Fiscal discipline: now comes the hard part

Despite improvements in the recent period, deficits need further trimming

Macroeconomic conditions in India have improved a great deal since the second half of 2013, when the country narrowly avoided a ratings downgrade to junk after the so-called “taper tantrum”. The Indian rupee was in a free fall and the economy was stumbling towards a crisis thanks to economic mismanagement in the preceding few years. The three most important indicators of economic health were flashing red: inflation, current account deficit and fiscal deficit.

Much has improved since then. The current account deficit and inflation are now under control, and there has been a considerable improvement in the fiscal position, though the consolidated fiscal deficit of the Indian government is around five percentage points higher than the average of its emerging market peers. Yet, the policy establishment has had good reasons to hope for a ratings upgrade, which will improve India’s standing in the global financial markets.

However, Standard & Poor’s, a rating agency, last week dismissed all such hopes, at least for now, citing the state of public finances as a key constraint for an upgrade.

While some enthusiasts in New Delhi may not agree, the reality is that despite improvements in the recent period, government deficits need further trimming, even as the task ahead will be made challenging by the prospect of higher salary and pension commitments. The one-time dividend from lower global energy prices has also been used; there is no similar windfall likely next year.

The coming Pay Commission recommendations will increase pressure on both central and state government finances. The government has accepted the One Rank One Pension scheme for the armed forces. Debt-laden state electricity boards will have to be rescued at some point in the near future, possibly by transferring part of the debt to the books of state governments (though that will not be a permanent solution to a persistent problem).

Further, the central government may have to infuse more equity in the public sector banks to help them deal with their bad loans, meet global regulatory requirements and enhance their lending capability.

The government also has to push capital expenditure to revive economic growth in the absence of investment activity in the private sector. And slower expansion in nominal gross domestic product essentially means that the denominator of the fiscal deficit and public debt ratios is growing at perhaps its slowest rate in a decade.

All these factors put together will make further fiscal consolidation a tough task—and will test the commitment of the finance ministry.

One way forward for the government is to aggressively push growth through reforms. Faster growth is the best way out. The second United Progressive Alliance government managed to follow a reckless fiscal policy yet keep the public debt burden under control by inflating away its debts.

What India needs as part of a sustainable fiscal correction is faster real growth, which will also help tax buoyancy.

One immediate policy option needs to be activated. As noted by the 13th Finance Commission, the government should use disinvestment to increase capital expenditure—a sort of asset swap. While the current government in New Delhi showed the intent to aggressively use the disinvestment option, and had set a praiseworthy target for the current year, the movement in the first half of the fiscal has been poor.

While many would disagree with the assessment of credit rating agencies, and their action (or lack of it) during and after the financial crisis has certainly not enhanced their credibility, it does not hurt to take their evaluation positively. It is indeed true that general government deficit in India has been on the higher side compared with its emerging-market peers and other middle-income countries.

Therefore, the necessary fiscal adjustment will not only be credit positive, but will also enhance India’s ability to absorb shocks emanating from global markets and create conditions for sustained higher growth in the medium to long run.

The political economy of welfare schemes

Governments that are interested in scaling up social security schemes prefer universal coverage

Social welfare schemes the world over are going through interesting times. Egged on by fiscal management targets, welfare cuts are routinely passed off as “reforms”. Subsequently, there is usually pressure on governments to target welfare to the most deserving. Determining who the deserving beneficiaries are and the appropriate value of these transfers is critical.

In a recent edition of the Pathways’ Perspectives, social policy specialist Stephen Kidd bats for universal social security schemes. His central argument is built around the political economy of targeting, suggesting that “inclusive social security schemes build political alliances between those living in poverty, those on middle incomes and the affluent”. Governments that are interested in scaling up social security schemes prefer universal coverage. The argument goes that this way, they build a wide coalition of interests that support their scheme and hope that this support translates into electoral endorsement. On the other hand, governments that are interested in scaling back social security schemes do so by first withdrawing from universal schemes and then introduce an element of targeting. Soon, those that do not benefit from the scheme are more likely to see it as wasteful public spending and therefore, support a move to cut back.

Theoretically, as a political economy argument, this makes a great deal of sense. The real test, therefore, is: this is a theory borne out by empirics? Here, Kidd offers us a variety of examples, ranging from 19th century Europe and modern-day United Kingdom to Mongolia and Uganda. These examples show how countries with more inclusive schemes display a higher commitment to financing social security, as demonstrated by higher levels of tax-financing for such schemes. For example, Nepal’s universal pension scheme spends about 0.5% of its GDP, which is significantly higher than that of its South Asian neighbours, India and Bangladesh, which only have poverty index-based pension coverage.

Kidd also provides examples of Chile, Bangladesh and the UK to show how poverty-targeting can lead to the exclusion of the poor from these schemes, either due to weak administrative capacity, or poorly administered eligibility criteria of poorly designed social security schemes. As opposed to this, universal schemes have not only the advantage of a straightforward beneficiary identification process, but can also be introduced as rights that citizens enjoy. There is also substantial evidence from across the world that for basic social security schemes such as old-age pension, universal coverage not only scores higher on equity, but is also administratively efficient and cost-effective.

Finally, with the example of Uganda’s successful universal Senior citizens’ Grant, Kidd illustrates how domestic political support (and finances) can be mobilised in favour of a universal social security scheme—the kind of support that is critical if development agencies supporting recipient governments are preparing for local ownership, scale-up and their eventual withdrawal.

While the political economy argument works, it also raises an interesting question: why would a democratically elected government ignore this rationale of expected electoral dividends? The answer lies in the specific nature of domestic electoral politics. But first an aside—from the country cases cited, I must point out that the likes of Uganda are hardly model democracies. There may be many other forces that contributed to the political economy conditions that led to the kind of decisions the governments in these countries took with regard to social security schemes, but electoral politics is unlikely to have been one of them. Social security schemes are as much about gaining legitimacy, as they are about promoting inclusive development. Even autocratic or semi-autocratic governments desire for a semblance of legitimacy.

Coming back to the nature of electoral politics, it is useful to examine how the specific conditions on the ground influence the design and roll-out of social security schemes in different countries.

Let’s take India, for instance—admittedly frustrating at times, as it does not conform to most general theories, but undeniably important since the country houses a large chunk of the global population that ranks poorly on various human development indices. Electoral politics in India is highly complex. A combination of identity-based politics, fragmented polity (numerous viable political parties) and the first-past-the-post system of elections creates conditions where narrow voting allegiances are cultivated through patronage dispensation. Therefore, determining ‘who’ benefits will always be controversial. Either aggregate data is plainly disputed by one or the other players in the system, or data takes a back-seat in the battle over identity-based entitlements. In regions where negotiations to corner a greater share of state resources play out as a zero-sum game, it is difficult to see political leaders pushing for universal benefits.

This is exacerbated by the existence of numerous viable political parties and the first-past-the-post electoral system which incentivises consolidating the votes of a core base of supporters rather than canvassing for a wider cross-cutting vote. Also, the fact that the poor turnout in higher numbers to vote also affects the thinking on these issues. Where a universal social security scheme might change the baseline conditions across an entire population, additional votes are likely to come from securing differentiated and attributable benefits for narrow constituencies.

More than the narrative around the pressure to manage the government’s fiscal deficit, perhaps that explains why governments in India are not committed to universal coverage of social security schemes? So long as political parties confine themselves to conventional politics, social security schemes will continue to be targeted, based on one or more criteria, rather than universal, even when faced with evidence to the contrary. It remains to be seen whether we will have a government that can push the boundaries of electoral politics, towards a politics of shared welfare through mobilisation that goes beyond conventional political allegiances.

The theme for the Vigilance Awareness this year is “Preventive Vigilance as a tool of Good Governance”.

The Vigilance Awareness Week is being celebrated from 26th October to 31st October, 2015. The theme for the Vigilance Awareness this year is “Preventive Vigilance as a tool of Good Governance”. The Commission has been laying stress on Preventive Vigilance and driving home the point that vigilance should not be seen in isolation but as a tool to achieve good governance and better operational results. The Vigilance Awareness Week is being celebrated every year and coincides with the birthday of Sardar Vallabhbhai Patel, known to be a man of high integrity.

A press meet was organized by the Central Vigilance Commission in New Delhi today. Addressing the media persons, the Central Vigilance Commissioner, Shri K.V. Chowdary said that more emphasis should be given to ‘preventive vigilance’ than the ‘punitive vigilance’. The systems and processes should be set in place so as to generate alarm in case of anything happening beyond the prescribed processes. He said that it is important to bring changes in the system so that we can prevent such misconducts.

Commenting upon the delays and pendency of cases, he said that areas need to be identified where delays have happened and appropriate action should be taken to streamline the procedures and SOPs about the dealing of applications, their criteria and other related matters. Explaining the scope of corruption, he said that corruption is not only about giving money, but it includes all actions where processes are being compromised. He said that now the Chief Vigilance Officers (CVOs) have been made to access the pendency of cases pertaining to their organizations through the website of the Commission, thus speeding up the disposal of cases and reduction in pendency. The Commission can keep a tab on the log of the CVOs.

The prime focus of the Commission is to curb the pendency of cases. The number of cases pending sanction for prosecution (more than 4 months old) were 28 as on 30-06-2015 which were reduced to 15 as on 31.08.2015, thus coming down to half within 2 months.

He said that the purpose of Vigilance Awareness Week is to generate awareness in the public at large about the bad effects of corruption. He informed that this year then CVC is giving lectures at school and college levels. This will take the message of preventive vigilance to the young minds and they will be in a position to influence the society at large, he added. He said that the training of the Officers of the Commission and CVOs is being organized within the country and abroad for improving their skills and efficiency. Commission has, as a part of its knowledge management exercise, initiated a program to invite one eminent person every month to address its officers and all CVOs (through video conferencing) on a topic related to vigilance and improvement of governance.

He said that road ahead for the Commission is to analyse the suggestions received by the Commission from CVOs and public at large.

The CVC also appealed to the media to spread awareness on this issue among the public at large. He said that the Commission receives many complaints from the public at large every year. The awareness should be generated among the public so that the complaint is addressed to the appropriate authority and the action can be taken faster.

Giving emphasis on preventive vigilance, Shri T M Bhasin, Vigilance Commissioner said that prevention is better than cure. He said that investigative vigilance takes time and it also affects the morale of the employees, so preventive vigilance should be given prominence over the investigative vigilance. He said that the theme of Vigilance Awareness Week is not for a week only, but it will be for the next one year and is a part of its regular and dynamic process.

The observance of Vigilance Awareness Week will begin with taking of pledge on 26th October, 2015 at 11:00 AM in all the Government, Public Sector Organizations, Autonomous Organizations and Local Bodies.

Besides the regular activities of display of banners, posters, advertisements in the Newspapers and organization of activities such as lecture, panel discussions, competitions in Government and Public Sector Organizations, the Commission this year is reaching out to college and school students in a big way. Debates/Elocution/Lectures are being organized in 135 cities/towns spread across the country. CVOs of 101 organizations are involved in organizing these competitions and each CVO has been assigned certain number of cities/towns with the instruction to organize these competitions in at least 3 colleges and 2 schools. It is expected that competitions would be organized in more than 2000 colleges and schools. Activities are being organized across India in cities including Delhi, Chennai, Mumbai, Kolkata, Hyderabad, Bangalore, Pune, Vijayawada and Ahmedabad. The Hindi College, Lady Shri Ram College, St. Stephen’s College, IIT Delhi, JNU from Delhi; Anna University, SRM University from Chennai, NNIMS College from Mumbai, Birla Institute of Technology from Kolkata and Gujarat National Law University from Ahmedabad are among other educational institutions organizing activities during Vigilance Awareness Week.

Africa, the indispensable continent for India

Africa, the indispensable continent for India
The third India Africa Forum Summit (IAFS) in New Delhi this week, with over 40 African heads of governments and states attending, will be the biggest foreign policy event hosted by India in more than three decades. While this process was partly in response to initiatives by other emerging powers, particularly the Forum on China-Africa Cooperation launched in 2000, it was also a belated recognition that Africa was becoming an indispensable continent for India’s future—one that New Delhi can ignore at its own detriment.

Today, India and Africa matter to each other in at least four ways: First is the common historical experience of colonization and decolonization. Derived from that is the normative notion and principle of independent, sovereign states committed—at least in theory—to the liberal peace paradigm. This was evident in the historic soft power approach that promoted sovereignty, independence and support for the liberal model of development.

Second, following India’s economic liberalization from 1991 onwards, Africa has emerged and is likely to remain crucial for natural resources and developing markets. This is evident in the increasing trade, which in the past five years has grown six-fold to nearly $70 billion. India is now Africa’s fourth largest trading partner, though raw materials make up over 80% of Africa’s exports to India. Crude oil and gas have emerged as the leading exports to India, accounting for nearly two-thirds of all exports. The increase in India-Africa trade has also been a principal driver behind India’s evolving concept of development partnership cooperation and has been the key approach for engagement with Africa since 2003.

Third, Africa remains vital for India’s emergence as a global actor in the international institutional arena. Both India and Africa are keen to reform the existing global governance structures, especially the UN Security Council (UNSC), and shape the emerging global regimes, particularly those related to food, energy, climate, water, cyber and space. However, there are two challenges: first, neither India nor African nations have the capacity to shape these regimes on their own; they will have to work together. Second, on many issues, such as climate change, UNSC reform and UN peacekeeping, there are significant differences.

In case of UNSC reforms, for instance, the Ezulwini consensus adopted by African nations at the prodding of China effectively preserves the status quo and benefits only the existing five permanent members of the UNSC rather than either India or Africa’s interests.

Finally, there are security threats emerging from Africa that not only impact the African nations but also have a strong bearing on India. Terrorism and organized crime (including piracy) are of increasing concern to India and Africa. International terrorism has been on the rise in Africa in recent years extending from Nigeria in West Africa to Somalia in the Horn of Africa. Reports also claim that terrorist groups with linkages in Afghanistan, Pakistan and Iraq have been using Africa as recruiting grounds for jihad. While India is not directly affected by the localized terrorist organizations in Africa, the troubling links between Somali and other groups such as the al Qaeda-affiliated al Shabab, and militant groups in the Af-Pak region could significantly affect India’s future security.

While the IAFS process is crucial to sustain the complex and multifaceted India-Africa relationship, this process alone may not be enough to strengthen the burgeoning relationship. That may require multiple and more frequent processes of engagement involving not only government-to-government interaction but also the private sector, state governments as well as civil society.

New energy norms for urea plants may save Rs 800 cr in subsidy

New energy norms for urea plants may save Rs 800 cr in subsidy
The government has issued revised energy norms under the new urea policy for existing 25 gas-based urea plants in the country, a move that is expected to save about Rs 800 crore in fertiliser subsidy.

As per the norms issued by the Fertiliser Ministry, all the gas-based urea manufacturing plants are divided into three groups and a specific energy norm is fixed for each plant.

Fertiliser subsidy stood at about Rs 70,000 crore during the last fiscal.

Under the first group, plants can consume 5.5 g.Cal of gas per tonne of urea, plants under second group can consume 6.2 g.Cal of gas and those in third group can consume 6.5 g.Cal of gas.

Gas constitutes of about 65-70% of the cost of production of urea and cost of gas used is reimbursed by the government in the form of subsidy.

"...We have issued the new energy norms for all the 25 gas-based urea plants and as per these norms it is estimated that there will be savings of Rs 800 crore in subsidy payments on account of cost of gas," a source said.

The new norms have been issued as per the new urea policy which was cleared by the Cabinet in May this year.

The Policy has the objective of maximising indigenous urea production and promoting energy efficiency in urea units to reduce the subsidy burden on the Government.

The Cabinet had already approved the pooling of gas to provide gas to all urea plants at a uniform price.

The government had already decided in January to allow urea producers to produce neem coated urea up to 100 percent of production.

Neem coated urea is required less in quantity with same plot size and gives higher crop yields.

The MRP of urea for the farmers is fixed at Rs 268 per bag of 50 kg, excluding local taxes. Government pays the difference between cost of production and selling price as subsidy to the companies.

India produces about 22 million tonnes of urea and imports about 8-9 million tonnes to meet the domestic shortfall.

Judicial independence, accountability and transparency

Judicial independence, accountability and transparency
In all the discussions and debate on the merits of the collegium and the National Judicial Appointments Commission (NJAC), what’s been lost is the question of whether the NJAC, as envisaged under the 99th Constitutional Amendment and NJAC Act 2014, actually served the purpose it was supposed to.

The 99th Amendment and the NJAC Act, we are told in the Statement of Objects and Reasons, set out to introduce accountability and transparency in the procedure of appointment of judges. This was sought to be done by incorporating the Union law minister and such “eminent persons” selected by the prime minister, leader of opposition in the Lok Sabha and the chief justice of India.

This raises the obvious question: To whom is the NJAC supposed to be accountable and to whom does the process seem transparent? The obvious answer seems to be the government and, indirectly, Parliament. The citizens of India are twice removed from the process and in no way wiser about the selection process than the currently opaque collegium process. The NJAC incorporates all the drawbacks of the collegium system with merely cosmetic changes to the composition. No norms of suitability of judges are set out, no involvement of the wider public is envisaged and much of importance is left to be decided at a later date, non-transparently by the collegium itself.

Does that automatically mean that the Supreme Court should have struck down the 99th Constitutional Amendment and the NJAC Act as being an intrusion into the independence of the judiciary? I do not necessarily think so. The Supreme Court’s judgment in Supreme Court Advocates on Record Association vs Union of India, striking down of the 99th Constitutional Amendment and the NJAC Act as being against the basic structure of the Constitution is, in my view, based on some questionable presumptions of fact and legal prestidigitation. Even those in favour of the judgment have not attempted to defend it on purely jurisprudential and legal grounds. The defence of the judgment rests on the fact that the consequences are better than the alternative: whatever its faults, the collegium has resulted in mostly independent judges whereas the NJAC (essentially the same collegium system with two less judges and three other participants) offers up the possibility and scope of executive mischief in appointment.

Yet, focusing exclusively on the aspect of independence of judges, whether in the context of the collegium or the NJAC, has meant that the terms of the debate have narrowed and taken the focus away from the equally important issues of accountability and transparency in the functioning of the judiciary. While independence of the judiciary was no doubt an important issue over which the executive and judiciary engaged in a mahayuddh in the 1970s, 80s and 90s, the fact remains that accountability of the judiciary and transparency in its functioning pose far more penetrating questions today that, if unanswered, threaten to undermine the institution.

It is a folly to separate issues of independence, and transparency and accountability in functioning of the judiciary into separate boxes. Functional independence sans accountability and transparency is a form of tyranny. Demanding accountability and transparency without a guarantee of functional independence is tantamount to demanding servitude. Neither is the proper state of affairs for our judiciary, and all modern, democratic societies have tried to strike some balance between these aspects in the way the judiciary is structured.

In looking at the next steps forward, the issues of judicial appointment must be addressed in tandem with those of accountability and transparency. We need more vigorous public debate on how to ensure accountability of judges and transparency in the functioning of the courts, and the court must willingly step into this debate. Having vigorously defended its independence, to dispel any notions that it is “a tyranny of the unelected”, the Supreme Court must accept the Right to Information Act, 2005, as its institutional dharma and not just as a bureaucratic inconvenience. This does not only mean that the judiciary must offer up information less grudgingly but should also be more proactive in releasing information and open itself to bona fide scrutiny from academics, researchers, the bar and lay citizens alike.

While judges in the lower judiciary are effectively held accountable by the high courts and on occasion, the Supreme Court, the same cannot be said of the judges of the higher judiciary itself. Apart from the ultimate tool of impeachment by Parliament on grounds of “misbehaviour”, we lack effective tools to address various kinds of misbehaviour that may not necessarily warrant impeachment but nonetheless harm the judiciary’s functioning and society at large. While the instances of malfeasances—corruption in public office as seen in the cases of P.D. Dinakaran, Soumitra Sen and Nirmal Yadav merit the maximal penalty of impeachment, it would be difficult to contend that judges who have poor disposal rates, don’t sit in court on time, or tend to leave judgments undelivered for years after hearing cases should also be faced with such maximal penalties. The time has come to back up the principles of good judicial conduct with penalties and ensure that these standards are upheld in public life for judges at all levels.

The judiciary is an independent constitutional authority in its own right, just as Parliament and just as the executive. Independent, harmonious functioning in an accountable and transparent manner is required of all three wings. Judicial reforms, especially those concerning the higher judiciary, must therefore be approached holistically—questions of independence, accountability and transparency must be grappled with and solutions proposed that will balance all these principles without undermining any. Non-negotiable should be a threshold level of independence of the judiciary from the executive and Parliament, accountability of judges in their functioning to the public at large, and transparency in the functioning of the judiciary that enables the public at large to appreciate why the institution works the way it does.

6 people reached

Inequality and growth

Economists don’t write bestsellers. But when Thomas Piketty published Capital in the Twenty First Century, his treatise on the inherent tendency of rising inequality under capitalism, it instantly became a runaway success. Angus Deaton, for whom inequality—including in India—has been a major focus of research, was given the Nobel Prize for economics last week. The World Economic Forum, which is the pre-eminent club of business and political leaders from the world’s richest countries, and not a “bleeding heart” forum for the “have-nots”, continues to cite rising inequality as a major global risk in its annual Global Risk Report. Why all this recent attention to inequality studies? Why the great concern about rising inequality?

I return to this question further below, but first a review of the facts. Is inequality indeed rising?

Piketty verified his theory empirically with data largely drawn from Europe and the US. But the tendency of rising inequality is also firmly confirmed by trends in Asia. Using data from the Asian Development Bank’s 2012 Asian Development Outlook, economists Juzhong Zhuang, Ravi Kanbur, and Changyong Rhee demonstrate that from the 1990s to the 2000s, income (or consumption) inequality distinctly increased in 12 major countries of the region, covering 80% of the Asian population (see chart).

The increase in inequality varied across countries and was most prominent in China. The rise in inequality there was about four times that in Taiwan, where it rose the least. Inequality also increased in India. But the increase was moderate compared with China, Indonesia, Korea, and some other countries. Inequality estimates for India may be underestimates as they are based on consumption expenditure not income. But whether that should effect increases in inequality is not clear.

In a recent study dealing specifically with India (mintne.ws/1Llxss0), economist Himanshu shows that inequality has been rising in rural India, but much less than in urban India. Thus, between 1993-94 and 2011- 2012 the Gini coefficient (x100), a standard measure of inequality, increased from 25.8 to 28.7 in rural India compared with an increase from 31.9 to 35.9 in urban India (see table). For the country as a whole, the Gini coefficient (x100) went up from 30 to 35.9 over the same period.

Why is inequality rising?

There are three broad mutually reinforcing forces at work that drive the rise in inequality.

The first is technological change. Every wave of innovation in the modern era, triggered by the steam engine, electricity, the motor car, the transistor, the computer and the IT revolution, etc., has resulted in the rising capital intensity of technology. That, in turn, has shifted demand in favour of capital vis-a-vis labour, thereby raising the share of profits relative to wages. It has also shifted demand in favour of more skilled workers relative to less skilled workers, thereby raising wage differential between skilled work, including the work of managers, and unskilled work. Both these trends have, in turn, raised inequality.

The capital intensification of technology has been reinforced by the massive growth in global trade and the globalized system of production, communication and finance. Capital can now source labour and locate production wherever it needs to in order to minimize the cost of labour.

Consider miniaturization, a technical change that has combined room sized computers, bulky television sets and landline telephones into a single smartphone. But supporting that little phone is an awesome system of global infrastructure: supply chains, robotized factories, power production and delivery systems, and the network of terrestrial communication systems integrated with satellite communication systems and trans-continental fibre optic cables under the sea.

Click here for enlarge

All of this raises the demand for capital inexorably. It reinforces the shift of demand in favour of capital vis-a-vis labour, and in favour of skilled work as opposed to unskilled work. These, in turn, intensify the rise in inequality.

The trend of rising inequality is further strengthened by liberalization reforms that free up markets in developing countries. Free markets better reflect scarcity values as demand shifts in favour of capital vis-a-vis labour and skilled work vis-a-vis unskilled work, thereby accelerating the rise in inequality.

I now return to my original question, why is rising inequality such a concern for the World Economic Forum?

Traditionally, the relationship between inequality and growth was seen in a rather static, zero-sum framework. Should we redistribute the existing pie, thereby compromising growth, or should we focus on growth, ignoring inequality? After all, a rising tide will lift all boats.

It is now recognized that the forces that drive growth are also the forces that raise inequality as discussed above, i.e., technical change, globalization and liberalizing policy reforms (Juzhong Zhuang, Ravi Kanbur, and Changyong Rhee 2014). They are two sides of the same coin. Moreover, there are negative feedback effects from rising inequality that adversely effect growth. So the search for growth can no longer ignore the challenge of rising inequality.

Consider a poor country where large sections of the working-age people are at the base of the income pyramid. They do not have access to the required minimum levels of nutrition and healthcare. They also lack access to the education and skill training required to equip themselves as skilled workers. Such a country will be trapped at levels of productivity and growth that are well below its potential.

However, countries can be trapped below their potential even without extreme deprivation if rising aspirations clash with the rise in inequality. The growing mass of people at the lower quintiles of income may not be hungry any more. But if they lack the means to fulfil their aspirations, that too can generate a great deal of anger and social tension. Such tensions are heightened in our times by consumerism and 24x7 television. Even poor people living in remote villages are exposed to the lifestyles and consumption of the rich, developing aspirations they may never be able to fulfil.

As the WEF’s 2015 Global Risk Report points out, rising inequality stokes the fires of social unrest and instability. Once instability takes hold of a society, normal governance, peace and security, the rule of law, all fall by the wayside.

In Angus Deaton’s words: “...there are also terrible dangers of inequality, if those who have escaped from destitution use their wealth to block those who are still imprisoned in it”.

The evolution of the crisis thereafter can take two different paths.

If the crisis takes an extreme form, it could be beyond the capacity of the government to cope. Governance could break down, and eventually there could be a failed state. There are several such examples around the world, including in our own neighbourhood. Growth is not even on the agenda in this scenario.

Alternatively, a government may be unable or unwilling to tackle the roots of rising inequality, but it may try to contain social unrest. It will do so through palliative entitlement policies and accommodation of identity politics. We are seeing this path unfold in India.

The Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), the Right to Food, the Right to Education are all examples of such palliatives policies adopted to cope with the consequences of rising inequality. These policies do not contain rising inequality, but merely moderate its adverse social consequences. And they do so at a large cost, compressing the fiscal space for public infrastructure investment, thereby also compromising growth.

These palliative policies are combined with policies of appeasement towards identity politics in the context of scarce employment opportunities. Reservations and quotas in everything from panchayats, to college admissions to jobs rule the day. The Hardik Patel episode is a good example. Here is a community that is by no means poor. Yet it wants reservations, simply because others have it. We may soon see a day when all jobs will be allocated by quotas. Meanwhile, merit is going out of the window. Productivity and growth potential are being compromised.

Is there a better way forward? Some ingredients of inclusive growth are well known. Public provisioning of quality education, skill development and health services for the poor. Ensuring transparency and fair competition in land and other asset markets, preventing regulatory capture. A level playing field between employers and employees in the labour market. Competitive product markets. A prudent fiscal strategy that combines restraint on tax expenditures along with targeting of subsidies.

Will all of this yield growth without rising inequality? We won’t know till we have tried it. Successive Union governments have sworn allegiance to inclusive growth but never delivered. It would take a statesman, not an ordinary politician, to rise above short-term political expediency, and the usual pulls and pressures of power, to walk down this path. Meanwhile, it may be instructive to look around and see which country, if any, has managed to contain the rise in inequality without compromising growth.