Poverty & Inclusive Growth: Inequality, inclusion and SDGs

The Palma ratio is named after the Chilean economist José Gabriel Palma and was popularised by Alex Cobham and Andy Sumner. It is the share of gross national income going to the richest 10 per cent of the population divided by the share going to the poorest 40 per cent. The choice of these groups rests on Palma's finding that the 'middle' half of the population, deciles 5 to 9, tends to receive about half of national income in most countries, so differences in inequality between countries come mainly from the two tails. A Palma ratio of 1 means the top decile and the bottom four deciles earn the same share. Option (b) describes the S80/S20 or quintile share ratio, which UNDP also reports, and option (a) is the decile dispersion ratio. Option (d) is the top 1 per cent income share made famous by Piketty's work. All are legitimate measures, but only option (c) is the Palma.

A Lorenz curve plots the cumulative share of the population, ordered from poorest to richest, on the horizontal axis against the cumulative share of income or consumption they receive on the vertical axis. If everyone had the same income, the bottom 20 per cent would get 20 per cent, the bottom 50 per cent would get 50 per cent and so on, so the curve would coincide with the 45-degree line of perfect equality. The more unequal the distribution, the more the curve sags below that line. The Gini coefficient is the area between the line of equality and the Lorenz curve divided by the whole area under the line of equality, so a curve that moves farther from the diagonal enlarges that area and raises the Gini. Option (b) follows directly. The poorest groups' share must have fallen, not risen, for the curve to sag more, and the curve says nothing about the level of average income, because it uses shares only.

The WEF presented the Inclusive Development Index in January 2018 as an alternative to GDP as the main yardstick of national economic progress. It covered 103 economies and used 12 key performance indicators grouped into three pillars: Growth and Development (GDP per capita, labour productivity, employment and healthy life expectancy), Inclusion (median household income, income Gini, poverty rate and wealth Gini) and Intergenerational Equity and Sustainability (adjusted net savings, public debt, the dependency ratio and the carbon intensity of GDP). Statement 2 is correct. Scores were expressed on a 1-7 scale, as in other WEF benchmarks, so statement 1 is also correct. Statement 3 is wrong: the 29 advanced and 74 emerging economies were ranked in two separate groups, because their levels of development differ so much. Norway topped the advanced list and Lithuania the emerging list, while India was placed 62nd among emerging economies, behind China and Brazil. The 2018 edition was the last stand-alone IDI.

The Twelfth Plan, titled 'Faster, More Inclusive and Sustainable Growth', has a section on the meaning of inclusiveness because it found the word too loosely used. It lists several dimensions: inclusiveness as poverty reduction, as group equality (SCs, STs, OBCs, minorities and women), as regional balance among States and regions, as attention to inequality, as empowerment and participation, and through employment programmes such as MGNREGA. On inequality it notes that the Gini coefficient for consumption, the ratio of consumption of the top and bottom deciles or quintiles, and the urban-rural ratio are possible measures, and it accepts that inequality may rise in a fast-growing economy but should not rise so much as to break social cohesion. Statements 1 and 2 follow this text. Statement 3 is the opposite of the Plan's view: it set 25 monitorable targets, of which GDP growth was only one, because growth was necessary but not sufficient for inclusion.

In his presidential address to the American Economic Association, published in March 1955, Simon Kuznets suggested that inequality in the size distribution of income might widen in the early phases of economic growth, stabilise for a while and then narrow in later phases. Plotted against per capita income, the path looks like an inverted U, now called the Kuznets curve, so statement 1 is correct. His main mechanism was structural change: as workers move out of agriculture, where average incomes are low and fairly evenly spread, into urban industry, where incomes are higher and more dispersed, overall inequality first rises; later, as the urban sector absorbs most workers and their bargaining power and political voice grow, it falls. Statement 2 is correct. Statement 3 is also correct. Kuznets himself said his paper was perhaps '5 per cent empirical information and 95 per cent speculation', based on a handful of countries. Later evidence, including rising inequality in rich countries since the 1980s, has led many economists to reject the curve as a general law.

Volume I of the Eleventh Plan was itself titled Inclusive Growth. Its opening chapter defines the objective as 'a growth process which yields broad-based benefits and ensures equality of opportunity for all', so statement 1 reproduces the Plan's own wording. Para 1.19 adds that the vision of inclusiveness goes beyond conventional poverty reduction to encompass equality of opportunity as well as economic and social mobility for all sections, especially SCs, STs, OBCs, minorities and women; statement 2 is therefore correct. Statement 3 inverts the Plan. The Plan did set a 9 per cent GDP growth target, but it repeatedly calls rapid growth a means and not an end, because growth was needed to raise incomes and to generate the resources for health, education and other public services. That is why it paired the growth target with 27 monitorable targets on poverty, employment, schooling, health, women and children, infrastructure and environment, instead of leaving distribution to the market.

The note by Ianchovichina and Lundstrom places inclusive growth against the older pro-poor growth debate. In the absolute definition associated with Ravallion and Chen, growth is pro-poor whenever poverty falls; in the relative definition associated with Kakwani and others, it is pro-poor only if the incomes of the poor grow faster than the average, that is, if inequality falls. Statement 1 is correct. The note then argues that inclusive growth is about raising the pace of growth and enlarging the size of the economy while levelling the playing field, with the emphasis on productive employment rather than direct redistribution of income, which it sees as a short-run tool. Statement 2 is correct. Statement 3 is wrong: the note insists on both the pace and pattern of growth, because growth must be broad-based across sectors and inclusive of a large part of the labour force to be sustainable. It also recommends looking at binding constraints to growth over the long run rather than at short-term income transfers.

Christoph Lakner and Branko Milanovic plotted the growth of real per capita income between 1988 and 2008 for each percentile of the world income distribution. The resulting shape resembles an elephant, hence the elephant curve. The body rises to a hump around the global median, where incomes grew by roughly 70 to 80 per cent, driven largely by the new middle classes of China and other Asian economies. The trunk lifts sharply at the very top, where the global top 1 per cent gained about 65 per cent. Between them, the curve dips to its lowest point around the 80th to 85th percentiles of the world distribution, where gains were close to zero. Many people in this group belong to the lower-middle and working classes of advanced economies, which is why the curve is often cited to explain discontent with globalisation in the West. The poorest 5 per cent also gained little, but not as little as the trough. The comparison is anonymous: it compares percentiles across years, not the same households.

The 12th Five-Year Plan (2012–17) had the theme "Faster, More Inclusive and Sustainable Growth" (d). Options (b) and (c) use some of the same words but miss "faster", and (a) is closer in spirit to earlier plans. The 11th Plan (2007–12) was "Towards Faster and More Inclusive Growth", so the 12th simply added sustainability.

The 12th was India's last Five-Year Plan. NITI Aayog replaced the Planning Commission in January 2015 and moved to vision and strategy documents instead. Notice how plan themes trace India's changing priorities: from heavy industry in the 2nd Plan to inclusion and sustainability later.

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All three are correct (d). Inclusive growth, the theme of the 11th Five-Year Plan (2007–12), means growth whose gains reach the poor and excluded. Self-Help Groups give women and the poor credit, savings and income (1). MSMEs create jobs on a large scale and spread industry beyond big cities (2). The Right to Education Act, 2009 builds the skills that let people share in growth (3). So options (a), (b) and (c) leave out real tools.

Notice the present versions: DAY-NRLM links about 10 crore women to SHGs, the Udyam portal registers MSMEs, and the NEP 2020 builds on the RTE. The 12th Plan's theme was 'faster, more inclusive and sustainable growth'. Trap: inclusive growth is about broad access, so all three fit.

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