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CASE STUDY

Is India Shining?

By Anurag Banerjee and Nilanjan Banik (published in Review of Development Economics)

Economic development in India is proceeding apace – and with the reforms which promote growth come concerns about increasing inequality. Some commentators argue that such rapid development has produced a growing disparity between rich and poor areas in the country, favouring the former over the latter. This view has remained unproven, with some research supporting the perception of regional inequality in incomes while other studies failed to find any evidence for it. If the general perception of increasing inequality were true, the researchers expected that their series of statistical analyses would have produced a clear clustering and separation between high and low income districts increasing alongside economic growth – something which wouldn’t be obvious if the increase in income was uniform.

Academics Anurag Banerjee, from Durham University Business School, and Nilanjan Banik, from Mahindra Ecole Centrale, Hyderabad, India have conducted the first examination of district-level economic data in India in an attempt to establish whether this contention is true. Explaining how rising income in one district affects neighbouring ones, this paper brings out an important linkage between effluents and affluence. Better sanitation facilities can bring about a higher growth in India's per capita income than building factories, banks, and schools.

A New Approach: District-Level Analysis

Banerjee and Banik’s research is the first to look at small-scale data and is primarily based upon statistical analysis of income figures at district level. If the general perception of increasing inequality were true, the researchers expected that their series of statistical analyses would have produced a pattern of ‘twin peaks’, with distinctions between high and low income districts increasing alongside economic growth – something which wouldn’t be obvious if the increase in income was uniform. Their study, published in the Review of Development Economics, February, 2014, finds post-reform growth in India did not increase regional inequality.

How did this happen? A policy impact analysis was conducted on the factors of interconnectivity of sub-regions and income generation. The paper finds better quality life supported through investment in potable water and sanitation s important for generation of higher per-capita income.

A 1% rise in closed drainage systems increased the per capita income between 0.96% and 2.58%, much higher than what's generated by development indicators such as providing tap water to households (between 0.16% and 1.30%); setting up factories (between 0.17% and 0.41%), opening banks (0.01% to 0.1%), or electrification (0.03% to 0.41%).

The absence of proper sanitation could cause water stagnation, resulting in diseases such as malaria and jaundice. If people stay healthy they can work harder and assimilate knowledge more efficiently, which translates into higher productivity and income growth.

Income Growth and Development Indicators

Income generation goes hand in hand with quality of life. Better infrastructural development, sanitation and health facilities have positive impact on income beyond the local area. The researchers concluded that economic growth in India has been accompanied by an associated improvement in the quality of life across income brackets, rather than favouring the rich over the poor. Generating income by setting up factories can be effective only if the workers are in good health and enjoy better sanitation facilities.