Per-capita income up, now to spread it

India’s nominal per-capita income has doubled in the previous 10 years. Two-thirds of that, however, is on account of inflation, which by itself tends to increase income inequality. That calls for deeper policy intervention to control inflation, increase government employment, improve financial inclusion and redistribute a bigger slice of fiscal resources. Social choice driven by equity has a significant contribution to the pace of economic growth at every level of per-capita income. Government employment has a bigger impact on inequality at high per-capita income levels, while fiscal transfers work better at the lower end. Inflation, however, has a uniform effect irrespective of an economy’s development stage.

Enhanced welfare in India over the previous 10 years is being counteracted by inflation, which has been in large measure within the legally mandated policy band. Yet, the bias for the consumer price index (CPI) has been to stay predominantly above target. This is over a period when inflation in capital-surplus economies has stayed underwhelmingly below monetary targets. That imposes a set of policy imperatives on India’s ability to improve its trade and investment performance. Tighter integration with the global economy helps India to reduce the interest rate differential, making inflation control more effective.

India’s policy mix broadly conforms to the accepted economic wisdom on pushing growth. The evidence is in the pace of its recovery from the pandemic in relation to that of China. It can push this advantage further to attain the required rate of real per-capita income growth that does not reinforce inequality. Non-democratic China made rapid increases in per-capita income through a social contract not available to India. There is, however, a wide room for improvement through investment, fiscal transfers and financial inclusion. The policy horizon needs to be pushed further so that redistribution reinforces growth. This particular social contract is sustaining structural changes to the Indian economy.