Poverty and Reforms - A Case Study for India by Tarun Das

8/14/2019 Poverty and Reforms - A Case Study for India by Tarun Das

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Submission of Research paper for the

Global Development Awards: 2003 Competition

Category: Medals for Research on Development

Topic: Pro-Market Reform and the Poor

Title of the Paper

Impact of Pro-Market Reforms Poverty and Inequality in India-

An Assessment and Lessons for Policy Makers

Dr. Tarun Das, Economic Adviser, Ministry of Finance, India

Abstract

This is a case study on India on the progress of pro-market reforms and their impact ongrowth, private investment, poverty, inequality, employment and other developmentindicators in 1980-2000. Indias reforms program emphasized on gradualism with ahuman face. Reforms helped India to move on a higher growth profile with moreemployment, less inflation and less poverty. The study makes an econometric analysis ofthe factors affecting poverty reduction at the macro and states levels with time series and pooled data for urban and rural sectors. The study confirms observations made byeconomists that while growth in income is essential for poverty reduction, it is by nomeans sufficient. It is important to focus on creating an enabling environment for thepoor to participate in, and benefit from, the growth process. The pro-poor public policiesinclude creation of employment opportunities and enhancing the level of health,education and skill of the poor.

A stable macroeconomic environment, characterized by low inflation and sustainablelevel of fiscal deficit makes it possible for the poor to safeguard their purchasing power.The reduction of government deficit allows banks to provide more funds for privateinvestment, which is more efficient. It also allows the government to devote more scarceresources to investment in social sectors. Effective safety nets that insure poor againstincome fluctuations, such as public works programs, are very effective in overcomingmarket failures, and need to be widened. There is a wide scope for strengthening thepublic-private partnership and involvement of NGOs for implementation of governmentschemes in social sectors.

Author: Dr. Tarun Das, Economic Adviser, Ministry of Finance, India.

Official Address: Room 34-A North Block, New Delhi-110001, India.

Residential address: 10/14 East Patel Nagar, New Delhi-110008, India.

Citizenship: Indian, Permanent Resident of India.

TeleFax: (00-91-11) 2309-3552. Mobile: Delhi 9818111841/ 9810047340

Email: [email protected]

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mailto:[email protected]:[email protected]


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Impact of Pro-Market Reforms Poverty and Inequality in India-

An Assessment and Lessons for Policy Makers

Dr. Tarun Das, Economic Adviser, Ministry of Finance

Room 34-A North Block, New Delhi-110001, India.

1. Introduction, Scope and Objectives of the Paper

It is well known that since 1991 India intensified pro-market reforms to encourageprivate participation in economic development and to impart dynamism to the overallgrowth process. Credible reforms were taken in industry, trade, infrastructure, fiscal andfinancial sectors to improve competitiveness of Indian industries and to exploit fullycountrys potentials for higher growth. As the initial reforms take root and second-generation reforms unfold, India is emerging as one of the fastest growing and dynamiceconomies of Asia.

Indias reforms program is characterized by the following unique features:

Gradual and Step by StepApproach not aBig Bang or Shock Therapy Approach

General political consensus Strong emphasis on human face

Least sacrifice made by people

No write-off / rescheduling of external debt

India has a multi-party democracy and adopted growth with social justice as one of thebasic objectives of planning since 1951. Indian government believes that no reforms can

succeed unless they are able to take the people along with them. Therefore, all reformsare based on general political consensus and have a bias for employment generation andpoverty reduction.

More than 12 years passed since the reforms started. Twelve years is a long period in thelife of an individual, but for a country as complex and large as India, 12 years are notenough to expect completion of all reforms. There is unfinished agenda of reforms inland and labour markets, local governments, external openness and capital accountconvertibility. However, it is a matter of satisfaction that the impact of reforms on growthand poverty reduction had been encouraging. India moved up on a higher growth pathwith higher employment, higher real wages, less inflation and lower level of poverty.

Inflation declined from 16 percent in June 1991 to around three percent today. Povertyratio declined from 36 percent in 1993-94 to 26 percent in 1999-2000. There was nowage freeze, no retrenchment of employees or shutting down of companies.

India came out of a severe balance of payments crisis without any debt write-off. Oncontrary, India was able to prepay a part of external debt to the multilateral fundingagencies and bilateral countries.

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Total foreign exchange reserves increased from US$1 billion, equivalent to two weeksimports in June 1991, to US$85 billion equivalent to 15 months of imports. The currentaccount balance, which recorded a deficit of 3.1 percent of GDP in 1990-91, had asurplus amounting to 0.3 percent of GDP in 2001-02 and 0.9 percent of GDP in 2002-03.

Foreign investment inflows improved from total of US$1 billion in 1980s to $40 billionin 1990s due to stability of the exchange rate, continual reforms in infrastructure andliberalisation of foreign investment policies.

External debt indicators also showed steady improvement. In terms of stock of externaldebt, Indias position improved from the third rank after Brazil and Mexico in 1990 to theninth rank after Brazil, Russian Federation, Mexico, China, Argentine, Indonesia, Koreanrepublic and Turkey in 2000. The external debt-to-GDP ratio declined from 38.7 percentat end-March 1992 to 19 percent at end-March 2003. The debt-service ratio declinedfrom 35.3 percent in 1990-91 to 13 percent in 2002-03. Due to these improvements, India

is now categorized as a low indebted country.

India is one of the few countries, which reaped these benefits without serious economicdisruptions or much sacrifice made by the people. Many countries with significantreforms experienced high rates of inflation, unemployment and poverty at the initial stage.There was no such adverse situation in India, as Indian reform program emphasizeddevelopment of appropriate safety nets for the vulnerable and weaker sections that mightbe adversely affected by structural reforms.

The basic objectives of this paper is to analyze the unique features of Indias economicreforms and to answer a number of questions, particularly the following:

(a) What has been the impact of reforms on poverty and social developmentindicators in India?

(b) What kinds of poverty alleviation and employment generation programs andsocial safety nets were used to protect the interests of the poor?

(c) How can we encourage further the private participation and public-privatepartnership for the development of social sectors?

(d) What lessons can we learn from the Indian experience for policy planning?

The paper is divided into six sections including this section on objectives and scope.Section-2 discusses briefly the pro-market reforms taken since 1991. Section-3 analysesthe impact of reforms on growth, private investment, poverty and inequality, employmentand other human development indicators. Section-4 makes an econometric analysis of thefactors affecting poverty reduction at the macro-level with time series data in 1977-2000,while section-5 carries out similar econometric analysis at the state levels with panel andpooled data for 1983-2000. Section-6 summaries main conclusions of the study andlessons for policy makers. The paper ends with selected bibliography on the subject.

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2. Pro Market Reforms in India since 1991

2.1 Paradigms of reforms

Table-1 summarizes paradigms of pro-market reforms in India since 1991. Reforms werebased on the following rationale (Das 1993, 2003):

(a) It was recognised that as there are imperfections in the markets, there are alsoimperfections in the government. It was, therefore, necessary to redefine the roleof the government from a controller to an enabler, from a supplier to a facilitator,from an operator to a policy maker, and from a regulator to a trustee of socialequity and environmental sustainability.

(b) Over the years, government widened its scope and participated in activities whereprivate initiatives are more productive. It was, therefore, necessary to reduce thescope of the government, and to encourage private participation including foreigninvestment in the development process.

(c) In many cases, twin objectives of the public sector (viz. growth and equity) wereinter-mixed and one objective was taken as an alibi for failure of another. In theprocess, both the prospects of higher growth and social justice were impaired. Itwas, therefore, necessary to focus on growth and to target subsidies and fiscalincentives for the welfare of the poor and vulnerable sections of the society.

(d) Till 1991 India adopted a restrictive policy on capacity expansion and foreignequity. Indian economy was characterized by high level of control, licenses,regulation, monopolistic practices in public utilities, complex tax regime withhigh rates, high tariff walls and Quantitative Restrictions (QRs), rigid factormarkets for land, labour and capital, and high levels of fiscal deficits. All theseled to low efficiency, high transactions cost, rent seeking, non-optimal allocationof resources, sub-optimal choice of industrial size, technology and location, lowquality but high prices of products and services, and bureaucratic inefficiency andcorruption. It was, therefore, necessary to liberalize the economy and to open it tointernal and external competitions.

In the post reforms period, there is re-orientation of public policies. The basic job of thegovernment is now to create enabling environment for public-private partnership; to linkfiscal, monetary and other incentives to productivity; to streamline public investment andsocial welfare programs; to repair market failures; to strengthen institutional structuresand legal system; and to put emphasis on consultations, flexibility, decentralization,selectivity, monitoring and co-ordination of policies and operations;

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Table-2.1 Paradigms of Pro-Market Reforms in India since 1991

Pre-Reforms Period Post Reforms Period

1. Quantitative licensing on external trade,

industrial size and investment2. State regulated monopolies of utilities

and external trade3. Strict Government control on finance

and capital markets4. Restrictions on foreign investment and

technology transfer

1. Abolition of industrial, investment and

trade licensing2. Removal of state monopolies, and

privatization of public enterprises3. Significant liberalisation of financial

and capital markets4. Liberal regime for FDI, portfolio

investment, foreign technology

5. Import substitution and export ofprimary goods

6. High duties and taxes with multiple

rates and large dispersion7. Sector-specific monetary, fiscal and

tariff policies8. End-use and sector-specific, multiple

and controlled interest rates

5. Export promotion and diversification,no import bias

6. Reduction and rationalization of taxes

and duties7. Sector-neutral monetary, fiscal and

tariff policies8. Flexible interest rates without any end-

use or sector specifications

9. Strict foreign exchange control, noconvertibility of rupee

10. Multiple and fixed exchange ratesdetermined by the Reserve Bank

11. Administered prices for minerals,

utilities, and essential goods12. Tax concessions on exports and savings

9. Abolition of exchange control, fullconvertibility on current account

10. Unified and market determinedexchange rates

11. Abolition of all administered prices

except for few drugs12. Rationalized and being phased out

13. Central planning, discretionary process,high degree of bureaucracy

14. General lack of consumers protectionand other rights

13. Decentralization, sound institutionalframework, reforming civil services

14. Acts governing consumer rights, IPR,independent regulatory authority

15. Outdated Companies Act16. No exit policy for land and labour, high

stamp duties and registration fees

17. Outdated legal system18. Explicit subsidies on food, fertilizers,

and some essential items19. Hidden subsidies on power, urban

transport, public goods, POL

15. Competition Law enacted16. No change in labor policy, slow

progress of reforms in land markets

17. No change18. No change, budget subsidies on LPG

and kerosene introduced19. No change, but user charges are being

rationalized, and subsidies targeted

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2.2 Pro-market reforms in fiscal and financial sectors

The basic objective of fiscal reforms since 1991 (Table 2.2) was to reduce fiscal deficitsso that public borrowings donot crowd out private investment. The associated tax

reforms aimed at creating a simple, equitable and stable tax system, which interferesleast with the efficient allocation of resources. Government desires to gradually increasethe scope of direct taxes and to move towards a system of value added tax.

Several measures were taken since 1991 to strengthen the banking system and to improvethe functioning of money and capital markets. Policy package included decontrol oflending and deposit rates, reduction of CRR from 25 percent in 1991 to 4.75 percent in2003, reduction of SLR from 38.5 to 25 percent, reduction of interest rates from over 21 percent to 10.5 - 11.5 percent in 2003, tightening of prudential norms for capitaladequacy and provisioning for non-performing assets, an active open market operationsand abolition of selective credit controls. An array of capital market reforms was

introduced for primary and secondary markets, equity and debt, and foreign investment.

Indian firms were allowed to raise funds abroad through Global Depository Receipts,Foreign Currency Convertible Bonds and offshore fund. Foreign Institutional Investors(FIIs), Non-resident Indians (NRIs) and Overseas Corporate Bodies (OCBs) wereallowed to operate in Indias capital markets subject to limits of individual holdings andcollective holding up to 49 percent of paid up capital.

Foreign investors are permitted to pick up disinvested shares of public enterprises, datedgovernment securities and treasury bills and shares of unlisted companies. The ForeignExchange Regulation Act (FERA) removing various restrictions on foreign companies,who can now own real estate, use their trademarks and brand names for domestic sale.India has become a member of the Multilateral Investment Guarantee Agency and signedtreaties for avoidance of double taxation with many countries.

2.3 External sector reforms

Significant reforms took place in external sectors (Table 2.3) with abolition ofquantitative restrictions on foreign trade and significant reduction of customs duties from400 percent in 1990 to maximum of 25 percent in 2003. The rupee is now fullyconvertible on current account and almost fully convertible on capital account for the non-residents. As regards exchange rate, India is regarded by the IMF as one of the countrieshaving independent floating exchange rate system.

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Table- 2.2 Major Pro-Market Reforms in Fiscal and Financial Sectors since 1991

Status in June 1991 Status in August 2003

Budgetary support to central public enterprises amountedto 1.5% of GDP besides various subsidies, preferentialfinancing, price and purchase preferences.

No hard budget constraints for PSEs.No disinvestment of government equity.

Budgetary support curtailed to 0.6% of GDP,preferential access to bank credits / price preferenceeliminated.MOUs with CPSEs strengthened.Disinvestment up to 49% of govt. equity is allowed.

Control on interest rates on government securities. Government securities are sold at market prices.

Irrational duty structure and high rates of taxes.Maximum RatesExcise duties 110%Import duties 400%Income tax 54%Corporate taxes:Domestic cos. 49% and 54%Foreign cos. 65%

Direct and indirect taxes are reduced and rationalized.Maximum Rates

Excise duties 24%Import duties 25%Income tax 30% + surcharge of 10%Corporate tax:Domestic cos. 35% + surcharge of 2.5%Foreign cos. 40% + surcharge of 2.5%

Double dividend tax on both individuals and companies.Existence of gift tax.Limited cases of tax holidays.

Dividend tax only on distributed profits.Gift tax abolished.Tax holidays extended to many infrastructure.

Highly regulated and controlled banking system with strictentry of new banks and branching rules.

New private banks set up. Govt share of equity in publicbanks is being brought down to 49%. Foreign equity innew private banks is allowed to the extent of 40%.

Bank deposit rates fixed according to account types andmaturities. Minimum maturity of fixed deposit is 30 days.

Bank deposit rates except for savings a/c liberalized. Themin. maturity of term deposit reduced to 7 days.

Issuing and pricing of securities, shares and bondsdetermined by the Controller of Capital Issues in theMinistry of Finance.

The office of CCI is abolished. Independent regulatoryauthority i.e. SEBI is established for orderly growth ofcapital markets.

Bank lending rates are fixed according to loan size and enduses. Floor rate on loans exceeding Rupees two lakh fixed

by the RBI at 21%.

The banks determine lending rate.PLR ranges between 10.5% to 12%.Banks are also allowed to lend at below PLR rates.

At least 40 percent of bank credits canalized to the prioritysectors at concessional rates.

Priority sectors rationalized. No concessional ratesexcept for small loans up to Rs.25000.

Government pre-empted large portion of bank reservesthrough CRR of 25% and SLR of 38.5%RBI Bank rate at 12%.PLR was high at above 21%.

Higher bank funds for private sector asCRR reduced to 4.75%. SLR reduced to 25%.Bank rate reduced to 6.25%.PLR is free and ranges between 10.75%-11.5%.

Inadequate norms concerning capital adequacy, incomerecognition, and provisioning for non-performing assets

Regulations, monitoring, norms on asset

classification, provisioning, capital

adequacy tightened as per international

best practices.

Portfolio investment by foreign investors in Indiancompanies is not allowed.Foreigners not allowed to buy government securities ordisinvested shares in PSEs.

FIIs, NRIs and OCBs allowed to operate in Indias

stock markets subject to individual and

cumulative ceilings.

NRIs/ FIIs allowed to buy govt securities & debt issues.

Indian firms not allowed to raise funds from foreign stockexchanges.

Indian firms allowed to raise funds abroad throughGlobal Depository Receipts, Foreign CurrencyConvertible Bonds and offshore fund.

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2.4 Pro-Market Reforms in industry and Infrastructure

Government abolished licensing for industrial production and exports except for a fewstrategic sectors (Table 2.3). Licensing is now required for only 6 industries which

account for 7 percent of manufacturing output. Only 4 industries are now reserved for thepublic sector.

Foreign investment policy is liberalized significantly. Most of the sectors (exceptagriculture, retail trade, print media etc.) are now open for foreign investment subject tosectoral caps on equity. Majority participation and equity up to 100 percent are allowedin most of the infrastructure sectors. Comparative statements on private sectordevelopment policies and foreign investment regime in selected Asian economies givenin Tables 2.4 and 2.5 respectively indicate that Indian investment environment iscomparable to best practices in Asian region.

Table-2.3 Major Pro-Market Reforms in Industry and Infrastructure since 1991

Status in June 1991 Status in August 2003

1. Industry and infrastructure:

(a) Licensing required for most industries, whichaccounted for 80% of manufacturing output.

(b) Restrictions on expansion under MRTP(c) Reservation of 836 items for SSI units(d) 18 core and infrastructure industries, mostly

with high capital intensity, long gestationperiod, lumpiness of huge capital, low returnand high risk, reserved for the public sector.

(e) Restricted foreign investment policy.

(f) No Competition Act.

(a) Licensing abolished except for 6 industries,which account for 7% of manufacturing output.

(b) MRTP Act amended.(c) Many items dereserved.(d) Only four industries viz. Defense products, rail

transport, atomic energy, minerals required byatomic energy reserved for public sector.

(e) Almost all the sectors are open for foreigninvestment except a few which are strategic onconsiderations of national security, publichealth, and environment.

(f) Competition Commission established.

2. External Sector reforms:

(a) Fixed exchange rate determined by RBI(b) QRs on 91% of imports(c) Imports of 55 goods canalized(d) 439 items of exports are subject to export

licenses.(e) Export taxes on agro products and minerals(f) Rupee not convertible on current account.

(g) No capital account convertibility.

(a) Exchange rate is market determined(b) Most QRs removed(c) Most items decanals(d) Abolished except for some minerals and

agricultural items, but compatible with WTO.(e) Export taxes abolished(f) Fully convertible on current account.

(g) Significant convertibility on capital account.

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Table-2.4 Private Sector Development and Investment Climate

in selected Asian economies in 1990 and 2000

Country Private fixedinvestment as % of

domestic fixed

investment

Domestic credit toprivate sectorAs % of GDP

Foreign DirectInvestment

As % of GDP

Entry and Exit Regulation in 2000

Entry Repatriation of:

1990 2000 1990 2000 1990 2000 Income Capital

Newly Industrializing Economies (NIEs)

Hong Kong .. .. 165 159 .. 89.0 F F F

Korea,Rep 87 79 66 102 0.7 3.2 RF F F

Singapore .. .. 97 110 20.7 11.6 F F F

Taiwan,China .. .. .. .. .. .. F F F

China and Mongolia

China 34 47 88 125 1.2 4.3 SS F F

Mongolia .. .. 19 8 .. 3.4 .. .. ..

South-East Asia

Cambodia 90 61 n.a. 7 1.7 3.9 .. .. ..

Indonesia 70 61 47 21 1.0 4.2 R R R Lao, PDR .. .. 1 9 0.7 5.4 .. .. ..

Malaysia 65 51 69 136 5.3 2.0 RF F D

Myanmar .. .. 5 9 .. .. .. R R

Philippines 82 69 22 45 1.2 2.8 SS F F

Thailand 85 68 83 109 3.0 2.8 RF F F

Vietnam .. .. 3 35 0.6 4.1 .. R R

South Asia

Bangladesh 58 70 17 25 0 0.6 F F F

Bhutan .. .. .. .. .. .. .. .. ..

India 61 70 25 29 0 0.6 AI F F

Maldives .. .. .. .. .. .. .. .. ..

Nepal .. .. 13 31 0 0 R R R

Pakistan 52 62 28 29 0.6 0.5 R F F

Sri Lanka .. .. 20 29 0.5 1.1 RF R F

East Asia

Japan 84 79 195 188 1.7 0.9 F F F

World

Low & middle income 65 67 42 55 0.9 3.5

East Asia & Pacific 63 50 71 106 15 3.9

Europe & Central Asia .. .. .. 21 0 3.8

Latin America & Carib. 74 80 28 28 0.9 4.5

Mid. East & N.Africa .. .. 42 47 0.9 1.0

South Asia 56 72 25 29 0.1 0.6

Sub-Saharan Africa .. .. 43 66 1.0 1.8

High Income 82 .. 108 136 3.0 10.1

World 78 .. 97 120 2.7 8.8

Notes:

(a) Two dots (..) stand for "Data not available"

(b) Entry and exit regulations are classified as Free (F), Relatively Free (RF), Delayed (D), Selected Sectors (SS), Authorized

Investors only (AI), and Restricted (R).

Sources : (1) World Development Indicators 2002, World Bank. (2) World Development Report 2002, World Bank.

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Table-2.5 Foreign Investment regime in selected Asian countries

Country Sectors allowed

for Foreign

Direct Investment

Areas of 100% foreign

equity

Duration

of FDR

Local

content

obligation

Export

obligations

1. India All except defense,agriculture,Plantation, atomicenergy, rail trans.

100% Eons, FTZ, EPZ,power, technologyparks, hospitals,

shipping, priority areas

Unlimited Abolishedsince 1991 Noneexcept for100%EOUs

2. Bangladesh All except arms,drugs, forestry,

nuclear power, rail

All allowed sectors Unlimited Valueaddition for

EOUs

Noneexcept for

EOUs

3.Myanmer Selected areas All allowed sectors,minimum of 35%

Unlimited No No

4.Nepal All sectors Projects with FDI aboveRs.20 million

Unlimited No No

5.Pakistan All except defense,alcoholic beverage

In any business Unlimited No No

6. Sri Lanka All areas exceptbroking, retail andpersonal services

All allowed sectors Unlimited No No

7.SouthKorea

All sectors exceptbanned/ restricted

All allowed sectors Unlimited No No

8.Singapore All sectors All areas except publicutilities, media, telecom

and transport

Unlimited No No

9.Indonesia All sectors exceptretail trade and

advertising

FDI of at least $50 mln,EOUs, designated

sectors and locations

30 years 51% in 20years

No

10.Malaysia All sectors Designated sectors Unlimited No No

11.Philippines All except media,

retail trade andAccountancy

100% EOUs and

designated sectors

Unlimited No No

12.Thailand All sectors exceptnegative list

Over 80% exports,designated sectors and

locations

Unlimited 51% in 5 yrsin allied andagriculture

No

13.Vietnam All sectors exceptminerals, telecom,aviation, shipping

All allowed sectors,Minimum of 30%

20 years No No

14. China All except publicutilities, leasing,real estate, trust,

transport

All allowed sectors,Minimum of 25%

10-30years

No No

15.Hong

Kong

All sectors except

broadcasting

All sectors except

banking

Unlimited No No

16.Taiwan All sectors exceptprohibited list

All sectors exceptrestricted list

Unlimited No No

17.Japan All except arms,environment,related industries

All sectors exceptprohibited list

Unlimited No No

18.Lao, PDR Selected sectors All allowed sectors 15 years No No

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2.5 Social sector policies and reforms

Growth with social justice had been primary objective of Indian planning since itsinception in 1951, and several anti-poverty measures are in operation for decades

focusing the poor as the target groups. These include welfare programs for the weakersections, women, children, and a number of special employment programs for self- andwage employment. Ongoing economic reforms since 1991 strengthened these programsto generate more employment, create productive assets, impart technical skills and raisethe income levels of the poor.

Government relied mainly on two approaches for poverty alleviation: the first based onthe anticipation that economic growth will have a trickle down effect on the levels ofliving of all groups; and the second that direct anti-poverty programs are also required.Government shifted public expenditure away infrastructure and industry towards socialsectors, and improved targeting of subsidies through changes in the public distribution

system. Central government expenditure on social sectors (comprising education, health,water supply, sanitation, housing, slum development, social welfare, nutrition, ruralemployment and minimum basic services) as a ratio to total expenditure increased from7.7 percent in 1990-91 to 11.3 percent in 2003-04, and as a ratio to the GDP increasedfrom 1.3 percent to 2 percent over the same period (Table-2.6)).

Trends of total expenditure on social services by the general government (Centre andStates combined) given in Table-2.7 indicate that:

(a) Despite fluctuations, total expenditure as a percentage of GDP virtually remainedinvariant around 29.5 percent in 1985-2002.

(b) There was marginal increase in social services expenditure from 5.8 percent ofGDP in 1985 to 6.2 percent in 2002 and the increase was uniformly distributedamong education, health and other services.

(c) The share of social services in total expenditure increased from 19.6 percent in1985 to 20.9 percent in 2002, that of education from 9.8 percent to 10.3 percent,and that of health from 4.4 percent to 4.6 percent in the same period.

(d) Composition of social services expenditure indicates that the share of education init declined from 50 to 49 percent that of health from 23 to 22 percent, while shareof other expenditure increased from 27 to 29 percent in 1985-2002.

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Table-2.6 Expenditure on Social Sectors by the Central Government

Year Total ExpenditureAs percent of GDP

Expenditure onsocial sectorsas percent of

total expenditure

Expenditure onsocial sectors

as percent of GDP

1992-93 17.4 7.8 1.41998-991999-002000-012001-022002-032003-04

16.015.415.516.016.717.0

10.510.011.111.111.311.5

1.71.71.71.81.92.0

Table-2.7 Expenditure on Social Services by the General Government(Combined Centre and States)______________________________________________________________________________

______________________________________________________________________________

India is committed to achieve the UN MDG targets by 2015. According to the HumanDevelopment Report (UNDP 2001) India is one of the 11 countries in the world that ison track to meet the UN MDG while 70 other countries are lagging or slipping. Thereport acknowledges the significant reduction of poverty ratio from 36 percent in 1993-1994 to 26 percent in 1999-2000, and also significant improvement in literacy rate.

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I T E MS 1985 1990 1995 1996 1997 1998 1999 2000 2001 2002

Actual Actual Acual Actual Actual Actual Actual Actual RE BE

Finance of Centre & States

As percentage of GDP:

Total Expend. 29.4 26.8 24.2 23.4 24.2 25.4 26.6 28.1 29.5 29.6

Social services 5.8 5.4 4.9 5 5.2 5.5 5.7 6.3 6.5 6.2

Education 2.9 3.1 2.7 2.7 2.8 3 3.3 3.1 3.1 3.1

Health 1.3 1.2 1 1 1.1 1.2 1.2 1.3 1.4 1.4

Others 1.6 1.2 1.2 1.3 1.3 1.3 1.2 1.8 2 1.8

As % of total expenditure:

Social services 19.6 20.3 20.4 21.5 21.4 21.6 21.3 22.4 22 20.9

Education 9.8 11.4 11.3 11.6 11.5 11.9 12.3 11.2 10.5 10.3

Health 4.4 4.3 4.3 4.5 4.6 4.6 4.4 4.8 4.8 4.6

Others 5.4 4.6 4.8 5.4 5.3 5 4.6 6.4 6.7 6

As % of expenditure on social services

Education 50 56 55 54 54 55 58 50 48 49

Health 23 21 21 21 21 22 21 21 22 22

Others 27 23 24 25 25 23 21 29 31 29


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2.6 Agricultural policies and reforms

Indian agriculture suffers from a mis-match between food crops and cash crops, loweryields per hectare than the world average, except for wheat, volatility in production andwide disparities of productivity over regions and crops. Domestic production of pulses

and oilseeds are still below the domestic requirements and India depends on imports ofpulses and edible oils to satisfy domestic demand.

Although the country holds sufficient buffer stock of food grains, food management isinefficient with unsustainable level of food subsidies. The rural economy and the privatesector lack the basic infrastructure to build up sufficient buffer stocks, and agricultureremains vulnerable to weather shocks. Private sector gets various fiscal incentives forimproving rural storage facilities. The central government provides financial assistance tothe States for procurement and distribution of food grains at subsidized rates particularlyto the families below the poverty line.

The enhanced availability of bank credits through priority lending to agriculture and agrobased industries, favourable terms of trade, liberalized domestic and external trade foragricultural products have attracted greater private investment in agriculture in recentyears. The successive Central Government Budgets stepped up public investmentsignificantly for rural electrification, rural roads, rural employment, irrigation, agricultureresearch and public distribution system for food grains.

2.7 Unfinished Agenda on Reforms

Momentum of reform needs to be maintained for sustaining higher growth and rapidprogress toward poverty alleviation. In particular, ambitious fiscal consolidation and broadbased structural reforms are needed to allow resources to be redirected from servicingpublic debt towards economic development and social programs and to create enablingenvironment for private investment.

Areas where further reforms would promote greater efficiency include the following:

(a) Privatisation of public enterprises at a faster speed,(b) Further liberalisation of the reservation policy for the small-scale industries,(c) Liberalisation in land and labour markets,(d) Formulation of an effective exit policy for bankrupt firms,(e) Coordinating state level reforms

(f) Reforms in municipalities and corporations(g) Strengthening regulation in infrastructure(h) Reforms in insurance, provident and pension funds, and(i) Thrust on state provision of basic needs.

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The following structural reforms need to be given priority:

Although major reforms were taken at the macro level and in production sectors,credible reforms need to be taken at local bodies particularly with regard to sale,acquisition and transfer of land and property.

Indian labour is highly protected. Reforms are necessary in labour markets forenhancing employment.

Regaining the momentum of the disinvestment program is critical for fiscalsustainability and improving efficiency in the public sector.

Further liberalisation of the non-debt creating financial flows including FDI isrequired for petroleum, real estate, telecommunications, civil aviation, banking andinsurance. There are synergies between disinvestment and the FDI strategy, andserious consideration may be given to use disinvestment as a magnet for foreign

investment.

There is significant scope for increasing Indian exports by encouraging both labour-intensive and high technology products.

India will have to face and surmount the challenges posed by new technologies andmarket places, such as Internet and e-commerce.

It is important to lock in recent gains on the inflation front. Management of inflationand protecting the interest of the vulnerable and weaker sections of the society shouldremain a priority agenda for the government.

Another priority of the government is to reduce inter-state disparities andinterregional inequality.

There is need for greater co-ordination, co-operation and partnership betweenprivate and public sectors. Both well-governed state and well functioning marketsare essential for high growth and sustainability. Government and free marketsshould supplement and complement each other. Government should withdraw fromsectors where private participation is more productive and more efficient. But thescope of government is to remain large in social sectors and physical infrastructure.

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3. Impact of economic reforms on Poverty and Growth

3.1 Sustained Economic Growth

Macro-economy responded well to wide ranging reforms initiated since June 1991. Theaverage GDP growth rate increased from 6 percent per annum in the Seventh Plan (1985-1990) to 6.7 percent in the Eighth Plan (1992-1997). The GDP growth rate decelerated to5.5 percent in the Ninth Plan mainly due to sluggish industrial growth and deceleration inagricultural growth caused by unfavourable monsoon. The service sectors having aweight of 50 percent in GDP, however, posted a robust growth of 8.1 percent in 1997-2002 (Table-3.1).

Table-3.1: Average GDP Growth rates in 1980s and 1990s

(In percent)

Sectors Average7th plan1986-90

1991-92 Average8th Plan1992-97

Average9th Plan1997-2002

1980s 1990s

Agriculture& Allied

3.4 -2.3 4.7 1.8 3.4 3.0

Industry 7.6 -1.3 7.6 4.5 7.0 5.8Services 7.4 4.9 7.5 8.1 6.9 7.6

Total GDP 6.0 0.8 6.7 5.5 5.6 5.8

3.2 Impact on Private Sector Participation

Since the First Plan in 1951, India adopted a mixed economy with significant privateinvestment in many sectors. There were mixed trends of private sector shares in sectoralGDP and GDIduring last two decades. Trends given in Table-3.2. indicate the following:

(a) While private sector share in overall investment (GDI) increased from 59 percentin 1980 to 71 percent in 1999, that in overall GDP declined from 80 to 74 percentover the same period.

(b) Private sector continues to have pre-dominant shares in sectoral GDP and sectoralinvestment in agriculture and allied sectors, manufacturing, construction, tradeand hotels, finance and real estate in 1980-2000.

(c) Private sector had negative value added in electricity, gas and water supply. Itsshare in value added remained invariant in agriculture, increased in trade andhotels, transport and communications, and decreased in mining and financialsectors despite significant reforms over the period.

(d) Private sector share in investment increased in agriculture, manufacturing, publicutilities, construction, community and social services, but decreased in miningand quarrying, trade and hotels, transport and communications.

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Table-3.2 Share of Private Sector in Sectoral GDP and GDI

Share of private sector in sectoral GDP (in percentage to sectoral GDP)

Year Agri- Mining Manufac Electri- Construc- Trade, Transprt Finance, Commn Total

culture and turing city, gas, tion hotels & storage, insurance, social, GDP

& allied Quarry- water restau- commu real personal

sectors ing supply rant nication estate services

1980-81 97 25 87 13 84 95 47 71 37 80

1990-91 97 14 81 -10 84 96 47 68 31 75

1999-00 97 15 87 -7 84 98 57 66 33 74

Share of private sector in sectoral investment (in percentage to sectoral GDI)

1980-81 52 7 83 10 58 102 56 90 38 59

1990-91 70 3 81 6 84 82 47 86 18 64

1999-00 72 3 88 14 71 60 44 87 26 71

Sectoral investment ratios in the private sector (share in overall GDP)

1980-81 1.6 0.1 4.4 0.3 0.3 1.4 1.8 2.0 1.3 13.2

1990-91 1.7 0.0 6.1 0.2 0.4 1.3 1.4 2.8 0.4 18.9

1999-00 1.2 0.0 7.2 0.3 0.2 0.6 1.0 2.5 0.7 18.9

3.3 Improvement in human development indicators

Increased availability of health care services resulted in continuous reduction of deathrate, birth rate and infant mortality rate over the years (Table-3.3). The trends are

consistent with the view that rapid economic growth brought about animprovement in living standards of people in general. Despite significantprogress, indicators of human development such as life expectancy, literacy andmedical care in India lag far behind those in East Asian countries.

Wide gender disparities exist with regard to economic, health and educational attainment.More than 40 percent of Indias illiterates are women. Incidence of infantmortality and child malnutrition is more pervasive for females. However, femalelife expectancy at birth improved in 1990s and now exceeds male life expectancy.Poorer health of women is caused by dual work burdens in production andreproduction and skewed pattern of intra-household food allocation in favour of

males.

There are wide inter-State variations in indicators of human development. For instance, inKerala the life expectancy at birth at 72 years and overall literacy at 90 aresignificantly higher than those in the States like Bihar, Madhya Pradesh, Orissa,Rajasthan and Uttar Pradesh (Table-3.4), but comparable with those in China,Malaysia, Indonesia, Thailand and Sri Lanka which made significant progress inhuman development (Table-3.5).

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Table-3.3: Basic Indicators of Human Development

Year Life expectancyat birth (years)

Literacy rate(percent)

Birth ratePer 1000

Death ratePer 1000

Infant mortality rate Per1000

1951 32.1 18.3 39.9 27.4 1461961 41.3 28.3 41.7 22.8 1461971 45.6 34.5 41.2 19.0 1291981 50.4 43.6 33.9 12.5 1101991 59.4 52.2 29.5 9.8 802001 63.5 65.4 25.8 8.5 68

Source: Economic Survey 2002-03, Ministry of Finance.

Table-3.4: Selected Indicators of Human Development for Major States

State Life expectancy at birth(years)

Literacy rate(percent)

Infant mortality rate per1000

Andhra Pradesh 60.6 44.1 66Assam 54.9 52.9 75Bihar 58.5 38.5 72Gujarat 60.1 61.3 62Haryana 62.9 55.9 68Karnataka 61.9 56.0 53Kerala 72.0 89.8 13Madhya Pradesh 54.0 44.2 97Maharashtra 64.2 64.9 48Orissa 55.5 49.1 95Punjab 66.4 58.5 52Rajasthan 58.0 38.5 86Tamil Nadu 62.4 62.7 54Uttar Pradesh 55.9 41.6 85

West Bengal 61.5 57.7 55All India 59.4 52.2 72

Table-3.5: Indicators of Human Development in Selected Asian Countries

Country Life expectancy at birth(years)

Infant mortality rate per1000

Adult literacy rate(percent)

China 69.2 38 82Indonesia 64.0 47 84

India 61.6 73 52

Kerala state (India) 72.0 13 90

Malaysia 71.4 11 84Philippines 67.4 32 95

Pakistan 62.8 95 38Korea, Republic 71.7 6 98Singapore 77.1 4 91Sri Lanka 72.5 17 90Thailand 69.5 31 94

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3.4 Increase in Real Wages for agricultural labour.

Average real wages for unskilled agricultural labour, which reflect economic conditionsof agricultural labourers, declined by 6.2 percent in the crisis year 1991-92, but increasedin subsequent years except in 1994-95 (Table-3.6). Increase in real wages along withagricultural growth contributed to a reduction of poverty and income inequality.However, there were no uniform trends across the States implying that local conditionsexert significant influence on agriculture wages.

Table-3.6 Change in real wages for unskilled agricultural labour

For all India (percentage change in agricultural year July to June)

Year Percentage change

1991-92 -6.19

1992-93 +5.21

1993-94 +5.611994-95 -0.391995-96 +0.721996-97 +1.641997-98 +2.501998-99 +3.45

1999-2000 +3.50

Source: Various Issues of Economic Survey, Ministry of Finance.

3.5 Poverty Reduction

Poverty ratios are estimated by the Planning Commission on the basis of the consumerexpenditure surveys conducted by the National Sample Survey Organisation (NSSO).The latest survey data are available for the 55th round covering the period July 1999 toJune 2000. Despite high population growth, the headcount ratio declined from 55 percentin 1973 to 26 percent in 1999 for all India i.e. at a rate of 1.1 percentage point per annum.The decline was fairly uniform across rural and urban areas. Rural poverty, whichaccounts for 75 percent of the overall poor, declined from 56 to 27 percent in 1973-1999,while urban poverty dropped from 49 to 24 percent during the same period. Interstatedifferentials of poverty also narrowed, although these still remain high. While only 6percent of population in Punjab lives below the poverty line, the incidence of poverty is

as high as 43 percent in Bihar.

The absolute number of the poor declined by only 61 million from 321 million in 1973to 260 million in 1999 due to population growth from 600 million in the early 1970s to991 million in 1999. In fact, the number of poor remained stable around 320 million in1973-1994 and declined to 260 million in 1999 due to reduction of poverty ratio by 10percent in 1993-1999. This shows favourable impact of economic reforms and higheconomic growth on the incidence of poverty and employment in 1990s.

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Table-3.7 Estimates of Incidence of Poverty in India 1973-1999

___________________________________________________________Year Poverty Ratios (%) Number of Poor (Million)

______________________ _________________________

Rural Urban Combined Rural Urban Combined__________________________________________________________1973-74 56.4 49.0 54.9 261 60 3211977-78 53.1 45.2 51.3 264 65 3291983-84 45.7 40.8 44.5 252 71 3231987-88 39.1 38.2 38.9 232 75 3071993-94 37.3 32.4 36.0 244 76 3201999 27.1 23.6 26.1 193 67 260__________________________________________________________

It may be noted that the official poverty ratios are basically deprivation indices as the

poverty line takes into account mainly bare biological needs (calorie intake of 2400 percapita per day for rural areas and 2100 per capita per day for urban areas). It does notconsider adequately needs on health, education, housing, transport, water, power,sanitation etc. not to talk of minimum entertainment and social, cultural and religiousneeds. Poverty line assumes fixed consumption basket over time and regions, although ittakes into account price differentials among the states.

The determination of poverty line also assumes continuous relationship between calorieintake and money income levels, which is not supported by facts. Since there aredifferences in consumption habits among the states and there does not exist an optimalconsumption basket, neither the uniform calorie norm nor the substitution of calorienorms by monetary norms is justified.

Table-3.8: Poverty incidence and growth rates in India

and selected Asian countries (in percent)

Country Povertyratios1975

PovertyRatios1995

AnnualReductionIn 1975-95% Point

AverageGDP growth1970-1980

AverageGDP growth1980-1995

India 54.9 26.1 1.1 3.2 5.6China 59.5 22.2 1.9 5.0 11.1Indonesia 64.3 11.4 2.6 7.8 6.6Korea 23.0 5.0 0.9 9.0 8.7Malaysia 17.4 4.3 0.7 7.8 6.4Philippines 35.7 25.5 0.5 6.2 1.4Thailand 8.1 0.9 0.4 7.2 7.9

Source of data: For India, Planning Commission; for others World Bank Report on

Social Consequences of the East Asian Financial Crisis, September 1998.Note: For India, poverty ratios refer to the years 1973 and 1999 respectively.

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Indias progress in fighting poverty is modest when compared with some of Asiancountries (like China and Indonesia) which experienced faster economic growth (Table-3.8). It is, therefore, often argued that a sustained and long lasting solution to the problem

of poverty depends on creation of opportunities for broad based economic development.

More than three-fourths of the poor live in rural areas. Economic groups most prone topoverty are rural households (mainly landless agriculture labour and marginal farmers),urban casual labour and the self-employed engaged in petty services.

Poverty is generated by many factors such as unemployment, ill health, and lack ofaccess to productive assets. Demographic factors also interact with socio-economic andenvironmental factors. Gender, literacy, land-ownership, employment status, religion andcaste are closely related to poverty. Some social and religious groups do not believe infamily planning and have large family size.

The spatial distribution of poverty in India is highly uneven; linkages betweenurbanisation, state domestic product and poverty ratios are weak testifying the complexityof the phenomenon of poverty; and urban poverty is both an outflow of poverty from therural areas as also an autonomous phenomenon.

The poor are caught by unfavourable forces at the local, national, and global levels thatcombine to form a three-tiered poverty trap. At the local level, factors include skeweddistribution of land and other assets, physical weakness, higher fertility rate, andrelatively lower power to fight against corrupt institutions. These are reinforced at thenational level by various policies ranging from tax laws to interest policies that aregenerally pro-rich. At the global level, the poor are held down by a mix of oppressivefactors such as tied grants, falling export prices and rising capital flight.

The culture of poverty theorists argue that poverty breeds poverty and a poor family has ahigh probability of staying poor as these families are associated with high risks of illhealth, high fertility rates, inadequate education, low skill, irregular sources of livelihood,low productive jobs, insecure shelter, limited accessibility to basic services and lack ofdynamism. With the progress of urbanisation, traditional joint families progressively broke down into micro families, which are economically less viable. A generalimprovement in health services led to an increase in the expectation of life and a largerproportion of aged persons. A decline in the infant mortality and maternal mortality ratesincreased the proportion of labour force in total population and that of females in thereproductive age group. But the growth of employment generally lagged behind thegrowth of labour force.

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Various studies by the World Bank (1997, 2000, 2003) made the following observations :

(a) There are sharp disparities in poverty ratios between states, between men andwomen, and between city and countryside.

(b) Although the Central government adopted a policy of growth with social justice,

no state government effectively combined both policies to encourage growth anddevelop human resources and physical infrastructure.(c) Agricultural investment, not agricultural subsidy, reduces poverty. Differentials

in agricultural growth and rural wages were major factors, which led to differentlevels of poverty across Indian states (Ravallion and Dutt). Green revolution,better irrigation and infrastructure were associated with rising rural wages andincreased rural non-farm employment, such as in Punjab and Haryana which hadthe highest per capita GDP and lower poverty.

(d) Investment on human capital reduces the extent of poverty. The human resourceapproach to poverty reduction across Indian states is exemplified by Kerala,which exported relatively skilled labour internationally and benefited from

remittances, even though its GDP growth was not rapid.(e) Degree of urbanisation was found to be less significant to affect poverty acrossstates, reflecting the capital-intensive, import-substituting nature of India'sindustrial development, its requirements for skilled rather than unskilled labour,and labour market regulations that limited the growth of organised employment.

(f) Inflation is a "harsh tax" on the poor because their incomes are not generallyindexed to prices.

3.6 Impact on Employment

There was a mixed trend in employment growth, which decelerated from 2.73 percent in1972-1978 to 0.98 percent in 1993-2000 (Table 3.9). The deceleration in employmentwas associated with a sharp decline in the growth rate of labour force from 2.29 percentin 1987-1994 to 1.03 percent in 1993-2000.

Table-3.9: Employment growth rates during 1972-2000 (percent)

Period Rate of growth of population

(% per annum)

Rate of growth oflabour force

(% per annum)

Rate of growth ofemployment

(% per annum)

1972-1978 2.27 2.94 2.73

1977-1983 2.19 2.04 2.17

1983-1988 2.14 1.74 1.541987-1994 2.10 2.29 2.43

1993-2000 1.93 1.03 0.98

Source: Planning Commission, Government of India.

A major shift in the work force structure in 1977-2000 was an increase in the proportionof casual labour from 27.2% to 33.2%, and a decrease in self-employment from 58.9% to52.9%, while the proportion of regular salaried employment in total employment

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remained stationary around 13.9 percent. The decline of self-employment in rural areasreflect the decline in proportion of farmers cultivating their own land owing tofragmentation of holdings. The increase in casual employment reflects the displacementof marginal cultivators and their conversion into agricultural labour.

Table 3.10 Sectoral Employment during 1983 to 2000

Employment (per cent to total) Annual growth rate (%)

Sector 1983 1987-1988

1993-1994

1999-2000

1983 to1987-1988

1987-1988 to1993-1994

1983 to1993-1994

1993-1994 to1999-2000

Agriculture 63.2 60.1 60.4 56.7 1.8 2.6 2.2 0.0

Mining & quarrying 0.7 0.9 0.8 0.7 7.4 1.0 3.7 -1.9

Manufacturing 11.6 11.9 11.1 12.1 3.6 1.2 2.3 2.6

Electricity, gas andwater supply

0.3 0.3 0.5 0.3 2.9 7.2 5.3 -3.6

Construction 3.0 4.4 3.5 4.4 12.1 -1.4 4.2 5.2Trade, hotels andrestaurant

7.6 8.3 8.5 11.1 4.9 3.0 3.8 5.7

Transport, storageand communication

2.9 3.0 3.1 4.1 3.2 3.5 3.4 5.5

Financial, real estate& business services

0.9 1.0 1.1 1.4 4.7 4.5 4.6 5.4

Community, social& personal services

9.8 10.1 11.1 9.2 3.6 4.1 3.6 -2.1

All Sector 100 100 100 100 2.9 2.5 2.7 1.1

During 1983-2000 the share of agriculture in total employment declined from 63 percentto 57 percent and that of manufacturing increased from 11.6 to 12.1 percent. In 2000, the

share of construction in total employment increased to 4.4%, that of trade and transport to15.2% and that of community services to 9.2%. During 1994-2000, trade has the highestgrowth rate (5.7%), followed by transport and communications (5.5%), financial services(5.4%), and construction (5.2%), whereas agriculture, mining and quarrying, and publicutilities registered negative growth rates in employment.

Organised sector accounted for only 9 percent of the total employment in 1978-1994,and its share declined to 7 percent in 1999-2000. This was entirely due to slowing downof employment in the public sector from 1.52 percent per annum in 1983-1994 to anegative growth rate of (-) 0.03 percent in 1994-2000. The decline of employment in thepublic sector could be attributed to restructuring programs of the public sector and

imposition of ban on new recruitment in government departments as a part of theeconomy drive to reduce expenditure. Employment in the public sector is unlikely toexpand rapidly as government is reducing its scope and many public undertakings havesurplus labour.

Growth rate of organized private sector employment accelerated from 0.45 percent perannum in 1983-1994 to 1.87 percent in 1994-2000. However, this was not enough to offset

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the employment slowdown in the public sector, as private sector accounted for only onethird of total organized employment.

The employment elasticity with respect to GDP declined continuously in 1980s and1990s. Rapid growth of employment in the organized sector depends on employment

growth in the private sector. Since the potential growth of organized employment islimited, bulk of the employment growth has to come from unorganized sector.

3.7 Impact on Unemployment

There are various concepts of unemployment viz. Usual Principal Status (UPS), UsualPrincipal and Subsidiary Status (UPSS), Current Weekly Status (CWS) and Current DailyStatus (CDS). All these concepts of unemployment indicate that unemployment ratesdiffer widely for rural and urban areas and for males and females. Generally, urban areashave higher unemployment rates for both males and females than rural areas.

The rate of unemployment on the basis of CDS increased from 6.03 percent in 1993-94 to7.32 percent in 1999-2000. Unemployment rates varied sharply across the states and inter-state variations were consistent over time. States where wages are kept higher thanneighboring regions by strengthening bargaining power of labour or by provision of socialsecurity have generally high incidence of unemployment.

The differentials of rural and urban unemployment rates narrowed in 1999-2000, due tosharp increase in unemployment rates for both rural males and females. One factor for thisdevelopment was a shift from self-employment to casual labour.

Female unemployment rates are generally higher than male unemployment rates thoughdifferences narrowed down over time and were nearly eliminated in rural areas in 1999-2000. Female unemployment rate in urban areas at 9.8 percent was more than the maleunemployment rate at 7.2 percent underlying the need to create employment opportunitiesfor females in urban areas.

3.8 Inequality in India

In the absence of comprehensive income surveys in India, household expenditure surveysconducted by the National Sample Survey Organisation since 1950 are used to have someidea of income distribution depending on the assumptions regarding savings in differentexpenditure brackets. There is some bias with regard to rich households, which are under

represented in both rural and urban areas. The concept of consumption expenditure usedin the surveys has undergone significant changes over time and there is substantialdiscrepancy between total consumption expenditure estimated from the surveys and thatobtained from the national accounts of the Central Statistical Organisation.

There are various studies on the extent of income inequality in India, but these studiesvary widely regarding the concept of income receiving unit, time period, assumptionregarding savings profiles, and estimation procedures for various inequality measures. So

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it is very difficult to draw any meaningful conclusion regarding the extent and trend ofincome inequality over time in India. However, it can be observed that the degree ofinequality in India is almost the same as in the case of developed countries and there issome evidence that the degree of income inequalities had a declining trend during 1977-1989 followed by an increasing trend since then (Das 1997). It is observed that

distribution of consumption expenditure in the urban sector is more uneven than that inthe rural sector, and the Gini coefficient for all India lies in between the Gini coefficientsfor the rural and urban sectors.

Inequalities of income and consumer expenditure are mainly due to the inequalities inassets or wealth distribution among the individuals. There are very few studies on thedistribution of wealth and assets in different states of India, and the studies are outdated.A study by Basu (1976) indicated that the degree of inequality in asset distributionremained almost stable during the years 1961-1971 although there were variations indifferent states. For the wealth distribution, a study by Jakhade and Shetty indicted adecline in the Gini index from 0.72 in 1960-61 to 0.68 in 1966-67. Another study by

Bagchi and Das (1977) indicated a decline in wealth inequality from 0.73 in 1960-61 to0.64 in 1972-73 in the rural sector, and from 0.59 to 0.58 in the urban sector.

The extent of business concentration (i.e. the concentration in the size distribution offirms) is another source of inequalities in income and wealth. An extensive study on thesize and concentration of the factory sector in India done by Sandesara (1979) indicatedthat the average size of the factory and concentration in all the industries declined in1951-1970 and concentration in industry varied inversely with employment and directlywith the average size of the factory.

Although recent trends of wealth and asset inequalities and the degree of businessconcentration are not available, the fiscal and development policies of the governmenthad always attempted to reduce such inequalities. The ongoing economic reforms andstructural changes in industry, trade, financial and public sectors must have also reducedeconomic concentration through abolition of regulation, licensing and undue protectionand enhancing competition among firms.

As regards regional disparities, there is some evidence that rural incomes are generallyless unequal than the urban incomes and the disparities between rural and urban incomeshave widened over time. Although the rural sector has lower inequality, it has higherpoverty ratios in most of the states. Several studies on the inter-state inequalities indicatethat there has been a reduction of inter-state inequality during 1950-51 to 1960-61followed by a gradual increase in inter-state disparities during 1960-61 to 1980-81.However, since 1981 there had been some reduction of inter-state inequalities due tolarger central transfers of both plan and non-plan resources to the poorer statesrecommended by the successive Finance Commissions due to their special weightage topoverty reduction and backward states.

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3.9 Redistribution Policies

Removal of wealth and income inequalities, socio-economic injustices and assurance ofminimum levels of living have been among the most important Directive Principles laiddown in the Indian Constitution. Right from the inception of planning in 1951, Indian

planners had attached great importance to issues relating to equity and redistribution.

The income of a household is the sum of what it earns from the various income-earningassets, which it commands, e.g., land, capital and labour. Therefore, the distribution ofincome across households is the resultant of two factors: (i) the distribution of income-earning assets across households; and (ii) the rate of return of these assets.

Government adopted progressive tax systems for redistribution of income, wealth andproperty, and various employment generation and anti-poverty programs. Before reformsin 1991, government introduced strict licensing, controls, regulations and anti-trust lawsrestricting size and growth of firms to reduce business concentration. Wage-income

policies were formulated for the organised labour to ensure equity. However, governmenthad to operate under several social and political constraints.

All direct taxes are progressive, and the maximum tax rates have been reducedsignificantly in 1990s. Indirect taxes like excise and customs duties are determined insuch a way that the mass consumption goods are generally exempted from the payment ofindirect taxes, and the luxury products are taxed at higher rates. Commercial banks aredirected to lend at least 40 percent of their lending to the priority sectors, which includeagriculture, small-scale industries, small transport operators. There is also a reservationpolicy for the small-scale sector, although many items having export potentials had beendereserved in post reforms period.

The agricultural development and policies led to some undesirable consequences. First, ithas created interregional disparities in agricultural production, especially food grainsproduction. Second, it has led to interregional disparities among different social groupssuch as landowners, tenants and landless laborers. It is generally observed that somestates such as Punjab and Haryana, which enjoyed assured and better irrigation facilities,recorded higher growth rates of food grains production, compared with other states.

In agricultural prices, government policy is to provide relatively high support prices forfood grains and to distribute the procured grains with large subsidy. Since the major partof marketable surplus of grains is controlled by big farmers, the high support pricesmostly help them rather than small farmers. The statutory stipulation of minimum wagesin industry or agriculture is virtually inoperative in the vast unorganized nonunionizedsectors where the overwhelming majority of the poor work. Similarly inoperative is therent control legislation in protective tenancy reforms in agriculture.

As regards direct provision of basic services for the poor, there was some progress in thelast two decades, but facilities in proportion to minimum needs remain meager. Apartfrom the problem of inadequate delivery system, finance was a major constraint.

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Whenever financial situation got worse, social welfare programs were the first casualtiesto be shelved. There is some evidence that the upper-income groups were able toappropriate a disproportionate share in social services (particularly education, health,transport, communication, and low-cost housing).

In sum, problems of poverty and inequality in India remain intractable, not becauseredistributive policies were inadequately considered in the planning models. At the microlevel, specific programs were ill conceived and uncoordinated and there wereadministrative inefficiencies. The major constraint was rooted in the socio-politicalsystem dominated by a complex constellation of forces representing the rich farmers, bigbusiness, elite, bureaucrats and unionized workers of the organized sector, who wanted toprotect their vested interests.

4 Factors Affecting Poverty at the Macro Level

Various empirical studies concluded that higher economic growth is a key driver ofpoverty reduction, with little direct role of pro-poor economic policies (once account istaken of the growth effects). However, a recent research by Dhaneshwar Ghura, CarlosLeite, and Charalambos Tsangarides (2003) observed that some public policies are"super pro poor" i.e. they appear to directly influence the incomes of the poor.

On the basis of cross-country econometric relations, they concluded the following:

(i) Countries with higher income shares of the poor are characterized by highermacroeconomic stability, lower income inequality, higher literacy, more democraticinstitutions, better governance, better internal environment, more open traderegimes and higher levels of financial development than those in other countries.

(ii) Economic growth is an important factor in raising the incomes of the poor.

(iii) Certain public policies have direct impact on the incomes of the poor, even aftertaking into the effect of growth. These include policies that lower inflation, shrinkthe size of the government, promote financial development, and raise theeducational level. The policies are considered "super pro- poor"because they raisethe incomes of the poor directly, as well as indirectly through economic growth.The direct and indirect effects are mutually reinforcing, and there is thus no trade-off between growth promotion and poverty alleviation.

(iv) The poor are significantly vulnerable to adverse movements in the terms of trade.

(v) A number of variables, such as trade openness, investment rate, the extent ofdemocracy, life expectancy, and civil wars that are generally shown to affecteconomic growth do not directly influence the incomes of the poor.

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In this paper an econometric exercise is carried out at the macro level for India on thebasis of time series data on poverty ratios and related variables for the period from1977-78 to 1999-2000. While data on all other variables were available for all theyears, poverty ratios were available only for the years 1977-78, 1983, 1987-88,1993-94 and 1999-2000 during which NSSO conducted large sample surveys on

household consumption expenditure. For the purpose of fitting multiple regressionlines, poverty ratios for the intervening years, for which no surveys were conducted,were estimated on the basis of linear interpolated.

The following potential variables were considered to influence the poverty ratio:

Per capita income;

Growth rates of overall GDP and its three main components viz. agriculture and alliedsectors, industry and services

Shares of agriculture, industry and services in GDP

Growth rates of private sector GDP and its three main components viz. agriculture,

industry and services GDP in the private sector Shares of private sector in agriculture, industry and services GDP

Growth rates of overall GDI and its components in agriculture, industry and services

Growth rates of private sector GDI in agriculture, industry and services

Shares of private sector in agriculture, industry and services investment

Human capital (life expectancy, literacy rate and population growth rate);

Physical capital (private and public investment);

Macroeconomic stability (WPI and CPI inflation rates and gross fiscal deficit);

Government size (share of social sector in central government expenditure);

Inequality (Gini coefficient of expenditure).

The best fitted linear and log-linear regression equations; given in tables 4.1-A, 4.1-B,4.2-A and 4.2-B respectively, indicate that poverty ratios are strongly influenced by theper capita income and expenditure inequalities at the macro level. While the incidence ofpoverty varies inversely with the per capita income, it is positively correlated with thedegree of inequality implying that, given the same level of development, a more unequaldistribution of income is associated with a higher level of poverty. The Per capita incomeand Gini ratios account for 97 per cent variations in poverty ratios over time (Tables 4.1-B and 4.2-B).

When other socio-economic and demographic variables are included as additionaldeterminants of poverty, there is little improvement in the R-square of the regressionequations, and the coefficients of per capita income and Gini index continue to retaintheir signs and their significance (Tables 4.1-A and 4.2-A).

The other variables that are significant in the multiple regression equations include thegrowth rate of population, inflation rate, share of social sectors in governmentexpenditure, literacy rate, expectation of life, share of service sectors in GDP, and shareof private sector in gross domestic investment. However, agricultural growth, overall

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GDP growth and share of private sector in GDP do not have significant influence onpoverty.

Poverty ratio is negatively correlated with the share of social sectors in centralgovernment expenditure, share of service sectors in overall GDP, share of private sector

in gross domestic investment and human development indicators such as literacy rate andexpectation of life. On the other hand, poverty ratio varies directly with the populationgrowth rate, inflation rate and gross fiscal deficit.

The results confirm the following observations made in many studies by the World Bank(1997, 1998, 2000 and 2003), Dutt and Ravallion (1997, 1999) and Ravallion and Dutt(1996a and 1996b):

(a) An increase in per capita income is essential for reduction of poverty, as itgenerates extra income that can benefit the poor.

(b) Educational achievement facilitated by public investment in health allows thepoor to participate in the economic growth process through employment.

(c) Inflation had a negative effect on poverty reduction. Higher inflation in India isgenerally associated with monsoon failures and a relatively higher rise in the priceof food grains. The poor are doubly hit, as their consumption basket ispredominantly food, and their wages and demand for labour rise less than pricesin years of poor harvests.

(d) Services sectors are the fastest growing sectors in the Indian economy andaccount for more than fifty per cent of GDP. These sectors have in general higheremployment elastisities. Their growth, therefore, helps in poverty reduction.

(e) An increasing share of private sector in total investment leads to povertyreduction, as private investment is more productive and more efficient in manysectors.

(f) A reduction of fiscal deficit also helps in poverty reduction, as it does not lead tocrowing out of private investment.

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Table-4.1-A: Determinants of Poverty at the Macro Level:

Linear Multiple Regression Equations

Poverty ratio as the Dependent variable

(All India time series data for the period 1977-78 to 1999-2000)

Independent variables Equation-1 Equation-2

Coefficient t-statistic Coefficient t-statistic

Constant 425.9 456.1

Per capita national income -0.002 2.58 -0.002 5.11

Growth rate of real GDP at factor cost 0.027 0.84

Growth rate of population 2.740 4.49 3.049 5.38

Inflation rate based on WPI 0.008 0.38

Gross fiscal deficit as percentage of GDP 0.123 1.60 0.085 1.11

Share of social sectors in central govt. expend. -1.358 4.78 -1.39 5.11

Literacy rate -1.407 6.02 -1.26 7.38

Expectation of life -7.281 5.51 -7.68 5.86Growth rate of agricultural GDP -0.018 1.28

Share of service sectors in overall GDP -0.466 2.34 -0.54 4.21

Share of private sector in overall GDP 0.217 1.25

Share of private sector in gross domestic invest. -0.067 3.42 -0.07 4.18

Gini ratio for consumer expenditure 43.801 4.16 44.06 4.11

Time (1977-78=1) -6.929 6.31 -6.96 6.34

R squared 0.999 0.999

No. of observations 23 23

Table-4.1-B: Determinants of Poverty at the Macro Level:

Linear Multiple Regression EquationsPoverty ratio as the Dependent variable


Independent variables Equation-3 Equation-4


Constant 47.861 41.594



Time (1977-78=1) -0.540 4.51

R squared 0.985 0.969


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Table-4.2-A : Determinants of Poverty at the Macro Level:

Log-Linear/ Semi-log Multiple Regression Equations


Independent variables (Log of) Equation-1

Log-Linear

Equation-2

Semi-log

Log of Poverty ratio

as the Dependent

variable

Poverty ratio as the

Dependent variable


Constant 41.43 1290


Growth rate of real GDP at factor cost 0.003 0.73

Growth rate of population 0.021 1.96 1.88 1.96

Inflation rate based on WPI 0.014 3.08

Gross fiscal deficit as percentage of GDP 0.025 1.87 1.09 0.44

Share of social sectors in central govt. expend. -0.043 1.98 -0.90 8.06

Literacy rate -3.979 9.00 -114 3.44

Expectation of life -3.622 3.17 -156 1.95Growth rate of agricultural GDP -0.003 0.83

Share of service sectors in overall GDP -1.078 5.79 -31.6 5.77

Share of private sector in overall GDP 0.190 0.61

Share of private sector in gross domestic invest. -0.052 2.04 -3.56 3.23


Time (1977-78=1) -0.139 6.50 4.32 4.92

R squared 0.999 0.999


Table-4.2-B : Determinants of Poverty at the Macro Level:Semi-Log Multiple Regression Equations

Poverty ratio as the Dependent variable


Independent variables (Log of) Equation-3

Semi-log

Equation-4

Semi-log


Constant 144.99 317.96



Time (1977-78=1) -0.592 3.53

R squared 0.980 0.968No. of observations 23 23

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5 Factors Affecting Poverty Across States

A World Bank study (World Bank 2000) on India on the basis of inter-state and inter-temporal data suggests that the major factors in reducing poverty are (a) faster growth,particularly agricultural growth that raises agricultural wages and tends to depress the

(relative) price of food, (b) lower inflation, (c) infrastructure, and (d) human resourcedevelopment, notably female literacy.

In this paper an attempt is made to study the econometric relations between poverty andother variables at the state level on the basis two sets of data:

(a) The first set of regressions uses panel data for 16 major States and All India for fouryears 1983, 1987-88, 1993-94 and 1999-2000 (having 68 observations) for each ofRural, Urban and Combined sectors.

(b) The second set of regressions uses pooled panel data for all the sectors and all theyears (having 204 observations).

Although such a cross-state and inter temporal regression analysis (Tables 4.3-A to 4.5-B) faces some daunting challenges such as state and time-specific effects, omission ofrelevant variables, endogeneity of explanatory variables, and uncertainty about theeffectiveness of the underlying statistical model, the results need special attention.

(a) Per capita state domestic product and the Gini ratio for consumer expenditure havesignificant correlations with the poverty ratio for different states. As in the case ofmacro level relations, while poverty ratio varies inversely with per capita income, itvaries directly with the consumption inequality across the states.

(b) The other variables that have significant influence on the poverty ratio across thestates include rate of unemployment, degree of literacy, expectation of life, old-agedependency ratio, and degree of urbanisation.

(c) As expected, poverty ratio varies directly with the rate of unemployment and old agedependency ratio in all the sectors.

(d) Poverty ratio is inversely related to expectation of life in all sectors implying that animprovement in health conditions and reduction of mortality rates have a positivecontribution to poverty reduction.

(e) However, certain results appear to be counter-intuitive. First, there is a positivecorrelation between poverty and literacy in all the sectors. This relationship maysimply imply that an improvement in the degree of literacy is associated with greaterpoverty after taking into account the improvement in per capita income or reductionin the unemployment rate. In other words, literacy reduces poverty throughimprovement in employment and income earnings, and its major impact is capturedby the income and unemployment variables. Second, rural poverty is inverselyrelated with the degree of urbanisation. This suggests that urbanisation leads togrowth of agro-based and food processing industries which provide moreemployment opportunities for the rural unemployed.

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Table-4.3-A : Determinants of Poverty across States

Log-Linear Multiple Regression Equations

Log of Poverty ratio as the Dependent variable

(Panel Data for 16 major States and All India

for four years 1983, 1987-88, 1992-93,and 1999-2000)

Independent variables (log of) Rural sector Urban sector Combined

Coeffi-cient

t-statistic

Coeffi-cient

t-statistic

Coeffi-cient

t-statistic

Constant 30.454 15.164 19.34

Time (catch-all variable, 1983=1) 0.060 0.93 -0.007 0.16 -0.016 0.46

Per capita consumption expenditure -0.019 6.82 -0.023 9.50 -0.016 7.43

Rate of unemployment 0.247 2.57 0.004 1.97 0.212 2.80

Literacy rate 0.612 1.96 0.926 1.55 0.265 1.09

Expectation of life -6.453 3.93 -3.429 2.45 -3.037 2.74

Old-age dependency ratio 0.773 2.21 0.121 0.51 -0.837 2.60

Gini ratio for consumer expenditure 1.346 2.81 0.150 1.97 0.629 2.00

Degree of urbanisation -0.380 2.12 0.466 4.93 0.032 1.98

R squared 0.856 0.793 0.831

No. of observations 68 68 68

Table-4.3-B : Determinants of Poverty across States






Coeffi-cient

t-statistic

Coeffi-cient

t-statistic

Coeffi-cient

t-statistic

Constant 25.183 20.233 19.574

Time (catch-all variable, 1983=1) 0.027 0.49 -0.022 0.54 -0.016 0.45

Inequality adjusted pc consum. Exp -0.030 8.42 -0.029 9.51 -0.022 8.56


Literacy rate 0.574 1.91 0.861 1.41 0.244 1.01


Old-age dependency ratio 0.901 2.26 0.237 1.95 0.775 2.47


R squared 0.864 0.780 0.820


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Table-4.4-A : Determinants of Poverty across States






Coeffi-cient

t-statistic

Coeffi-cient

t-statistic

Coeffi-cient

t-statistic

Constant 42.610 34.831 33.397

Time (catch-all variable, 1983=1) 0.297 3.11 0.220 2.65 0.199 3.56

Per capita Net state domestic prod. -0.749 4.23 -0.684 4.26 -0.595 5.60


Literacy rate 1.135 2.92 0.509 0.57 0.692 2.29


Old-age dependency ratio 1.797 3.50 0.839 2.71 -0.182 0.53

Gini ratio for consumer expenditure 1.018 1.96 0.701 2.00 1.144 2.84


R squared 0.803 0.760 0.789No. of observations 68 68 68

Table-4.4-B : Determinants of Poverty across States





Independent variables (log of) Rural sector Urban sector CombinedCoeffi-cient

t-statistic

Coeffi-cient

t-statistic

Coeffi-cient

t-statistic

Constant 36.207 32.590 29.750

Time (catch-all variable, 1983=1) 0.128 1.83 0.099 1.55 0.065 1.40

Inequality adjusted pc NSDP -0.0006 6.26 -0.0005 4.28 -0.0005 6.11


Literacy rate 0.991 2.80 -0.285 0.34 0.481 1.65


Old-age dependency ratio 2.035 5.08 0.891 2.83 0.472 2.01


R squared 0.820 0.680 0.754


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Table-4.5-A: Determinants of Poverty across States



(Panel and Pooled Data for 16 major States and All India,

stratified by rural, urban and combined


Independent variables (log of) Equation-1 Equation-2


Constant 26.290 24.833

Dummy (0 for Urban, 1 for National, 2 for Rural) -0.298 4.66 -0.271 5.42

Time (catch-all variable, 1983=1) 0.125 0.12 0.093 0.93

Per capita consumption expenditure -0.017 9.91

Inequality adjusted per capita consump. Exp. -0.025 12.19

Rate of unemployment 0.241 4.07 0.227 3.96

Literacy rate 0.295 1.40 0.328 1.61

Expectation of life -5.465 5.74 -5.280 5.94

Old-age dependency ratio 0.448 2.21 0.367 1.96

Gini ratio for consumer expenditure 0.649 2.50

Degree of urbanisation 0.119 2.12 0.108 1.98

R squared 0.710 0.727


Table-4.5-B: Determinants of Poverty across States



(Panel and Pooled Data for 16 major States and All India,

stratified by rural, urban and combinedfor four years 1983, 1987-88, 1992-93,and 1999-2000)

Independent variables (log of) Equation-1 Equation-2


Constant 38.18 33.307

Dummy (0 for Urban, 1 for National, 2 for Rural) -0.241 3.50 -0.337 6.06

Time (catch-all variable, 1983=1) 0.226 4.37 0.094 2.40

Per capita net state domestic product (NSDP) -0.658 7.18

Inequality adjusted per capita NSDP -0.0006 8.76

Rate of unemployment 0.117 2.09 0.160 2.46

Literacy rate 0.823 3.39 0.575 2.47

Expectation of life -8.161 8.51 -8.393 8.92

Old-age dependency ratio 1.019 4.76 .243 6.53

Gini ratio for consumer expenditure 0.861 3.07

Degree of urbanisation 0.005 2.00 0.076 2.01

R squared 0.685 0.690


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6 Concluding Observations

The relations between poverty and other variables lead to the following policyprescriptions:

Higher growth rate of national income than that of population is essential for poverty reduction as it provides extra income for distribution among the poorwithout affecting the well being of the relatively richer households.

While growth in per capita income is a necessary condition for poverty reduction, itis by no means sufficient. It is also important to focus on creating an enablingenvironment for the poor to participate in, and benefit from, the growth process. The pro-poor public policies include creation

Poverty and Reforms - A Case Study for India by Tarun Das

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