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Is Inequality the Unstated Constraint on India’s Growth?
The study of economic growth in India has tended to be dominated by discussions on the effects of policies associated with liberalisation. Consequently, several other questions that are important to India’s growth story have not received adequate attention. This paper looks at two such questions: How does India determine how much it must save for growth? And who bears the burden of these savings through constraints on their consumption? This paper seeks answers to these questions from the experience of the post-independence Indian economy. In the process, it captures the part that inequality has played in generating the savings required for India’s rapid growth since the mid-1980s, a role that it is no longer in a position to play.
The economic policy discourse in India has tended to move in waves that overwhelm differences between major political parties. In the decades before 1991, it was not just the Congress that avowed socialism, but the Bharatiya Janata Party (BJP) too was launched as a party of “Gandhian socialism.” The discourse was flipped in 1991, with the Congress announcing that the free market was an idea whose time had come, and the BJP’s economic policymakers believing they were an even greater force of liberalisation. Among the consequences of this overwhelming tendency to swim with the tide is that several elements in India’s longer-term growth story tend to be ignored. One such casualty is the role of consumption patterns in determining the course of India’s growth patterns that bring out the critical role that inequality has played in generating India’s post-liberalisation growth. An empirical look at the role of consumption in India’s growth has been undertaken in this paper to find that gross inequalities in consumption have fuelled India’s economic growth, but this process may have now reached the end of its tether.
Consumption and Growth
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