FE Editorial : Setting the record straight

Written by fe Bureau | Updated: Dec 30 2009, 02:57am hrs
One of the great myths that critics of economic reform have perpetuated is that liberal economic policies have led to a rise in povertyor to no decline in poverty at all. The Prime Minister, at a meeting of the Indian Economic Association in Bhubaneswar on Sunday, put the record straight by affirming the realitypoverty has declined in the period after economic reform began. Obviously, if economists and statisticians change the bar by shifting the poverty line, it is possible to show that poverty, by some measure, has increased. But many of the studies that put poverty upwards of 50% are plagued by problems of methodology and dated data. Ideally, the next measurement of poverty needs to wait for the next National Sample Survey numbers, which are due to be published next year. At the moment, we are working with 2004-05 data, which pre-dates the very high growth period of 2004-08. It also precedes UPA-1s ambitious social spending programmes, particularly the widely cast NREG, besides subsidised food programmes. A combination of high growth and some redistribution will undoubtedly show lower numbers in poverty.

Of course, the Prime Minister readily admitted that much more needed to be done to raise the standards of living of the poor, and one cant disagree with that. But the way forward is more reform, not less. As long as we agree that reform is working, we will remain on the right track. The UPA is quite apparently determined to push a redistributionist agenda even in its second term. But for that kind of spending to be sustainable, we need high growth that will boost government revenues. Only deeper economic reform can ensure high growth, once the fiscal and monetary stimulus are withdrawn. Also, economic reform policies have directly benefited the poor even without government redistribution. One need not look any further than the revolution in telecomalmost half of all Indians own mobile phones. Conversely, the lack of reform in certain sectors is the root cause of poverty not falling fast enough. The Prime Minister mentioned agriculture in his speech at the Indian Economic Associationthis is one sector that needs sweeping reform if it is to become more productive. Of course, inclusive growth needs public investment in education, health and infrastructure. But inclusive growth also needs financial sector reform, which will make cheaper finance available to potential small entrepreneurs and to consumers. Only a combination of more market-based reforms and well targeted government spending will bring poverty down faster.