Nothing epitomizes India’s economic potential more than its computer software industry, which has become one of the most dynamic in the world. It has seen exports shoot up to $7.5 billion in 2001/02 from less than one billion just seven years earlier. India, the world’s thirteenth largest economy, has developed a diversified industrial base, a relatively large and sophisticated financial sector, and a large skilled labor force.
How much have India’s poor shared in this economic progress? The incidence, depth and severity of absolute poverty have been on a trend decline since the early 1970s. However, progress has been uneven, with far higher rates of poverty reduction in some states of India than others. Inter-state differences in growth rates are part of the reason, but only part; the rest is due to inter-state differences in the responsiveness of poverty to economic growth. This diversity across states not only explains past experience but also holds some clues about the actions that are now needed to assure continuing progress for the country’s poor.
From crisis to reform: past experience and current trends
Cross-country comparisons suggest that the number of people living in absolute poverty tends to fall with sustained economic growth. And one would expect the impact of growth on poverty to be relatively high in a country such as India with relatively low inequality at the outset of the 1990s. Data for India prior to the 1990s also suggest that periods of economic growth have tended to come with lower absolute poverty. The national poverty rate had been falling noticeably (though not continuously) since the early 1970s, at a trend rate of almost one percentage point per year, and at a higher rate in periods of higher growth. The proportion of the population with expenditure per person below a widely-used historical poverty line for India fell from about 60% around 1970 to 40% in 1990.
Thus, with the strong signs of a revival in economic growth since the early 1990s, fueled in large measure by economic policy reforms following the macroeconomic crisis at the start of the decade, there was an expectation that higher growth would push India to a higher rate of poverty reduction. India’s growth rate in net national product per capita was almost 5% a year between 1993/94 and 1999/00. This is somewhat higher than the 1980s, and considerably higher than the 1960s and 1970s when GDP per capita grew at an average rate of barely 1% a year. Did this yield an acceleration in poverty reduction?
The answer to this question has been a matter of considerable debate, reflecting several concerns about India’s poverty data. Some observers have argued that poverty incidence in India has fallen far more rapidly in the 1990s than previously. Others have argued that poverty reduction has stalled, and that the poverty rate may even have risen. The policy reforms have been identified by some observers as the culprit; they argue that the benefits of reform have been highly unequally distributed, greatly dulling the impact on poverty.
While some of the concerns about India’s poverty data are not easily resolved, the thrust of available evidence suggests that during the 1990s India has more or less maintained its post-1970 historical trend rate of national poverty reduction of about one percentage point per annum, with no compelling signs of acceleration or deceleration.
Diverse experience across states
Why is India not making more progress against poverty? To answer this question we need to look at what has been happening at state level. The aggregate picture for India as a whole hides considerable diversity in rates of poverty reduction across states. The southern state of Kerala has had the highest long-term rate of poverty reduction, with a trend decline in the poverty rate of 1.8 percentage points per year over 1970-2000 (Chart). At the other extreme, the poverty rate fell at a trend rate of only 0.5 points per year in the northern state of Bihar and even less in Assam in the northeast.
In parallel, there have also been signs of regional divergence in state domestic products (per capita) over time, with lower growth rates in initially poorer states. This has been evident in the 1990s, continuing a pattern seen in the 1980s.
These observations hold some important clues for understanding why economic growth has not done more for India’s poor overall. Using an econometric model based on state-level data for India spanning nearly 35 years (from 1960-61 to 1993-94), and allowing for both state-specific effects and time trends, we find that higher average farm yields, higher state development spending, higher (urban and rural) nonagricultural output per person, and lower inflation were all poverty-reducing. Except for nonagricultural output, the poverty impacts of these variables are similar across states (for a given poverty measure).
However, it is striking how much the responsiveness (elasticity) of consumption-poverty measures to growth in the nonagricultural sector has varied across states. Growth has been more pro-poor in some states than others. A 5% rate of growth in state nonagricultural output per capita would bring about a 5-6% rate of decline in the poverty rate in Kerala and West Bengal but only about a 1% rate of decline in Bihar’s poverty rate. Bihar has not only seen less economic growth over the longer-term, but the growth that has occurred has had less impact on poverty than in other states.
While part of the difference in statewide rates of poverty reduction is due to differences in agricultural and non-agricultural growth, another important part is on account of differences in the degree of responsiveness of poverty to growth. The elasticity of national poverty incidence with respect to non-agricultural output per capita and agricultural yields (calculated as a weighted sum of state-specific elasticities) has been declining over time, especially the non-agricultural growth elasticity. This sheds some light on the evolving nature of growth and poverty reduction process in the country.
In the aggregate, growth has become less pro-poor. This is not because growth has become less pro-poor within states; we did not find evidence of change in state elasticities over time. Rather it is because of the geographic composition of growth: widening regional disparities and limited growth in lagging areas has made the overall growth process less pro-poor over time. By and large, economic growth in India during the 1990s has not occurred in the states where it would have the most impact on poverty nationally. A more pro-poor geographic pattern of growth would have required higher growth in states such as Bihar, Madhya Pradesh, Maharashtra, Orissa and Uttar Pradesh.
Why does economic growth benefit the poor more in some states than others? Our results point to the importance of initial conditions. Most of the differences across states in the effectiveness of nonagricultural growth in reducing poverty are explicable in terms of differences in initial rural development and initial human resource development going back to the early 1960s. In particular, low initial farm productivity (as a proxy for farm technology and rural infrastructure), poor literacy and basic health, higher initial levels of urban-rural disparity in living standards and greater landlessness all inhibited the prospects of the poor participating in the growth. The role of initial literacy alone is particularly important. For example, more than half of the difference between Bihar and Kerala in the poverty impact of nonagricultural output growth is attributable to Kerala’s substantially higher literacy rate around 1960.
The role of these initial conditions is doubly important as many of these are also needed for fostering higher economic growth. Hence, investment in these key areas of human and physical resource development will be a crucial element in future poverty reduction in India.
The diverse performance of India’s states has implications for what India needs to do now to make a bigger dent in poverty in the future.
- In pursuing higher growth in the aggregate, the important role of the sectoral and geographic composition
of growth should not be neglected since that has a direct bearing on how pro-poor the overall growth process
- Promoting higher agricultural productivity, especially in lagging rural areas will need to get high
- Growth in the non-agricultural economy also has a significant role to play. An important challenge here
will be to make the non-agricultural growth process more pro-poor particularly in key regions such as the
- Some key avenues for promoting more pro-poor growth include investments in basic education and health,
rural infrastructure and technology. There is also a role here for promoting a more equitable distribution of
assets in rural areas.
- There is also a positive role for public spending which could be usefully directed to promoting the right conditions for pro-poor growth, especially in the lagging regions. Improving these conditions will be a significant challenge in both economic and political terms
Gaurav Datt is a Senior Economist in the World Bank’s Poverty Reduction and Economic Management Unit in the East Asia region and Martin Ravallion is Research Manager in the Bank’s Development Research Group.
This article draws on the authors’ papers, "Why Has Economic Growth Been More Pro-Poor in Some States of India than Others?", in the August 2002 issue of the Journal of Development Economics and "Is India’s Economic Growth Leaving the Poor Behind?," in the Summer 2002 issue of the Journal of Economic Perspectives, and from Ravallion’s presentation, "China and India: Which Had More Pro-Poor Growth in the 1990s?" PREM Learning Week, World Bank, June 2002.
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