Inclusive Growth

INCLUSIVE GROWTH: IMBALANCE BETWEEN POLITICAL FANTASY AND BUSINESS SUSTAINABILITY Growth and Sustainability are two issues which are both complimentary and supplementary to one another. To view the premise from more immaculate point of view one needs to comprehend actual theories that run into above mentioned “processes”. Allow us to provide an example worthy of deep consideration. According to a theory, only natural analogy for continuous growth is a CANCER CELL. To develop into a full grown mass of flesh, cancer cell utilizes and at times exploits each and every available resource while maintaining a steady growth rate. From perspective of growth and expansion, cancer cell clearly outnumbers its competitors. Its glorious growth rate and not its carcinogenic activities, gives it an infamous competitive edge. Sustainability of growth is a primary focus in above mentioned analogy. While cancer cell finds no hindrances in sustaining glorified growth rate, repercussions are evident in collapsing surroundings and defunct system. Hence concept of business sustainability while maintaining an inclusive growth is imperative. To emphasize the importance of vivacious sustainability balanced with evenhanded and long lasting growth let us consider performance of the Irish economy over Celtic Tiger Era. Celtic Tiger is a term used to describe a period of rapid economic growth in Ireland during period 1995-2007 which came to a halt by 2008. The case is clear: an economically challenged government, perniciously influenced by the interests of the housing lobby, blew it. The enormous growth rate is subjected to a low corporate taxation rate (10 to 12.5 percent throughout the late 1990s), and to net transfer payments from members of the European Union. Also The EU aid was used to increase investment in the education system and physical infrastructure. This increased productive capacity of the Irish economy. The provision of subsidies and investment capital by Irish state organizations encouraged highprofile companies like Dell, Intel, and Microsoft to locate in the country. These companies were attracted to Ireland because of its European Union membership, relatively low wages, government grants and low tax rates. Also various geographic and demographic factors provided a stable business environment.

Public debt as a percentage of GDP dropped significantly over the 1990s. Ireland was transformed from one of the poorest countries in Western Europe to one of the wealthiest. Disposable income soared, unemployment fell and average industrial wages grew. The new wealth resulted in large investments in modernizing Irish infrastructure and cities. Thus growth was seen due to cultural and social factors like education, political factors like implementation of tax structures and demographic factors like entrepreneurship making business profitable. The Celtic Tiger's momentum slowed sharply in 2002, after seven years of high growth. The major challenges it faced was property bubble, the collapse of the banking system, collapse in consumer spending, low competitiveness and unequal distribution of wealth which ended the tiger era. Post Celtic Tiger Ireland, doesn't have a good health service, an end to child poverty, a world-class infrastructure or even an acceptable system of primary education. Nor does it include the much-touted "innovation society" or "knowledge economy" that is the only way out of the current mess. During the Tiger era the availability of cash did not propagate a good society due to a lack of vision and far sightedness from the government’s part. It failed to take into consideration the effect of change in policies on the business and social environment. Ireland's dire economic state in 2009 is blamed on a series of "calamitous" government policy errors. Between the years of 2000 and 2003 the then Finance Minister Charlie McCreevy boosted public spending by 48% while cutting income tax. A second problem occurred when government policies allowed, or even encouraged, a housing bubble to develop, "on an immense scale". This explains the importance of having a right balance between political fantasies, implementing them and foreseeing the effect on the country’s economy for better business sustainability which would ultimately result in an inclusive growth in the long term. Thus inclusive growth keeps various factors into consideration like cultural, political, economic, demographic and geo-political.

The chart below best illustrates the relationship between various factors contributing growth with respect to Indian context. CULTURAL:

POLITICAL:

Tolerance

Democratic

Educational Base

Secular

Skilled manpower

Judicial System

INCLUSIVE GROWTH GEO-POLITICAL:

DEMOGRAPICS:

Natural Resources

Young working population

Among Largest Economies

Vast domestic market

Nuclear Power ECONOMICS: Entrepreneurial class Resilience (No boom-bust cycle)

Growth is never masked by problems; it is always cornered by issues. Washington State Department of Ecology has defined Sustainability as “Meeting the needs of the present without compromising the ability of future generations to meet their own needs.” Above definition of sustainability is in congruence with fact that if one needs to work within constraints of limited resources and support, then it constantly needs to find ways to efficiently consume resources and maintain ways and means to either replenish, if possible, or revivify resources so as to be able to carry forward with its activities in future. Emphasis has been made on conservation and protection of resources because achieving growth on behalf of mindless exploitation will always result in short term benefits. Hence we can deduce that sustainability to Business is a pro-active approach to ensure the long-term viability and integrity of the business by optimizing resource needs, reducing environmental, energy or social impacts, and managing resources while not compromising profitability.

Business sustainability is the increase in productivity and/or reduction of consumed resources without compromising product or service quality, competitiveness, or profitability. Hence Business sustainability would involve three main factors: •

Economic sustainability

•

Social sustainability

•

Environmental sustainability

Growth in a competitive economy is and will always be inclusive, because it cannot be otherwise. When commenting on growth in larger terms we seem to criticize political standpoint of growth simply due to fact that political reforms and incentives have rarely seemed to improvise on prospects of growth. We will certainly refrain from being critical but to quote an example of political fantasy, The Eleventh Plan Approach Paper according to which a key element of the strategy for inclusive growth must be "to provide the mass of our people access to basic facilities such as health, education, clean drinking water etc, and that governments at different levels have to ensure the provision of these services". The question, which must be asked, is why previous ten plans could not make any significant differences in these areas and that too with so much of high-sounding ideas but with no substances of real value? That is the legacy of "high thinking-no action" socialism we have to bear within the twenty-first century. Political fantasy is in focus, as we forget to see whether political reforms are seeping through realistic hindrances of corruption and superfluous governance to reach grassroots of society which are ideal targets of such reforms. Liberalization is one such reform that has been used very ostensibly as opposed to deeper impact which was supposed to be created by its implementation on economy. Our economy was very late on opening up to world (early nineties), and even when it opened the very intensions of beating slow growth rate and emerging as a strong market economy were defeated due half baked and opaque policies of then government and unstable political climate that emerged from FMCGs (Fast Moving Corrupt Governments) in later half of nineties decade. Negative market sentiments appended with detrimental realization of liberalization ensured that growth which surged by around four percentage points immediately following declaration of liberalization was annihilated during later phases. Only when stable governance under Prime Minister Dr. Manmohan Singh, same person who laid foundations of liberalization as finance minister, returned did economy was revived and near doubled digit growth was achieved. Stable governance and realistic political policies considering mass sentiments of market economy is need for achieving business sustainability. Any imbalance between political vision and business objectives would result in vast suppression of growth.

Inclusive Growth needs greater liberalization. Primarily we must identify way and means to judge inclusiveness of growth in society. It would be useful, therefore, to begin with some criteria by which to judge inclusiveness. To begin with, inclusive growth must be of brisk equivalence worth to all coupled with it. Social as well as economical sustainability of business depends heavily on inclusion of mass quantum of people associated with it. So from that perspective, widespread employment generation would surely be indicative of inclusivity of growth. Secondarily Growth must be multi-ethnic in order to be considered inclusive. Multi-ethnic growth doesn’t imply a racial or cultural angle, but simply to establish a fact that social sentiments are conveniently ignored while proposing growth reforms. Business sustainability profoundly depends on social and economic sustainability of that business. Growth can be accurately inclusive only if it is perceived alike by all sections of society. When Tata group ventured into West Bengal for setting of manufacturing plant of highly acclaimed Nano cars, social as well as ethnic sentiments were clearly undermined. Failure of Tata group in sustaining manufacturing activities in West Bengal clearly conveyed a message across that, imbalance between governmental policies and business intensions leads to vast digression from fundamentals of growth and social harmony. To continue further on same paradigm when Gujarat government welcomed Nano project with arms wide open, Industrial proliferation was an agenda which was clearly visible on near dogmatic political policies of State government. Gujarat government gave priority to industrial development and growth overlooking social and environmental sustainability of such “Business Friendliness”. Ramifications have been clear as Gujarat would be one of the worst drought affected states in India. Agricultural output of Gujarat would certainly suffer as no ‘real’ provision was made in government plans for agricultural sector development. Business would certainly be affected as morale (both social and ethnic) would be badly hampered leading to low productivity and sinking profits. Also as inflationary pressures mount on food grains and other commodities, domestic consumption of industrial goods would go down. Subsidies would be needed to be provided tied with import of basic material goods. Such unnecessary expenditure (subsidies) and spending (imports) would lead to lower average growth rate. Lower growth rate is direct indicator of

ineffective production and inefficient utilization of resources; which would act as repellent for most industrial set ups. As above mentioned spiral is completed very purpose of politically narrow ‘business friendly’ policies is defeated. (Ref: figure no. 1)

Government Policies Supporting Industrial Sector: Government Policy

Suppresses Agricultural Sector growth Inflationary Pressures Business Morale Reduces Inflationary Pressures Industrial Consumption Is Low Subsidies given by government to Industries Growth Rate Is Lowered

Ineffective Production And Improper Utilization of Resources

Less attractive Industrial Segment for investment

Failure of Policies i.e. Political fantacies

IMPULSE OF GROWTH IN AGRCULTURAL SECTOR:

On the contrary In India today, if a growth impulse is strongly present in agriculture, the resulting economy-wide growth is more likely to be inclusive than growth driven by some other factor, say, exports. There are two reasons for this. First, at least 55% of the country’s labour force is agricultural, and close to 70% of the population is rural. Agricultural growth is more employment-intensive. Second, as the availability of food in the economy is increased, it becomes cheaper. This releases demand for industrial goods, in turn stimulating industrial growth and non-agricultural employment. So, as we can see, there is a double benefit in an agriculture-driven growth strategy. (Ref: figure no. 2) PRO Agriculture Government Policies

Government Policy

Agricultural Growth

Agriculture based Employment Generation

Inexpensive Food grains Release demand for industrial goods Industrial Growth

High Growth Rate

Growth of Industrial & Agricultural Sector

Overall/Inclusive Growth

As far as political perspective of imparting agricultural sector growth is concerned, it involves reforms as loan waiver for farmers (expenditure) and substandard irrigation projects which eventually are not put to use. On consumer side; primary focus seems to be on heavily subsidizing (expenditure) basic commodities like sugar and wheat without actually locating cause of such massive price rise. This is yet another example of superficial and detrimental planning commission of government. Economic sustainability of agricultural industry heavily relies on delicate balance of supply and demand dynamics. But shrewd practices such as illegal hoarding of commodities by interim distributors leading to demand pull inflation is the very issue which must be nipped to bud. Secondarily ill management of funds allocated to irrigation projects has been serious threat to development of agro-industry for past numerous five year plans. What is it if not political fantasy that every coming government subjects truckloads of money for irrigation projects and still farmers all over India rely on monsoon rains for “handsome yields?” Since the second half of the 1990s, real expenditure on irrigation has increased by at least 100%. But the expansion of irrigation has actually slowed. Agro-industry suffers the worst when natural calamities like drought affecting nation this monsoon brings out loopholes in reforms proposed by government. Drought is not a rainfall disaster, but a condition created more out of mismanagement of rainfall. As we write this paper, our nation has received more than 75% of average monsoon rainfall. This is by no stretch of imagination a drought situation. But Drought is still looming over due to mismanagement of government policies and narrow political intensions. Quite simply, a strategy that encourages agriculture is likely to produce a higher growth rate and has a higher chance of sustaining itself than a strategy that focuses singlemindedly on the external market over which India has no control whatsoever. In any case, the external market is going to take some time to recover after the financial meltdown. These examples give us reason to believe that in the areas of the economy most crucial for inclusive growth, it is governance rather than finance that is the binding constraint. More generally, the possibility of accelerating growth at this point revolves around governance reforms and not the market reforms that have been focused upon for the past decade and a half. As an entity, India is no longer as poor as we like to imagine. Ineffective governance is a political challenge. India has been cursed by widespread political instability of sorts.

Contrasting views of national growth that exists within ideology of two leading political parties has lead to huge instability within market and business sectors. No wonder our stock markets react so voraciously to change of governments rather than realistic market dynamics. To acquire balance between political stance and business intension, emphasis must be on transparent governance and effective market oriented policies. India is blessed with technocratic and scientific wealth. Proper governmental support and public-private involvement in utilizing this wealth would ensure true inclusive growth. True inclusive development would mean that even the poorest Indians get a chance to move into the modern, high-productivity sectors. A development strategy with inclusive growth as the overarching goal should have two mutually underlined premeditated factors: First, high and sustainable growth to create productive and decent employment opportunities; and second, social inclusion to ensure equal access to opportunities. High and sustainable growth should be driven by a dynamic private sector. The central role of the government is to develop and maintain an enabling environment for business investment and private entrepreneurships by addressing market failures, and policy shortcomings through investing in infrastructure and human capital, building institutional capacities, maintaining macroeconomic stability, adopting market-friendly policies etc. Promoting social inclusion requires public interventions in two areas: (i) investing in education, health, and other social services to enhance human capacities; and (ii) promoting good policies and sound institutions to advance economic and social justice and level playing fields. China Growth Fantasy Let us to return again to global scenario. To simplify matters, we would restrict to economic growth of India and China. Both countries have certain demographic similarities which enables us to compare them. Both have abundant human resource, competitive environment for business, vibrant investment incentives and robust political and financial governance to ensure sustained growth. And both have stark dissimilarities. India has democratic political system whereas People’s Republic of China is socialistic to its core.

Implementation of policies varies vastly in both countries. China has huge trade surplus while India narrowly manages its fiscal deficit. But despite their inherent differences both nations have posted mind boggling growth rates in past decade. And while economic slowdown is felt in both countries, each has their own ways to tackle recession. Analysis should be focused on affect of political reforms on business and industrial development in both countries. Exports are backbone of Chinese economy. Relatively lower wage rates combined with draconian incentives to business set ups ensured China received nearly 40% of global foreign investment fund flow. The Chinese way of keeping their currency at artificially low levels to ensure high level of exports only results in selling off their assets, both natural and human, to the world at large as cheaply as possible. While the government coffers show a huge trade surplus, the ordinary Chinese is deprived of a decent wage. The natural resources get converted into finished products cheaply and are dumped in other countries at what are conceived as competitive prices, which are in fact exploitative of the Chinese population. It is fortunate that India has followed a more prudent approach although our growth rate may appear a tad slower than the Chinese. Consequences are such that China has posted towering GDP growth rate for more than quarter of century. But here’s the downside- Relating Gross Domestic Product or GDP growth with real inclusive growth of China would be outlandish. To take the point home the obsession with China’s impressive GDP growth often ignores discussion of what’s causing that growth and whether it’s self-sustained. Consider, for example, data about the very slow growth of household incomes in China. This is particularly apparent in rural households. For the past 20 years or so, rural household income has grown at a rate half that of GDP growth. The slow household income growth, combined with rapid GDP growth, means that China has created huge production capacity but at the expense of its own consumption base. All the new “excess” production had to go somewhere, i.e., to the US. What’s more, the persistence of this gap suggests that over time, China’s growth has become more, not less, a derivative of America’s consumption appetite.

Let us illustrate this point. The following proposition will sound familiar to many foreign investors who have done business with Chinese local officials eager to get their investment capital: “Do you want 10 acres of densely populated land for your new factory? No problem. We will clear the land for you in three weeks.” Many foreign investors marvel at the “business-friendly” attitude of local governments in China, in sharp contrast to the seeming incompetence of the Indian government to get things done. But this “business-friendliness” is the heart of the problem: The Chinese households often reap almost no financial benefit from the conversion of their residential land into industrial or commercial development. The Chinese government, thanks to its formal ownership of all land assets, can relocate households on a scale unthinkable in a market economy, often with compensation far below the fair market value of the land. This is why factory owners incur far lower costs in setting up operations in China compared with other countries, and also why thousands of skyscrapers can mushroom seemingly out of nowhere overnight in Chinese cities. Hence China growth fantasy cannot be attributed as an icon of inclusiveness as Inclusive growth by its very definition implies an equitable allocation of resources with benefits accruing to every section of society. But, at the end of the day, it’s not just about the big macroeconomic numbers. A country needs a well-trained labor force and dynamic companies to take advantage of growth-inducing policies. But China is not exempt from a basic economic principle: A cost to one person is an income to another. The fact that factory owners and developers in China incur lower costs means that the income to some other economic participant is low. Those who derive low income in China happen to be the majority of the population, especially the rural Chinese who have little political power to protect themselves. Thus, one sure mechanism of private wealth creation—urbanization achieved when small landholders sell out to developers at market prices—is almost completely missing in China despite the fact that the country is urbanizing at a dizzying rate on the surface. To truly rebalance the Chinese economy requires the Chinese government to focus on the income growth of the Chinese people rather than being fixated with GDP growth. One straightforward way to do this is to adopt market pricing of land by permitting and

encouraging competition when acquiring land from Chinese peasants as a part of its current stimulus package. In the past two years, the Chinese leadership has done a good job reducing the expenditures—such as taxes, education and health fees—of Chinese peasants. It is time now to raise their income. Individual (human resource empowerment) & Inclusive Growth Inclusive growth can be looked upon in various aspects. Business is the heart of any economy and politics its heart beat. For proper functioning of the entire society (Human body), the heart has to carry out its function at proper rate, i.e. business and politics should strike the right balance. But not to forget that the entire system comes down to one factor in common i.e. an individual who forms the life giving blood in the entire human body. (The System) “The poor need the savvy politician to help them navigate through rotten public services. The politician needs the corrupt businessman to provide the funds that allow him to supply patronage to the poor and fight elections. The corrupt businessman needs the politician to get national resources cheaply.” But looking at the present scenario, growth is taking place but is limited, only for politicians. Individual growth and business growth is negligible. The following diagram represents the thought flow.

Current State

However, growth should be inclusive and not exclusive. A better scenario would be where all the three elements are uniformly benefited by each other and there is over all growth of business, politics and an individual.

Ideal State

Inclusive growth is a collective effort of economically enhanced government regulation and control as well as a socially and environmentally stable business activity. When and where can one witness growth? The answer is an economy which is culturally and socially uplifted with a strong human resource. An economy or a country with a stable government can take decisions and also continue with the welfare activities keeping in mind the democratic and secular ideologies. But when can growth become inclusive? Only when its foundation is deep rooted and strong and is directly connected to an individual. An individual is whole and sole responsible for the country’s progress. Every Business activity has its motto of customer satisfaction. No supply chain is complete without the human element. Similar is the case of political activities, where India is proud to say that it is one of the largest democracies in the world and the definition of democracy itself explains its existence due to people.

So it finally comes down to an individual base. Hence individual growth is the Unique Selling Point (USP) for inclusive growth. And a proper communication channel between them ensures balance and sustained growth. Connecting Link between Business and Politics – Individual: Business sustainability on a whole starts with group of businesses or Individual business irrespective of whether the business is organized or unorganized in nature, the role in the value chain may be of supplier or producer, the individual is key link and the individual cannot be overlooked as individual conviction is a vital thing for overall inclusion. If individual is ignorant and unaware of the implication of his business or his role in the motive of sustaining a business for longer run the majors will not be implemented effectively and efficiently. Similarly the individual who is directly part of government selection and hence indirectly part of decision making at national and state level. Refer chart (3)

Root of Environmental Sustainability and Political Fantasy Business Sustainability Business Sustainability

Political Transition Global Political Environment

Individual Business

Organized Business

Country Environment

Unorganized Business

Suppliers

Manufacturer

State Government

Urban

Rural

Individual

Individual Conviction

Both these links in flow charts suggests us the huge significance of individual in sustaining a business and his responsibility towards overall inclusiveness.

Sustainable growth for civil society and presenting human resource as demographic dividend only works if our population is literate, employable and employed. Commercialize education by privatization of some education sectors so that quality education can be provided to mass with government partially bearing the cost by providing some incentives to private players. Vocationalising general education is need of century where to impart the employable skills or Industry specific study and in depth awareness can be developed the role of private industry with government goes hand in hand.

The need of an hour is that government should consider the civil society as key link for business sustainability and any policy related to civil society should be routed through a channel which involves social acceptance as critical element before finalization or execution of a policy. Factors for accepting a business will be related to analyzing the long term impact of business on environment, social inclusion and macro economical significance. Government policies which has social mandate will have social acceptance widespread and will in turn become sustainable for longer period.

GOVERNMENT POLICIES

SOCIAL

BUSINESS

ACCEPTANCE

SUSTAINABILITY

Civil Society is affected by the wrong government policy will end up in retaliation of policy with non acceptance or revoke that in turn will affect the very purpose of sustainability of policy. Government policies

Business Establishment

No Social acceptance

Social Revoke -----Unsustainable Businesses. Inclusive growth will be achieved when the business will be judged not only on the basis of financial statement but the social benefits to majority of people in civil society in addition to product benefits.

GOVERNMENT

CIVIL SOCIETY

BUSINESS (Pvt.)

Hence the involvement of civil society becomes essential for the smooth working of both business and government entities.

Transition of Economies:

Under Developed Economy

Low Reforms Labour Intensive Basic needs not full filled

Developing Economy Liberalization

Education

Skilled Human Resource

Learned Skills

Conducive Business Environment

Developed Economy

We have argued that with an innovative mindset, we will not only be able to meet our corporate aspirations, but unleash a multiplier impact on the development of society for long term sustainability of the nation and its people. While focusing on India's poor and the upliftment of the rural economy, we recognized that India also has other challenges that it must meet, to achieve sustainable growth. The unprecedented surge in manufacturing and services will unleash a war for talent, and much more will have to be done to educate, train and develop our human resources. The quality and capability of our people will drive India's future, and every investment must be made to prepare our human capital for the challenges of tomorrow. Again, this must be an inclusive process, so that the disadvantaged have an opportunity to participate in India's growth. We are sure, with a concerted effort to forge a partnership among Government, Academia and the Corporate sector, we can achieve much more in this critical area.