Budget: Revisiting Growth versus Equity debate

Madhuri.S

Government policy makers and economists worldwide have always debated the issue of growth
versus equity. The fundamental question being,

Should the government place more emphasis on growth target of per capita income that will
trickle down to the lower sections of the society over a period of time, OR,
emphasize on more equitable growth that takes away scarce resources from investment towards
developmental objectives such as increased education, health care and other reforms?

For policy makers the difference lies in setting targets in terms of sectoral growth rates for
agriculture, industry, services vis--vis setting targets in terms of social indicators like
employment and education.

The debate stems from an important statistical relation between income per capita and Gini
coefficient, demonstrated by the Nobel Laureate Simon Kuznets in 1955. The Kuznets curve
demonstrated that there is a short term trade-off between per capita income growth and
inequality, until the economy reached a threshold level of income which allows the government
to focus more on developmental objectives and increase government expenditure on social
sectors. However, empirical evidence in recent years has been mixed and the high growthinequality relationship is not borne out in many cases like Latin America which shows low
growth with high inequality during 1994 as opposed to East Asian economies which had high
growth coexisting with low inequalities. Hence, the success of an economy is a function of the
governments policy mix regarding growth and developmental goals.

Viewed in this perspective, the budget in the past laid greater emphasis on developmental goals to
achieve what it calls a more inclusive growth to achieve growth through equitable development.
The emphasis is on higher public spending to stimulate private consumption. This is a welcome
strategy as research has shown that higher public spending in areas like education equips people
with skills and increases labor force participation rates; increased spending on infrastructure
attracts private investment in rural sections of the society opening up employment opportunities
and increased agricultural credit encourages greater private consumption.

However, Indias high fiscal deficit brings back the question of tradeoff between growth and
equity once again. Only difference is that the tradeoff now is not between growth and equity
but between growth and fiscal deficit because of the huge proportions it has attained thanks
to limited revenue generation.
Fiscal deficit is not a bad thing per se if the expenditures are within targeted levels, if they
1. Do not crowd out private sector investment by competing for investment funds and
raising interest rates.
2. Do not increase inflation leading to appreciation of currency and flight of capital.

In order for the fiscal stimulus to put the economy on its growth path the government has to roll
out specific measures with regard to disinvestment, investments in farm productivity; removing
anomalies with respect to administered pricing through subsidy reforms and investment
incentives in agriculture related services and environmental friendly projects.