India’s prosperity problem: Public finances now compensate the majority for economic insecurity, regardless of growth

To be rich is glorious' is a slogan apocryphally attributed to Deng Xiaoping. Equally, to be poor is dehumanising. Individuals in extreme poverty are constantly on the verge of extinction, requiring handouts from government, or charity, to survive. They have no hope that their progeny will escape their fate, unless there's intervention.

Extreme and chronic poverty, unattended, is a terminal disease. For this reason, the most important global Millennium Development Goal (MDG) promised the elimination of extreme poverty by 2020. Happily, this goal has been substantially met in India. India's extreme poverty has plummeted from roughly 431 mn people in 1990 to under 75 mn in 2025.

The next goal is an increase in universal prosperity, meaning most people being able to afford basic necessities by earning enough to buy these without needing subsidy. These include food, clothing, decent housing, healthcare and education. Whether the last two are publicly or privately supplied is not the question here. That decision is about efficiency and universal affordability. Both should be affordably provided to the population without need to subsidise anyone.


If most people in an economy can afford these five things, then the economy is 'developed', it has attained a threshold level of prosperity. This requires a high level of per-capita income, but also relatively fewer people earning less than the per-capita income and, therefore, requiring subsidy. Hence, how much the majority (not just the rich) earns matters for a prosperous society.

Economic growth does not automatically ensure prosperity, though a larger per-capita GDP is a necessary condition. Economic growth produces prosperity if it results in a larger number of people becoming prosperous, due to their income shares rising as a consequence of growth. This is called inclusive growth.

The greater the number of people whose income share rises by at least as much as the growth rate, the more inclusive is an economy. An inclusive economy delivers a prosperous society. There are billionaires in prosperous societies. But if the number of billionaires rises even as the majority of people see their incomes stagnate, then growth is not delivering prosperity.

I am speaking of incomes rising when growth rises before redistributional transfers. If people stay poor and their incomes rise only because government transfers money from the rich to the poor, that is not inclusive growth. I term this 'compensatory income' - handouts given to compensate people for failure of the economic system to allow them to earn more. If a large number of people depend on such handouts, then growth is not delivering prosperity.

The development transformation of Japan, China, South Korea and, more recently, Chile reflects a process that fosters inclusive growth These countries grew by exporting manufacturing goods using cheap labour. But, over time, wages rose significantly across the economy allowing the vast majority of people to grow more prosperous.

It created billionaires. But at the same time, public investments fostered world-class health and education systems, and liveable cities and rural habitats, further enhancing mass prosperity. In contrast, countries like Brazil, Turkey, Argentina, Thailand and the Philippines could not foster inclusive growth. They also created billionaires but not prosperity. They are stuck in a middle-income trap, where GDP has grown to respectable levels, but the majority remains dependent on public transfers and handouts to secure basic requirements of a prosperous existence.

What of India? From 1980 until about 2010, the country saw a period of reasonably high growth and modest increase in inclusive prosperity, even as the pace of poverty reduction accelerated. Remarkably, India did this without increasing manufacturing exports significantly (though exports of services did play a role). Instead, the economy, especially in southern and western India, prospered through increases in domestic consumption and investment underpinned by continuously rising real wages, including in agriculture. The top 10% of the population saw a huge increase in prosperity, some of which trickled down to the next 40-60%.

But post-2011, India was unable to further expand prosperity to the next tranche of 150 mn-odd people. Their income stagnated. Regional inequality accentuated, with the majority population in the north and east earning per-capita incomes 1/4th that of peninsular India. This led to a huge shift in public spending, away from health, education and basic services, to transfers to the poor to keep poverty at bay, and to subsidise almost everything they could not afford with their earnings - food for 800 mn people, gas cylinders, affordable housing, free bus rides for women.

Public finances are now used to not build things, provide livelihoods, or provide quality health, education or public transport, but to compensate the majority for prosperity failure. And this continues whether growth is high or low.

The disease of prosperity failure has now spread to the educated, especially Gen Z. Their wages have fallen precipitously. Unlike 30 yrs ago, white-collar entry-level jobs now earn less than required to pay income-tax because the young, without legacy assets from ancestors, face deprivation. In these circumstances, they can hardly be expected to pay I-T. This despite India being the fastest-growing economy in the world.

To repeat, to be poor is dehumanising. But to be part of the 'not-poor-but-not-prosperous' Indian majority, dependent on family or government subsidies in the face of high economic growth, is profoundly depressing.