poverty reduction strategies and policies in india by tarun das

8/14/2019 Poverty Reduction Strategies and Policies in India by Tarun Das

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Poverty Reduction, Issues, Modalities and Strategies in India

Dr. Tarun Das1

Economic Adviser, Ministry of FinanceGovernment of India

EMAIL: [email protected]

Google Search: Tarun Das, Economic Adviser, Ministry of Finance

(a) Current Poverty Level and Situation

Poverty ratios are estimated by the Planning Commission on the basis of the consumer

expenditure 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 percent

in 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, which

accounts 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. Interstate

differentials of poverty also narrowed, although these still remain high. While only 6

percent of population in Punjab lives below the poverty line, the incidence of poverty isas 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 to

991 million in 1999. In fact, the number of poor remained stable around 320 million in

1973-1994 and declined to 260 million in 1999 due to reduction of poverty ratio by 10

percent in 1993-1999. This shows favourable impact of economic reforms and higheconomic growth on the incidence of poverty and employment in 1990s.

Table-B.1 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 65 329

1983-84 45.7 40.8 44.5 252 71 3231987-88 39.1 38.2 38.9 232 75 307

1993-94 37.3 32.4 36.0 244 76 3201999 27.1 23.6 26.1 193 67 260

__________________________________________________________

1 Prepared for the United Nations Economic and Social Commission For Asia and Pacifica (UN-ECAP),

Bangkok, Thailand as inputs for the ESCAP Economic and Social Survey for 2004.

1
mailto:[email protected]:[email protected]


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environmental factors. Gender, literacy, land-ownership, employment status, religion and

caste are closely related to poverty. Some social and religious groups do not believe in

family planning and have large family size.

The spatial distribution of poverty in India is highly uneven; linkages between

urbanisation, 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 the

rural areas as also an autonomous phenomenon.

The poor are caught by unfavourable forces at the local, national, and global levels that

combine to form a three-tiered poverty trap. At the local level, factors include skewed

distribution of land and other assets, physical weakness, higher fertility rate, and

relatively lower power to fight against corrupt institutions. These are reinforced at thenational level by various policies ranging from tax laws to interest policies that are

generally pro-rich. At the global level, the poor are held down by a mix of oppressive

factors 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 a

high 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 of

dynamism. With the progress of urbanisation, traditional joint families progressively broke down into micro families, which are economically less viable. A general

improvement in health services led to an increase in the expectation of life and a larger

proportion 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 the

reproductive age group. But the growth of employment generally lagged behind the

growth of labour force.

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 had

the highest per capita GDP and lower poverty.(d) Investment on human capital reduces the extent of poverty. The human resource

approach to poverty reduction across Indian states is exemplified by Kerala,

which exported relatively skilled labour internationally and benefited fromremittances, even though its GDP growth was not rapid.

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(b) Improvement in human development indicators

Increased availability of health care services resulted in continuous reduction of

death rate, birth rate and infant mortality rate over the years (Table-B.3). The trendsare consistent with the view that rapid economic growth brought about an

improvement in living standards of people in general. Despite significant progress,

indicators of human development such as life expectancy, literacy and medical care in

India lag far behind those in East Asian countries.

There are wide inter-State variations in indicators of human development. For

instance, in Kerala the life expectancy at birth at 72 years and overall literacy at 90are significantly higher than those in the States like Bihar, Madhya Pradesh, Orissa,

Rajasthan and Uttar Pradesh (Table-B.4), but comparable with those in China,

Malaysia, Indonesia, Thailand and Sri Lanka which made significant progress in

human development (Table-B.5).

Table-B.3: Basic Indicators of Human Development

Year Life expectancy

at birth (years)

Literacy rate

(Per cent)

Birth rate

Per 1000

Death rate

Per 1000

Infant mortality rate

Per 1000

1951 32.1 18.3 39.9 27.4 1461961 41.3 28.3 41.7 22.8 146

1971 45.6 34.5 41.2 19.0 129

1981 50.4 43.6 33.9 12.5 110

1991 59.4 52.2 29.5 9.8 80

2001 63.5 65.4 25.8 8.5 68

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

Table-B.4: Selected Indicators of Human Development for Major States

State Life expectancy at birth

(years)

Literacy rate

(Percent)

Infant mortality rate per

1000

Andhra Pradesh 60.6 44.1 66

Assam 54.9 52.9 75Bihar 58.5 38.5 72

Gujarat 60.1 61.3 62

Haryana 62.9 55.9 68

Karnataka 61.9 56.0 53

Kerala 72.0 89.8 13

Madhya Pradesh 54.0 44.2 97

Maharashtra 64.2 64.9 48Orissa 55.5 49.1 95

Punjab 66.4 58.5 52

Rajasthan 58.0 38.5 86Tamil Nadu 62.4 62.7 54

Uttar Pradesh 55.9 41.6 85

West Bengal 61.5 57.7 55

All India 59.4 52.2 72

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Table-B.5: Indicators of Human Development in Selected Asian Countries

Country Life expectancy at birth

(years)

Infant mortality rate per

1000

Adult literacy rate

(Per cent)

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 84

Philippines 67.4 32 95

Pakistan 62.8 95 38

Korea, Republic 71.7 6 98

Singapore 77.1 4 91

Sri Lanka 72.5 17 90

Thailand 69.5 31 94

(c) Gender related issues

Despite significant progress, indicators of human development, such as life expectancy,

literacy, school enrollment and medical care, in India lag far behind those of most EastAsian countries. Still more than 35 of the adult population are illiterate.

Wide gender disparities also exist in India with regard to economic, health and

educational attainment. More than 40 per cent of Indias illiterates are girls or women.The incidence of infant mortality and child malnutrition is more pervasive for females;

however, female life expectancy at birth has improved during the last decade and now

exceeds male life expectancy. The generally poorer health of women is caused by dualwork burdens in production and reproduction tasks and skewed pattern of intra-household

food allocation in favour of male members. Regional variations are also observed ingender disparities correlated to poverty incidence.

Female unemployment rates are generally higher than male unemployment rates

though differences narrowed down over time and were nearly eliminated in ruralareas in 1999-2000. Female unemployment rate in urban areas at 9.8 percent was

more than the male unemployment rate at 7.2 percent underlying the need to create

employment opportunities for females in urban areas.

(d) 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 increased

in subsequent years except in 1994-95 (Table-B.6). Increase in real wages along with

agricultural 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.

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Table-B.6 Change in real wages for unskilled agricultural labour

Year Percentage change

1991-92 -6.19

1992-93 +5.21

1993-94 +5.61

1994-95 -0.39

1995-96 +0.72

1996-97 +1.641997-98 +2.50

1998-99 +3.45

1999-2000 +3.50

(e) 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 different

expenditure 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 substantial

discrepancy between total consumption expenditure estimated from the surveys and that

obtained from the national accounts of the Central Statistical Organisation.

There are various studies on the extent of income inequality in India, but these studies

vary widely regarding the concept of income receiving unit, time period, assumption

regarding savings profiles, and estimation procedures for various inequality measures. Soit is very difficult to draw any meaningful conclusion regarding the extent and trend of

income inequality over time in India. However, it can be observed that the degree of

inequality 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 coefficients

for 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 the

distribution 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 in

different states. For the wealth distribution, a study by Jakhade and Shetty indicted a

decline 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 to

0.64 in 1972-73 in the rural sector, and from 0.59 to 0.58 in the urban sector.

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The extent of business concentration (i.e. the concentration in the size distribution of

firms) 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) indicated

that the average size of the factory and concentration in all the industries declined in

1951-1970 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 government

had always attempted to reduce such inequalities. The ongoing economic reforms and

structural changes in industry, trade, financial and public sectors must have also reduced

economic 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 generally

less 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 higher

poverty 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 1960-61

followed 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 to

larger central transfers of both plan and non-plan resources to the poorer statesrecommended by the successive Finance Commissions due to their special weightage to

poverty reduction and backward states.

(f) 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 laid

down 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-earning

assets, which it commands, e.g., land, capital and labour. Therefore, the distribution of

income 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 reforms

in 1991, government introduced strict licensing, controls, regulations and anti-trust laws

restricting size and growth of firms to reduce business concentration. Wage-incomepolicies were formulated for the organised labour to ensure equity. However, government

had to operate under several social and political constraints.

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All direct taxes are progressive, and the maximum tax rates have been reduced

significantly in 1990s. Indirect taxes like excise and customs duties are determined in

such 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 are

directed to lend at least 40 percent of their lending to the priority sectors, which include

agriculture, small-scale industries, small transport operators. There is also a reservationpolicy for the small-scale sector, although many items having export potentials had been

dereserved in post reforms period.

The agricultural development and policies led to some undesirable consequences. First, it

has created interregional disparities in agricultural production, especially food grains

production. Second, it has led to interregional disparities among different social groups

such 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 part

of marketable surplus of grains is controlled by big farmers, the high support pricesmostly help them rather than small farmers. The statutory stipulation of minimum wages

in industry or agriculture is virtually inoperative in the vast unorganized nonunionized

sectors where the overwhelming majority of the poor work. Similarly inoperative is the

rent control legislation in protective tenancy reforms in agriculture.

As regards direct provision of basic services for the poor, there was some progress in the

last two decades, but facilities in proportion to minimum needs remain meager. Apartfrom the problem of inadequate delivery system, finance was a major constraint.

Whenever financial situation got worse, social welfare programs were the first casualties

to 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 because

redistributive policies were inadequately considered in the planning models. At the micro

level, specific programs were ill conceived and uncoordinated and there were

administrative inefficiencies. The major constraint was rooted in the socio-politicalsystem dominated by a complex constellation of forces representing the rich farmers, big

business, elite, bureaucrats and unionized workers of the organized sector, who wanted to

protect their vested interests.

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(g) Factors Affecting Poverty at the Macro Level

An econometric exercise is carried out at the macro level for India on the basis of timeseries data on poverty ratios and related variables for the period from 1977-2000. While

data on all other variables were available for all the years, poverty ratios were available

only for the years 1977-78, 1983, 1987-88, 1993-94 and 1999-2000 during which NSSOconducted large sample surveys on household consumption expenditure. For the purpose

of fitting multiple regression lines, poverty ratios for the intervening years, for which no

surveys were conducted, were estimated on the basis of linear interpolation.

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 allied

sectors, 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 B.7-A, B.7-B,

B.8-A and B.8-B; indicate that poverty ratios are strongly influenced by the per capita

income and expenditure inequalities at the macro level. While the incidence of poverty

varies inversely with the per capita income, it is positively correlated with the degree ofinequality. The Per capita income and Gini ratios account for 97 per cent variations in

poverty ratios over time (Tables B.7-B and B.8-B).

When other socio-economic and demographic variables are included as additional

determinants of poverty, there is little improvement in the R-square of the regression

equations, and the coefficients of per capita income and Gini index continue to retain

their signs and their significance (Tables B.7-A and B.8-A).

The other variables that are significant in the multiple regression equations include the

growth rate of population, inflation rate, share of social sectors in governmentexpenditure, literacy rate, expectation of life, share of service sectors in GDP, and share

of private sector in gross domestic investment. However, agricultural growth, overall

GDP growth and share of private sector in GDP do not have significant influence onpoverty, as these variables had mixed trends in the period.

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Poverty ratio is negatively correlated with the share of social sectors in central

government 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 population

growth rate, inflation rate and gross fiscal deficit. The results confirm the following

observations made in many studies by the World Bank:

(a) An increase in per capita income is essential for reduction of poverty, as it

generates extra income that can benefit the poor.(b) Educational achievement facilitated by public investment in health allows the

poor to participate in the economic growth process through employment.

(c) Inflation had negative effect on poverty reduction. Higher inflation in India is

generally associated with monsoon failures and a relatively higher rise infoodgrain prices. The poor are doubly hit, as their consumption basket is

predominantly food, and their wages rise less than prices in 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 higher

employment elasticity. Their growth, therefore, helps in poverty reduction.

(e) An increasing share of private sector in total investment leads to poverty

reduction, as private investment is more productive in many sectors.

(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-B.7-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 5.86

Growth rate of agricultural GDP -0.018 1.28

Share of service sectors in overall GDP -0.466 2.34 -0.54 4.21Share 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-B.7-B: Determinants of Poverty at the Macro Level:

Linear Multiple Regression Equations



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-B.8-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-B.8-B: Determinants of Poverty at the Macro Level:

Semi-Log Multiple Regression Equations



Independent variables (Log of) Equation-3

Semi-log

Equation-4

Semi-log


Constant 144.99 317.96



Time (1977-78=1) -0.592 3.53R squared 0.980 0.968


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(h) 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 four

years 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 the

years (having 204 observations).

Although such a cross-state and inter temporal regression analysis (TableB.9-A to B.11-B) faces some daunting challenges such as state and time-specific effects, omission ofrelevant variables, endogeneity of explanatory variables, and uncertainty about the

effectiveness 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 of

macro level relations, while poverty ratio varies inversely with per capita income, it

varies directly with the consumption inequality across the states.(b) The other variables that have significant influence on the poverty ratio across the

states include rate of unemployment, degree of literacy, expectation of life, old-age

dependency ratio, and degree of urbanisation.(c) As expected, poverty ratio varies directly with the rate of unemployment and old age

dependency 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 positive

contribution to poverty reduction.

(e) However, certain results appear to be counter-intuitive. First, there is a positive

correlation between poverty and literacy in all the sectors. This relationship maysimply imply that an improvement in the degree of literacy is associated with greater

poverty after taking into account the improvement in per capita income or reduction

in the unemployment rate. In other words, literacy reduces poverty throughimprovement in employment and income earnings, and its major impact is captured

by the income and unemployment variables. Second, rural poverty is inversely

related with the degree of urbanisation. This suggests that urbanisation leads togrowth of agro-based and food processing industries which provide more

employment opportunities for the rural unemployed.

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Table-B.9-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

Coeffici

ent

t-

statistic

Coeffici

ent

t-

statistic

Coeffici

ent

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-B.9-B: Determinants of Poverty across States



(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 CombinedCoeffici

ent

t-

statistic

Coeffici

ent

t-

statistic

Coeffici

ent

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

Rate of unemployment 0.242 2.62 0.046 1.53 0.211 2.77

Literacy rate 0.574 1.91 0.861 1.41 0.244 1.01

Expectation of life -5.674 3.59 -4.616 3.42 -3.334 3.06

Old-age dependency ratio 0.901 2.26 0.237 1.95 0.775 2.47

Degree of urbanization -0.272 2.01 0.311 3.65 0.043 2.17

R squared 0.864 0.780 0.820

No. of observations 68 68 68

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Table-B.11-A: 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 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-B.11-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 8.92Old-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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(i) Protective safety nets

In India, positive discrimination in favour of the scheduled castes (SCs). Scheduled Tribes(STs) and Other Backward Classes (OBCs), minority ethnic groups women etc. as an

instrument of social justice has been heritage of the liberation struggle and a constitutional

obligation endorsed by judicial sanctions. Social security has been listed in the ConcurrentList of the Constitution signifying the responsibility of both the Centre and the States in

this sphere. The task of providing meaningful social security continues to be challenging

in view of financial and operational constraints, high incidence of poverty, unemployment,illiteracy and the large size of labour force in the unorganized and informal sectors.

The permanent social security benefits provided through legislative measures like

Minimum Wages Act, Industrial Disputes Act, Workmens Compensation Act, EmployeesState Insurance Act, Employees Provident Fund & Miscellaneous Provisions Act,

Maternity Benefit Act, and Payment of Gratuity Act, etc. cater to mainly organised urban

labour comprising only 8 per cent of the total labour force. Most of the states have pension

schemes for the old and disabled, but due to eligibility criteria of income and age, only 9percent of old-age population gets the benefit of pension. Most of the States implemented

the Minimum Wages Act, but the levels of minimum wages and coverage vary from stateto state. Some special employment Programmes are also being implemented by some state

governments like the Employment Guarantee Scheme in Maharashtra and the self-

employment Scheme for Registered Unemployed in West Bengal.

Immediately after the independence, the Government enacted the Industrial Dispute Act

(IDA), 1947 for protection of workers. IDA permits lay-off, retrenchment and closure in

all undertakings, which do not employ more than 100 workers. In the case of larger units,as per the Act, no retrenchment, lay-off or closure is allowed without taking prior

permission from the government and the affected workers not being served at least three

months notice in writing indicating reasons for such actions.

In addition, in order to mitigate the possible adverse impact of economic reforms, a

National Renewal Fund (NRF) has been established to fund schemes for compensation,retraining and redeployment of workers affected by restructuring. The NRF is being

financed partly by disinvestments of government equity in public enterprises and partly by

contributions made by the World Bank and individual country donors. Since its inception

in 1992 the Fund has financed the voluntary retirement of 100,000 workers who haveopted for voluntary retirement.

Some important initiatives taken over the years to improve the well-being of theweaker sections like the scheduled castes, as well as Other Backward Classes include: (I)

Reservation of jobs to the extent of 22 per cent for SCs/STs in both public and private

sectors, (ii) Reservation of 27 per cent of jobs for Other Backward Classes (OBCs) in theCentral Government and Public Sector Undertakings, excluding the creamy layer. (iii)

Setting up a National Commission for Backward Classes, (iv) A scheme for education

complexes in low literacy pockets for improving literacy among tribal women, (v) setting

up of a National Backward Classes Finance and Development Corporation to promote

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Government relied mainly on two approaches for poverty alleviation: the first based on

the 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 social

sectors, and improved targeting of subsidies through changes in the public distributionsystem. Central government expenditure on social sectors (comprising education, health,

water supply, sanitation, housing, slum development, social welfare, nutrition, rural

employment 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 increased

from 1.3 percent to 2 percent over the same period (Table-B.12).

Trends of expenditure on social services and total expenditure by the general government(Centre and States combined) in 1990-2003 given in Table-B.13 indicate that:

(a) Despite fluctuations, total expenditure of the general government as a percentage

of GDP increased from 27.4 per cent to 29.7 percent in 1990-2003.(b) There was significant increase in social services expenditure from 5.9 percent of

GDP in 1990 to 8.2 percent in 2003, but the increase was basically for other socialservices except health and education which as a percentage of GDP virtually

remained invariant over.

(c) The share of social services in total expenditure increased from 21.5 percent in

1990 to 27.4 percent in 2003 due to substantial increase in the share of otherservices from 4.6 per cent to 12.9 per cent in total expenditure at the expense of

shares of education and health in 1990-2003.

(d) Composition of social services expenditure indicates that the share of education init declined from 56 to 36 percent that of health from 22 to 17 percent, while share

of other expenditure more than doubled from 22 to 47 percent in 1990-2003.

Table-B.12 Expenditure on Social Sectors by the Central Government

Year Total Expenditure

As percent of GDP

Expenditure on

social sectors

as percent of

Total expenditure

Expenditure on

social sectors

As percent of GDP

1992-93 17.4 7.8 1.4

1998-991999-00

2000-01

2001-022002-03

2003-04

16.015.4

15.5

16.016.7

17.0

10.510.0

11.1

11.111.3

11.5

1.71.7

1.7

1.81.9

2.0

Source: Budget Documents of the Ministry of Finance.

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Table-B.13: Trends of expenditure on social services and total expenditure

Of the general government (Centre and States combined) in 1990-2003

I T E MS 1990 1995 1998 1999 2000 2001 2002 2003

Actual Actual Actual Actual Actual Actual RE BE

Finance of Centre & States (Rs.Bln)

Total expenditure 1557 2931 4654 5428 5865 6534 7519 8113

Expenditure on social sector 334 781 1282 1471 1618 1767 2059 2242

Education 187 346 588 623 657 687 748 816

Health 75 143 267 256 279 298 342 364

Others 72 292 427 593 681 782 970 1062

As percentage of GDP:

Total expenditure 27.4 24.7 26.7 28.0 27.9 28.5 30.7 27.3

Expenditure on social sector 5.9 6.6 7.4 7.6 7.7 7.7 8.4 7.5

Education 3.3 2.9 3.4 3.2 3.1 3.0 3.1 2.7

Health 1.3 1.2 1.5 1.3 1.3 1.3 1.4 1.2

Others 1.3 2.5 2.5 3.1 3.2 3.4 4.0 3.5

As % of total expenditure:

Expenditure on social sector 21.5 26.6 27.6 27.1 27.6 27.1 27.4 27.4

Education 12.0 11.8 12.6 11.5 11.2 10.5 9.9 9.9

Health 4.8 4.9 5.7 4.7 4.8 4.6 4.5 4.5

Others 4.6 9.9 9.2 10.9 11.6 12.0 12.9 12.9

As % of expend. on social sector

Education 56 44 46 42 41 39 36 36

Health 22 18 21 17 17 17 17 17

Others 22 37 33 40 42 44 47 47

Memo item:

GDP at current mp (Rupees billion) 5687 11880 17410 19369 21043 22960 24510 27543

Source: Various Volumes on State Finances published by the Reserve Bank of India.

Anti-poverty programs have been strengthened over the years to generate moreemployment, create productive assets, impart technical and entrepreneurial skills and

raise the income level of the poor. Most of the poverty alleviation and employmentgeneration programs are targeted towards the rural development, as majority of the poor

live in rural areas. Major programs, which were operational during 2001-2003, include

the following:

(i) Jawahar Village Development Program: introduced in April 1999 as successor

to Jawahar Rozgar Yojana for generation of productive employment for the ruralunemployed poor that result in the creation of durable community assets.

(ii) The Golden Jubilee Village Self-Employment Scheme, which was introduced in

April 1999 as a result of restructuring and combining the Integrated RuralDevelopment Program and allied programs along with Million Wells Scheme intoa single self-employment program. It aims at promoting micro enterprises and

helping the rural poor into self-help groups (SHG). The scheme covers all aspects

of self-employment like organisation of rural poor into SHG, their capacitybuilding, training, development of infrastructure and clusters, financial assistance

through bank credit and subsidy and marketing support.

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(iii) Employment Assurance Scheme (EAS) started on the 2nd October 1993 aims at

creating economic infrastructure and community assets for sustained employment

for at least 100 days of unskilled manual labour for poor rural households indrought prone areas, desert areas, tribal and hilly areas. The scheme was

restructured in 1999-2000 to make it a single wage employment program.

(iv) Integrated Village Employment Program launched in September 2001 aims atproviding wage employment in rural areas and food security along with creation

of durable social, economic and community assets.(v) The National Social Assistance Programme is a centrally sponsored scheme

launched on the 15th August 1995 with 100 per cent Central funding to the States

and Union Territories for providing social assistance to the poor households

affected by old age, maternity, and death of sole bread earner.(vi) The Prime Ministers Village Development Scheme: introduced in 2000-01 for

village level development in 5 critical areas viz. Health, primary education,

drinking water, housing and rural roads.(vii) The Golden Jubilee Commemorative Employment Scheme: The Urban Self-

Employment Program and the Urban Wage Employment Program are the twospecial schemes under this program. It was introduced in December 1997 by

consolidating various programs operated earlier for alleviation of urban poverty.(viii) Indira Awas Yojana aims at providing housing units free of cost to the members

of the scheduled casts and scheduled tribes and free bonded labour below the

poverty line.(ix) Samagra Awas Yojana was launched as a comprehensive housing scheme in

1999-2000 with a view to ensuring integrated provision of shelter, sanitation and

drinking water.(x) Food for Work Programme launched in February 2001 and aims at augmenting

food security through wage employment in drought affected rural areas. Wages

are paid partly in kind (i.e. foodgrains) and partly in cash.(xi) Annapurna launched in April 2000 provides foodgrains at highly subsidised

prices (Rupees 2 per kilogram of wheat and rupees 3 per kilogram of rice) to the

senior citizens who donot get pensions.(xii) Krishi Shramik Samajik Suraksha Yojana launched in July 2001 provides social

security benefits to agricultural labourers on hire.

(xiii) Shiksha Sahayog Yojana launched in 2002 provides educational allowance for

study in classes 9th to 12th to children of parents living below the poverty line.(xiv) (Targeted) Public Distributed System (PDS) provides foodgrains to the poor

households at subsidised prices, which are even lower than the subsidised prices

of foodgrains supplied to the other households.(xv) Integrated Child Development Services provides an integrated package of

services comprising supplementary nutrition, health, immunisation, health check-

up and referral services, pre-school non-formal education and health to children

below six years.

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(k) Progress and issues in poverty reduction efforts

The relations between poverty and other variables lead to the following policy

prescriptions:

Higher growth rate of national income than that of population is essential for

poverty reduction as it provides extra income for distribution among the poor

without affecting the well being of the relatively richer households.

While growth in per capita income is a necessary condition for poverty reduction, it

is by no means sufficient. It is also important to focus on creating an enabling

environment for the poor to participate in, and benefit from, the growth process. The

pro-poor public policies include creation of employment opportunities andenhancing the level of health, education and skill of the poor.

A stable macroeconomic environment, characterized by low inflation andsustainable level of gross 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 private

investment, which is more productive and more efficient. It also allows thegovernment to devote more scarce resources to investment in social sectors. .

Most evaluations of the poverty alleviation programs, done by the government or others,conclude that these programs are not very effective in reducing poverty. They suffer from

ill defined and multiple objectives, limited targeting, under-funding, complex

administration, high administrative costs and leakage, lack of proper accountability and

adequate monitoring. A recent study of the Public Distribution System (PDS) suggestedthat only 25 percent of food grains actually reach the poorest 40 percent of the

population, and administrative costs account for 85 percent of total expenditure andtherefore far outweigh the income gains to the poor.

One of the better-targeted programs is the Integrated Child Development Services. Food

for works program is also more successful at targeting the poor and improved their livingstandards at a relatively low cost.

As unemployment is the root cause of poverty and the population growth in India is veryhigh, there should be more emphasis on family planning. For an urban family a child is

born by parental planning and family size is limited to the necessary minimum. On

contrary, in rural India a child is regarded as an asset and is expected simply because of

normal life cycle progressions.

Government is trying to change this environment by suitable public policy on education,

health and family welfare, and economic incentives for micro families. But thesemeasures have marginal impact on the net reproduction rates and the family size as socio-

cultural-religious environment put a constraint on the effectiveness of family planning.

Female education, awareness and better standard of living would create the requiredconsciousness among the people that smaller families are desirable. If the needs for

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health and family welfare services are fully met, it will be possible to achieve substantial

decline in the family size and enable the families to improve quality of life.

Low productivity of small landholders leads to poverty, low energy in-take and under

nutrition, which in turn prevents the development and creates a vicious circle. In most of

the States, non-farm employment in rural areas has not grown very much and cannotabsorb the growing in labour force due to high population growth. Those who are getting

educated specially beyond the primary level do not wish to do manual agricultural work.

They would like better opportunities and more remunerative employment in rural areas.This can be done by developing agro-based and rural resource-based enterprises.

Government provides several fiscal and monetary incentives for the small-scale

industries, many of which are based on agricultural goods and rural resources. But thesesmall industries suffer from lack of modern technology, adequate bank credits, skill

labour and efficient network of markets. It is imperative that a program of skill

development, vocational training and technical education is adopted on a large scale in

order to generate productive employment in rural areas for those living there. The entiregamut of existing poverty alleviation and employment generation programs may have to

be restructured to meet the newly emerging demand for employment.

It is observed that investment on rural infrastructure and agricultural extension services

reduces poverty to a greater extent than agricultural subsidies, which are not properly

targeted and enjoyed by the rich farmers. Roads, well-designed irrigation systems, floodcontrol, rural electrification and telecommunications and the economic use of fertilizers

can make inroads against rural poverty.

While some states were able to take advantage of the stabilization and economic reforms

to speed up growth and poverty reduction, others lagged behind due to poor governance,

insufficient infrastructure, lack of human development and lack of fiscal adjustment.

Agriculture, which may have lost its impetus in reducing poverty, remains the least

reformed and most distorted sector. Lack of reforms of labour and product markets limitboth the rate of growth and its labour intensity.

International experience indicates that the cost recovery for basic social services does not

generate much revenue and adversely affects the utilization rates, especially by the poor.Therefore, any attempt to raise the services charges to cover full cost for the provision of

basic services will be counter-productive and is to be avoided to the maximum extent

possible. When imposed, cost recovery should improve quality and exempt the poor.When cost recovery occurs, revenues should go a special fund to be reinvested in the

social sectors.

In the education sector, at the higher level, there is a case for greater cost recovery, but

the political economy constraints may go against the enhancement of user charges. In

countries like Malaysia and Sri Lanka, lower level services have been delivered free of

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charge for decades on the principle of universality, and even the World Bank was

persuaded against the imposition of user charges.

While the level, efficiency and equity of social expenditure matters, there is need to

ensure effective utilization of existing resources. Expenditure levels cannot be increased

without improved absorptive capacity. In this respect, the involvement of the communityappears to be extremely important in order to improve absorptive capacity, transparency

and the appropriate monitoring of expenditures.

There is a wide scope for strengthening the public-private partnership in the delivery of

health care services. There is also a wider scope for more involvement of Indias several

thousand Non-Government Organisations (NGOs) for implementation of many

government schemes in social sectors.

In sum, India needs to reformulate an anti-poverty strategy that is fiscally sustainable and

more finely targeted to those who cannot benefit from the opportunities offered by

growth. Safety nets should focus on those who either cannot participate in the growthprocess (for reasons of extreme deprivation or vulnerability combined with poverty) or

face continuing exposure to risks.

Effective safety nets that insure rural poor against the income fluctuations, such as public

works programs, are very effective in overcoming important market failures, and need to

be strengthened and widened.

(l) Future agenda on poverty reduction with special reference

to the United Nations Millennium development goals

The UN Millennium Development Goals (MDG) - global targets that the worlds leaders

set at the Millennium Summit in September 2000 are an ambitious agenda for povertyreduction. The targets include the following:

(i) Halve, between 1990 and, 2015, the proportion of people whose income is lessthan one dollar a day.

(ii) Halve, between 1990 and 2015, the proportion of people who suffer from hunger.

(iii) Ensure that by 2015, all children will be able to complete a full course of primary

schooling.(iv) Eliminate gender disparity in primary and secondary education preferably by

2005 and to all levels of education no later than by 2015.

(v) Reduce by two-thirds, between 1990 and 2015, the under-five mortality rate.(vi) Reduce by three-quarters, between 1990 and 2015, the maternal maternity ratio.

(vii) Have halted by 2015, and begun to reverse the spread of HIV/ AIDS.

(viii) Have halted by 2015, and begun to reverse the incidence of malaria and othermajor diseases.

(ix) Integrate the principles of sustainable development into country policies and

programmes and reverse the loss of environmental resources.

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(x) Halve by 2015 the proportion of people without sustainable access to safe

drinking water.

(xi) By 2020, to have achieved a significant improvement in the lives of at least 100million slum dwellers.

(xii) Develop further an open, rule-based, predictable, non-discriminatory trading and

financial system.(xiii) Address the Special Needs of the Least Developed Countries. Net ODA as

percentage of DAC donors GNI is targeted to be raised to 0.7 percentages in

total, and 0.15 per cent for LDCs.(xiv) Address the special needs of landlocked countries and small island developing

states.

(xv) Deal comprehensively with the debt problems of the developing countries through

national and international measures to make debt sustainable in the long run.(xvi) In co-operation with developing countries, develop and implement strategies for

decent and productive work for the youth.

(xvii) In co-operation with pharmaceutical companies, provide access to affordable,

essential drugs in developing countries.(xviii) In co-operation with the private sector, make available the benefits of new

technologies, especially information and communications.

India is committed to achieve the UN MDG targets by 2015. According to the Human

Development 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. The

report acknowledges the significant reduction of poverty ratio from 36 per cent in 1993-

1994 to 26 per cent in 1999-2000, and also significant improvement in literacy rate.There has been continuous increase in the share of expenditure on social services of the

Centre, States and Union Territories taken together in their total expenditure from 14.4

per cent in the Sixth Five Year Plan (1980-1985) to 21.7 per cent in the Ninth Five Year

Plan (1997-2002).

In this respect, it may be mentioned that since 1991 India has undertaken a number of

reforms in industry, trade, financial and fiscal sectors to improve efficiency, productivityand competitiveness of Indian industries and to impart dynamism to the overall growth

process. These reforms had a human face from the very beginning and had been further

deepened through second-generation reforms initiated in 2000.

These reforms have placed India on a higher growth profile with faster reduction of

poverty and malnutrition, improvement in literacy rate, improvement in overallemployment growth, moderate rate of inflation, favourable balance of payments and

increase in overall levels of living of the Indian people. However, on fiscal front theprogress is not adequate implying problems for sustainability of growth in future. There

are serious constraints on infrastructure development. There are also problems relating towidening of inter and intra regional and sectoral disparities and inter-personal

inequalities. Therefore, the objectives and scope of second-generation reforms are to

remove these constraints for higher growth alongwith inter sectoral and inter regionalequity and social justice.

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Under second-generation reforms government is allocating more and more resources for

the development and utilisation of human resources. Suitable targets for the reduction of

poverty, hunger, mortality and illiteracy rates have been incorporated in the Tenth five-year Plan (2002-2007).

The Approach Paper to the Tenth Five-Year Plan (2002-2007), which outlines a strategyto achieve a GDP growth rate of 8 per cent, has a specific focus on human development.

The Approach Paper stipulates that growth in per capita GDP should be accompanied by

significant improvement in human development indicators and basic services to thepeople such as basic health, education, drinking water and sanitation. It also includes the

expansion of economic and social opportunities for all individuals and groups, reduction

in disparities and a greater participation of people in the decision making process.

The Plan indicates the following monitorable targets:

Reduction of poverty ratio by 5-percentage point by 2007 and by 15 percentage

points by 2012. Providing gainful high quality employment to the addition to the labour force over

the Tenth Five-Year Plan.

All children to go to schools by 2003, and all children to complete at least five

years of schooling by 2007.

Reduction of gender gaps in literacy and wage rates by at least 50 per cent by2007.

Reduction in the decadal rate of population growth between 2001 and 2011 to

16.2 per cent.

Increase in the literacy rate to 75 per cent during the Tenth Five-Year Plan.

Reduction in the infant mortality rate to 45 per 1000 births by 2007 and to 28 by

2012. Increase in the forest and tree cover to 25 per cent by 2007 and 33 per cent by2012.

All villages to have sustained access to potable drinking water within the planperiod.

Cleaning of major polluted rivers by 2007 and other notified stretches by 2012.

The attainment of these targets not only necessities a substantial allocation of resourcesfor the social sectors but also involves an enhanced role for the government in the

provision of social services and development of urban and rural infrastructure.