The Vulnerable 50%
India’s economy has failed the most-vulnerable half of the population. Shefali Saldanha argues that the pandemic could be an opportunity to change the system.
For the past couple of months, our news-feeds have been filled with heartbreaking stories of the estimated 40 million labourers stranded across the country with little savings and limited food, living in unhygienic conditions and desperate to get home. We hoped, for fear of infection rates overwhelming our already stretched healthcare system, that the virus would not hit the 104 million Indians living in slums, where safe distancing and regular hand-washing is impossible. Unfortunately, this nightmare is quickly becoming a reality.
The pandemic has brought stories not only of stranded migrant labourers and outbreaks, but of rising unemployment, and shocks to our economy that may take years to recover. It has revealed how fragile the country is, where 50 percent of the population are below the poverty line, or hovering close above it. The truth is that we will never become the middle-income nation that we aspire to be if we continue to ignore this ‘vulnerable 50%’. India will remain reliant on foreign investment and will struggle to maintain high levels of GDP growth.
The system is broken, but I believe that the COVID-19 pandemic could present a unique opportunity to change the flawed structures in place that keep the poor trapped in a whirlpool of generational poverty.
Economic liberalisation in 1991 kick-started an era of foreign direct investment in the Indian economy, privatisation of public-sector enterprises, and the opening up of the economy to private players. While this led to India becoming one of the fastest-growing economies in the world, the trickle-down effect that was claimed to enrich the country’s poor, never happened.
The vast majority of the country remains left behind. We may add on average three billionaires a month, but we’ve also raced up the global tables of inequality, a trajectory that began in the 1990s. This is strong evidence that GDP growth has disproportionately benefitted some a lot more than others.
How can incomes grow when half the population depends on the agriculture sector, which accounts for only 14 percent of the GDP? How can there be growth when the government consistently underspends on public services like education and health? What is development when India ranks 129 out of 189 countries on the Human Development Index?
We have aleady begun to feel the effect of this. India is a consumption-led economy (60% of GDP is consumption). A decline in disposable incomes has contributed to a slowing consumption growth rate for the past year, and thus, a decline in GDP growth rate—albeit still at a good pace.
How can incomes grow when half the population depends on the agriculture sector, which accounts for only 14 percent of the GDP and yields little to the people by way of prosperity? How can there be growth when the government consistently underspends on public services like education and health—7.7% in the 2019-20 financial year—woefully lower than most European countries than spend upward of 40%? What is development when India ranks 129 out of 189 countries on the Human Development Index?
This vast growing middle-class, that so many foreign and local companies and investors have hedged their bets on, has not materialised. In a 2015 study by Pew Research Institute titled ‘A Global Middle Class is More Promise than Reality’, Rakesh Kochhar writes: “although the poverty rate in India fell from 35% in 2001 to 20% in 2011, the share of the Indian population that could be considered middle income increased from 1% to just 3%. Instead of a burgeoning middle class, India’s ranks of low-income earners swelled. Many of these were people hovering closer to $2 than $10 in daily income, and thus still a ways away from the transition to middle-income status [$10-20/day].”
In the past few weeks, as the government and the central bank have tried to figure out how to revive the economy through fiscal and monetary policies, I have read that Prime Minister Narendra Modi has called for a reform to the agriculture sector, and is devising a plan to attract those companies leaving China to set up shop in India. While the official plans are still to be released, I gather from media reports that the agriculture reform is focused on greater use of technology, doing away with archaic regulations and middlemen, changing the mandi system.
To lure foreign companies leaving China—specifically in 10 designated manufacturing sectors—the government plans to create a land pool twice the size of Luxembourg. The deal is likely to be sweetened with lower taxes and relaxation of labour laws. Though the corporate tax rate was already lowered in Sep-19 from 30% to 22% leaving little room for further reduction, IHS Markit analysts predict that the government will offer tax holidays and possibly amend the labour laws to allow for easier hiring-and-firing of workers.
Agriculture sector reform is critical, as is a plan to revive the economy. As promising as these plans appear, however, it is important that we do not reinforce the existing structures that continue to disadvantage half the population, and instead, reimagine a structure that allows everyone to prosper. Our small-hold farmers need fair prices for their produce and protection of their land. They need help to remain competitive. They need strong regulations with proper implementation that protect them, not “partnerships” with big businesses that will further exploit them. Left to fend for themselves in the “free” market, they will get swallowed up by large corporations.
I worry about where this promised land—this double Luxembourg—for the land pool, is coming from. Since civil unrest by farmer groups and local populations demanding fair compensation has been cited as the greatest impediment to buying land and setting up business in India, Modi is unlikely to upset his critical voter base (plus land is the purview of the state). I am concerned that the land pool focused on attracting manufacturing companies puts India in a labour price war with countries like Bangladesh and Vietnam. I fear that at a time when unemployment is soaring and our workers are at their most vulnerable, this could lead to further exploitation. At a time when we need strong labour laws that protect our workforce, nine states have already announced a relaxation in labour laws to attract foreign investment. This is absolutely terrifying.
Together the agriculture and manufacturing sector employs 68% of India’s workforce but accounts for only about 30% of GDP. If we can develop these sectors and ensure this workforce earns well and comfortably moves into the middle-income bracket, we can ensure strong consumption, and thus, strong GDP growth. We also make India more self-reliant and less vulnerable to shocks in the global economy. To do this, India needs to have regulations in place that ensure a good income and standard of living for this workforce, and to invest in public services like education, health, water, sanitation, and housing to develop skilled labour. Equally important is to have systems in place to implement these regulations.
Early media reports leave me both slightly hopeful and extremely worried. I’m hopeful that the agriculture sector is finally getting the attention it needs, but I’m worried that the reforms may not be inclusive. I’m hopeful that we can get rid of the regulations that keep us poor, but worried that we will also get rid of the ones that protect the poor. The government has a critical role to play at this juncture to revive the economy and support the poor with fiscal measures. The pandemic presents a unique opportunity to build political will to make structural changes.
If cheap labour remains our main selling point, the bottom 50% will remain vulnerable. The economy will grow but at a slower pace and at the cost of half the country’s population. We should take this opportunity to build an economy with a stronger growth story, an inclusive one, that can be shared by every Indian.
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Shefali Saldanha is Singapore-based working for an Impact Investing firm managing the India portfolio. Previously she worked for a social enterprise based in Mumbai. She has an MBA from Oxford, a BA from the University of Virginia and over a decade of experience working in the social sector space in India and regionally. You can find her at linkedin.com/in/shefalisaldanha.
