lower levels of maternal mortality; better sex ratios; lower levels of malnutrition etc. The paper tries also to explain these differening outcomes within the overall context of distorted structural change and rising inequality.