Vantage point

Thursday, September 20, 2007

Inequality is growing.... Beeeeg Surprise!

Over the last few months, everyone from Pankaj Mishra to several bloggers have been shedding tears at the growing inequality in the country. Gini has become as much a part of party conversations as gin. Ironically, these are the very people who will be pushing for the "protection of the small farmer".

I am not one of those who will wrestle with numbers to examine if inequality is indeed growing or not. I have to wrestle with numbers enough on a day-to-day basis. I will grant, for the sake of argument, that inequality has been growing after the reforms. My reaction is.... Duh!

Seventy percent of the population is working in agriculture, a sector that contributes barely 25% to the economy. Which means 30% of the population is working in sectors that contribute about 75% of the GDP. On top of that, the growth rate of agriculture is a fraction of the growth rates of manufacturing and services. So is it really a beeeeeeeg surprise that inequality is growing?

No matter how much public investment is poured into agriculture, it is impossible that growth in that sector will ever match up to the other sectors. So even if we did everything possible for the farmers, inequality is still going to grow.

If someone really wants to wear the hat of the central planner, the answer does lie in "protecting the small farmer". But not the way we understand it. Traditionally, this means making it easier for the small farmer to keep farming. Unsurprisingly, such efforts have been a spectacular failure, as is evident from the suicides in Vidarbha which have become so common that they don't even make the headlines any more.

This "protect the small farmer" policy has created false and inefficient incentives for the farmer to keep farming, or be in a profession which has low returns and high uncertainty. In most parts of the world, the small farmer stopped farming and started working in other sectors like manufacturing. In India, laws are so heavily skewed against setting up manufacturing units, that such a change has not happened.

The way out, even for a central planer, is to protect the small farmer by making it easy for him to give up farming and make a smooth transition to another vocation. Make sure that the proportion of the population employed in a sector is not that radically different from the sector's contribution to the GDP. Only that will do something substantive about inequality.