Poverty reduction in India

Over the last 60 years, in both development theory and policy discussions, there has been much debate about the poverty impacts of economic growth and structural transformation in developing countries. Reliable evidence to inform these debates calls for good household surveys over time. Inferring trends with just a few observations can be hazardous.

Among developing countries, India has the longest series of national household surveys suitable for tracking living conditions.  The surveys are reasonably comparable over time since the basic survey instruments and methods have changed rather little (at least compared to other countries).  India thus provides rich time series evidence—uniquely so among developing countries—for testing and quantifying the relationship between living standards of the poor and macroeconomic aggregates. What do we learn from these data?

Debates on poverty and growth in India

Famously, India’s post-independence planners hoped that the country’s urban-centered industrialization process would bring longer-term gains to poor people, including through rural labor absorption. However, that hope was largely shattered by the evidence of the slow pace of poverty reduction in the period from Independence until the 1980s. In explaining this, a number of observers pointed to the slow pace of labor absorption from agriculture associated with the more inward-looking and capital-intensive development path of this period.

The urban population share has been rising steadily over time in India, from 17% in 1950 to 31% today. However, India’s pace of population urbanization (proportionate increase in the urban population share) has been less than either South Asia as a whole or lower middle-income countries as a whole, and markedly slower than for (say) China. The trend rate of growth in India’s Net Domestic Product (NDP) per capita in the period 1958-1991 was under 2% per annum. The picture that emerges from the accumulating evidence from India’s National Sample Surveys (that started in the 1950s) indicates that economic growth in India up to the start of the 1990s, though slow, had in fact been poverty reducing. Ravallion and Datt (1996) showed that the elasticity of the incidence of poverty with respect to mean household consumption was -1.3 over 1958-1991. Given the modest rate of growth over this period, success at avoiding rising inequality prior to the 1990s was key to this outcome.

Many observers came to the view that too little growth was the reason for India’s slow pace of poverty reduction. However, a deeper exploration of the data suggests that the sectoral pattern of growth also played a role. Using data up to the early 1990s, Ravallion and Datt (1996) found that rural economic growth was more poverty reducing, as was growth in the tertiary (mainly services) and primary (mainly agriculture) sectors relative to the secondary (mainly manufacturing and construction) sector. They also found that spillover effects across sectors reinforced the importance of rural economic growth to national poverty reduction. Urban growth and secondary sector growth had adverse distributional effects that mitigated the gains to the urban poor, while urban growth brought little or no benefit to the rural poor. The slow progress against poverty reflected both a lack of overall growth and a sectoral pattern of growth that did not favor poor people.

Economic reforms following the macroeconomic crisis of 1991-92 marked a significant change in India’s economic landscape, ushering in a new phase of high economic growth.  Growth rate of NDP per capita more than doubled in the period since 1992. There was much hope in India that the higher growth rates attained in the wake of the economic reforms would bring a faster pace of poverty reduction. However, there have also been signs of rising inequality in the post-reform period, raising doubts about how much the poor have shared in the gains from higher growth rates.

New evidence spanning 60 years

With the backdrop of this history of recent economic change in India, a new paper has revisited the implications for poverty of both the higher rate of growth and the pattern of growth (Datt, Ravallion and Murgai, 2016).  The sectoral imbalance in India’s post-reform growth would be a concern for poverty reduction if the model linking poverty to growth had remained the same, notably with the rural and agricultural sector contributing most to poverty reduction. However, previous research found signs that the process of economic growth had been changing in India, making urban economic growth more pro-poor in the post-reform period up to 2005-06 (Datt and Ravallion, 2011).  It is important to know whether this pattern has continued in more recent data—to assess whether stronger linkages from urban economic growth to rural poverty reduction have continued, alongside a more economically diversified rural economy.

The new paper aims to provide a “thick description” of India’s long-term progress against poverty. For that purpose we have compiled a new data series on poverty and related data spanning 60 years, extending the period of analysis in past research. While India’s NSS’s have been reasonably comparable over time as noted above, there are still some data problems, including some changes in survey design, and also a worrying degree of divergence between the NSS consumption aggregates and the private consumption component of domestic absorption in the national accounts. Our research tries as best we can to address these concerns.

With the benefit of nearly two decades of post-1991 data, we believe there is now sufficient data for the post-1991 period to test the poverty implications of the new rate and pattern of growth in post-reform India.  Attribution to reforms per se is problematic, but further scrutiny of the emergent properties of the changing growth process with respect to poverty reduction is clearly important.  The sectoral structure of NDP growth in the post-1991 period is of interest, as is the role played by population urbanization, including the Kuznets process that has been so influential in past thinking about the distributional implications of economic growth in poor countries.

India’s long-run progress against absolute poverty is evident from the findings of Datt et al. (2016) using data spanning nearly six decades from 1957 to 2012. The following Figure provides a summary, giving both national accounts aggregates and the poverty rates for two poverty lines. The trend decline in the national incidence of poverty for our upper line was 0.65% points per annum, accumulating to a sizable fall in the poverty rate of more than 35% points.  In proportionate terms, poverty incidence declined at the rate of 1.3% per annum.

Figure_india

The long-run poverty decline is evident in both urban and rural areas, and is higher for the poverty gap and squared poverty gap indices, reflecting gains to those living well below the poverty line. Rural poverty measures, that were historically higher than for urban areas, have been converging with urban measures over time, and the (distribution-sensitive) squared poverty gap index for urban India has actually overtaken that for rural India in recent years (Figure 2).  There has been a marked urbanization of poverty in India over this period. This is consistent with findings for most other developing countries.

Even though a trend decline in poverty emerged around the early 1970s, the year 1991-92—the benchmark year for economic reforms in India—stands out as the year of the great divide.  Markers of a structural break are many. There was a significant spurt in economic growth, driven by growth in the tertiary sector and to a lesser extent, secondary sector.  The pace of poverty reduction also accelerated, with a 3-4 fold increase in the proportionate rate of decline in the post-91 period.  The acceleration in rural poverty decline was even higher than that for urban poverty.  This happened alongside a significant increase in inequality both within and between urban and rural areas, in contrast with a decline in rural inequality and no trend in urban inequality pre-91.  Despite the increase in inequality, we find greater post-91 responsiveness of poverty to growth in the aggregate, regardless of whether growth is measured based on national accounts or survey-based consumption.  Thus, faster growth also appears to have been more pro-poor when the latter is measured by the growth elasticity of poverty reduction.

Even more striking is the fact that we find evidence of a structural break in the relationship between poverty and the composition of growth.  Both urban-rural and sectoral (output) decompositions are suggestive of stronger inter-sectoral linkages, whereby growth in one sector transmits its gains elsewhere.  Post-91, urban growth has emerged as the primary driver of poverty reduction. Urban poverty has become significantly more responsive to urban growth, but (even more importantly) urban growth has become significantly more rural poverty-reducing since 1991.  This is in sharp contrast to the pattern prior to 1991, when urban growth had no impact on rural poverty.

Also striking is that our post-1991 data point to sector-neutrality (by output) in the poverty-reducing effect of growth in net domestic product. Unlike the pre-91 period, when only primary and tertiary sector growth contributed to poverty reduction, after 1991 all three sectors have had a significant impact.  The tertiary sector has the highest (absolute) growth elasticity of poverty reduction, about twice as high as those for the primary and secondary sector.  This reflects both the changing nature of the growth process as well as the large structural transformation of the Indian economy over the last two decades with the secondary and tertiary sectors now accounting for much larger shares of national output and employment.  By the same token, the post-91 sector-neutrality of marginal poverty impacts need not be an enduring result as the process of structural change in the economy continues.

The consequences of these marked differences in the impacts of different sources of growth on poverty are borne out by our poverty-growth accounting exercises for the two periods.  Pre-91, poverty reduction was almost entirely driven by rural growth and favourable distributional changes; the contribution of urban growth was negligible. Post-91, rural growth, though still important, has been displaced by urban growth as the most important contributor to the observed (and more rapid) poverty reduction, even though urban growth has had adverse distributional effects.  Seen through the lens of growth by output sectors, the contribution of primary sector growth has rapidly dwindled from accounting for about two-fifths of the total poverty decline pre-91 to less than 10 percent of the total (and larger) poverty decline post-91.  The tertiary sector alone has contributed over 60% of the post-91 poverty reduction.  The secondary sector growth has contributed about a quarter.  India’s construction boom since 2000 has clearly helped assure a more pro-poor growth process from the secondary sector.

A systematic poverty-growth accounting also helps us understand the role played by urbanization (Datt et al., 2016).  Development economics has been much influenced by the classic Kuznets process—envisaging a shift of population from rural to urban areas without change in rural or urban distributions. However, we find that this has had very little role in poverty reduction in either period.  This reflects in part the relatively slow rise in the share of India’s urban population and the relatively small and shrinking differences in rural and urban poverty rates.  But the population shift has been associated with significant distributional changes that were favourable during the pre-91 phase of slower growth and adverse in the latter phase of more rapid growth.

Thus, the role of urbanization seen as a population shift appears to have been a mixed one. However, the urbanization process can also be interpreted more broadly to encompass urban economic growth as well as population growth. Then the new results indicate that urbanization has played an important role in poverty reduction in post-reform India.

Further reading:

Datt, Gaurav and Ravallion, Martin, 2011, “Has India’s Economic Growth Become More Pro-Poor in the Wake of Economic Reforms?” World Bank Economic Review 25(2): 157-189.

Datt, Gaurav, Martin Ravallion, and Rinku Murgai, 2016, “Growth, Urbanization and Poverty Reduction in India,” NBER Working Paper 21983.

Ravallion, Martin and Gaurav Datt, 1996, “How Important to India’s Poor is the Sectoral Composition of Economic Growth?”, World Bank Economic Review 10: 1-26.

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