Many say that fast GDP growth has benefited only a few rich businessmen. That’s simply false. The latest data and research show that record GDP growth has benefited the masses and the poorest states. Poverty has fallen sharply and the poorest states have increased growth amazingly. That’s one reason so many incumbent governments in poor states have been re-elected.
For decades, anti-incumbency dominated elections, and three-quarters of incumbent governments lost. But the trend has reversed in the last few years: suddenly three-quarters of incumbents are winning.
The Congress was re-elected in the 2009 parliamentary elections. Several chief ministers were re-elected too. Nitish Kumar in Bihar is the latest example. Earlier examples were Orissa, Maharashtra, Andhra Pradesh, Chhattisgarh, Madhya Pradesh and Tamil Nadu.
What has changed? The BJP, the losing incumbent in 2004, claimed that India was shining. That was false. GDP growth in its five years (1999-04) averaged only 5.7% per year, no faster than in the preceding two decades. By contrast, growth during UPA rule (2004-09) zoomed to 8.5% per year.
The new Tendulkar formula for measuring poverty shows that poverty reduction during the BJP rule-and indeed since 1983 – was around 1% per year. Economist Surjit Bhalla cites the latest NSSO survey to show that in the next three years, from 2004-05 to 2007-08, poverty reduction tripled to an astonishing 3.3% per year. Poverty fell as much in those three years of 9% GDP growth as in the preceding 11 years.
The BJP lost in 2004 because neither growth nor poverty reduction improved significantly. The UPA was re-elected in 2009 because both growth and poverty reduction improved hugely.
A new study by economists Arvind Panagariya and Poonam Gupta buttresses this conclusion. This assumes that voters in fast-growing states will vote for the ruling state party even in parliamentary elections. This sounds reasonable: 90% of villagers have never seen a central government official, and know only state government officials.
Although the national incumbent (Congress) won the 2009 parliamentary elections, it won just nine of 72 seats in the non-Congress states of Bihar, Orissa and Chhattisgarh. A look at the recently revised CSO data shows why. Economic growth skyrocketed between 2000-04 and 2004-09 from 4.5% to 12.4% in Bihar, from 4.8% to 10.2% in Orissa, and from 6.1% to 9.7% in Chhattisgarh. UP has doubled its rate from 3.3% to 6.7%, suggesting that Mayawati will be re-elected in 2012.
You can question the quality of state GDP data, yet the trend is unmistakable. Poor states have no incentive to artificially inflate growth rates-they would rather artificially understate growth to wangle more grants from New Delhi.
Examining state GDP growth between 2004-05 and 2008-09, Panagariya and Gupta divide the major states into three growth categories-high, medium and low (relative to national growth). In high-growth states, a whopping 85% of candidates of the incumbent state party won in 2009. The winning rate dropped to 50% in medium-growth states and 30% in low-growth states. This indicates strongly that fast growth benefits and draws votes from the masses. Many other factors (alliances, caste, regional pride, inflation) remain highly relevan.
But fast growth matters as never before. When slowgrowing states accelerate to 6% or more, incumbents start winning. Panagariya and Gupta conduct statistical tests to control for other factors that may determine outcomes. The overall pattern remains unchanged-fast growth benefits incumbents. This may be not just because of fast growth but reduced poverty and accelerated jobs too. These are inter-related-fast growth reaches the masses and hence reduces poverty and creates jobs. Government service delivery remains lousy, especially in health, so social indicators remain deplorable. Yet the latest research shows that the overall condition of the masses has improved. This is corroborated by the spread of cellphones to the masses-teledensity has skyrocketed to 70%.
Why have fast growth and mass improvement gone together? Not because some crumbs from fast growth were thrown to the poor. Rather, only when the vast majority of people improved their income did this add up to record growth and poverty reduction.
Growth was slow in 2000-04 in poor states, and this kept the national GDP growth down to 5.6%. But GDP shot up to average 8.5% in the next five years. This was not because of economic reform, which mainly stalled in this period. Rather, chief ministers in poor states changed policies to take advantage of the growth potential created since 1991. So growth accelerated dramatically in large, poor states, and this gave India 9% growth. If they keep up this hugely improved performance, India will be transformed in a decade.