Inequality matters

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SummaryThat poverty in India has declined between 2004-05 and 2009-10 is indisputable.

Given the average GDP growth of 8.5% during FY05 to FY10, the Eleventh Plan target of reducing poverty by 2 percentage points a year was disappointing

Radhicka Kapoor

That poverty in India has declined between 2004-05 and 2009-10 is indisputable. Poverty estimates based on the Tendulkar poverty line released last year indicated that poverty headcount ratio declined by 8%, 4.8% and 5.7% in rural, urban and all-India, respectively, during this period. This worked out to an annual decline of 1.64% and 0.92% in rural and urban India, respectively. Given that the average growth rate of GDP during this period was about 8.5%, exceeding 9% in three of the five years, and that the Eleventh Plan aimed to reduce poverty by 2 percentage points a year, this pace of poverty reduction is indeed disappointing. If economic growth was the only factor that mattered for poverty reduction, we should have witnessed greater poverty reduction. Moreover, states with the highest growth rate should have performed the best in terms of poverty reduction. But state-wise poverty estimates indicate that this is not the case. For instance, Bihar and Chhattisgarh witnessed average growth rates of about 10% during this period, yet poverty declined by less than 1%.

While growth is unquestionably necessary for substantial poverty reduction, it appears that growth is getting weakly linked with poverty reduction. In other words, the growth elasticity of poverty (GEP) is not high enough. GEP gives the percentage change in a chosen poverty measure in response to a 1 percentage change in GDP or mean income and can be interpreted as the poverty reducing impact of growth. In the poverty literature, GEP is found to be a function of initial income distribution, and it has been shown that rising levels of inequality lower GEP. The rationale for this is that the higher the initial inequality, the lesser the poor will share in the gains from growth. Martin Ravallion explains this succinctly as: “Unless there is a sufficient change in the distribution, people who have a larger initial share of the pie will tend to gain a larger share in the pie’s expansion”.

The National Sample Survey (NSS) data point in the direction of rising inequality in India. The Gini coefficient for rural India increased from 0.27 to 0.28 between 2004-05 and 2009-10, with rural inequality rising in 11 states. The Gini coefficient for urban India increased from 0.35 to 0.37, with urban inequality

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