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India’s growth-inequality predicament

Nov 23 2013, 19:01 IST
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SummaryWhile the period from 2004-05 to 2011-12 saw a considerable reduction in poverty, it has also witnessed a widening of rural-urban disparities

Across the world, concerns are being voiced about rising inequality and how severely it can damage the social fabric of a nation.

In the Indian context, concerns have been eloquently articulated by some of the very well-noted economists who fear that the government’s fixation on growth prevents it from effectively addressing the problem of rising inequality and its structure. While no one refutes the claim that some benefits accruing from the economic reform growth have trickled down, a consequence of which is the millions who have been uplifted above the poverty line, the bone of contention is that a certain privileged section of society has received a disproportionate share of the benefits accruing from the growth process which has translated to rising vertical as well as horizontal inequalities.

Economic growth can translate to either an increase or decrease in inequality; if inequality does rise, it implies that a certain section of society is receiving a disproportionate share of total benefits accruing from growth. On the other hand, if inequality falls, it implies that the benefits are percolating to the economically-deprived sections of society. As with poverty, a number of studies on inequality, based on NSS consumption expenditure data, have been carried out in the post-reform period with mixed results. It is interesting to note that the so-called poorest state in the country, Orissa, has shown the steepest decline in poverty ratio—24.6 percentage points between 2004-05 and 2011-12 (table 1).

Other states where the decline in poverty ratio is significant include Andhra Pradesh, Bihar, Maharashtra and Uttarakhand. Interestingly, in all these states, rural poverty declined at a much faster pace than urban poverty. Relatively high economic growth in some of the BIMARU states (Bihar, Madhya Pradesh, Rajasthan and Uttar Pradesh) and Orissa has led to a significant dent on overall poverty.

This is much pronounced in rural areas of all major states other than Kerala, where urban areas witnessed a higher reduction in poverty estimates. It is quite plausible that benefits of long-term high growth, especially in the low-income states where the benefits of growth percolate to the economically-backward rural sections, can be easily envisioned.

This reveals the dichotomy between monthly per capita consumption expenditure (MPCE), growth and the corresponding poverty reduction, which leads us to the issue of the distribution of households near the poverty line. In other words, if households are heavily distributed near the poverty line, even a small increase in MPCE can

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