Poverty reduction: Govt intervention yes, but target it better

By: | Published: April 29, 2015 1:39 AM

Access to banking and improvement in agricultural productivity have the largest effects in reducing poverty

A lot has been said about the Make-in-India campaign. The idea behind launching this programme is to create employability for Indian youth. India has 560 million young people under the age of 25, and without adequate manufacturing capability and inability to participate in global production network, India’s demographic dividend may turn out to be a bane. Three other statistics should also be taken into consideration. One, India’s working population, which is currently estimated at 750 million, is going to be around 1 billion by 2020. The worst part is that close to 30% of Indian citizens with a bachelor’s degree are out of work. Two, people dependent on agriculture and allied activities contribute around 18% of national income, and support the livelihood of around 50% of India’s population. The worst part is that even agriculture is becoming highly mechanised—the contribution of human and animals to farming has gone down from 60% during the 1970s to less than 5% at present. Three, financial inclusion is still a far cry. About 70% of the value of the Indian stock market is derived from 30 well-established companies listed on the Bombay Stock Exchange, where, in fact, there are around 6 crore SMEs with poor access to funds.

Wrap this up, and you may well find reasons for the increase in income inequality in India. The gap in income shared between the top 10 percentile and the poorest 40 percentile of the population has been on a constant rise since 1995. The benefits of growth have increasingly being cornered by the richest and more skilful members of the society. The inequality is aggravated by the fact that costs of healthcare and education—the two basic necessities of life—have grown faster than the growth in per capita income. For instance, a survey by Assocham points out that the parents’ spending on a single child’s education has gone up from R35,000 in 2005 to over R94,000 in 2011, almost a 300% increase. A majority of parents spend, on an average, more than R18-20 lakh in raising a child by the time he/she graduates from a high school.

In fact, examining district-level per-capita income brings out the same story. In a recently published paper (A Banerjee, N Banik and J Mukhopadhyay, The Dynamics of Income Growth and Poverty, Development Policy Review, May 2015), we show labour and health market interventions in the form of MGNREGA and National Rural Health Mission has limited outcome when it comes to making income distribution more equal. Although poverty has fallen post-1991 reforms, an aggravating income distribution may make the government fighting a losing battle against poverty, more so in the future.

Generally, poverty is measured in terms of the headcount ratio (HCR), which is the proportion of national population whose incomes are below the official threshold level of income. Since income data are hard to obtain, many countries instead use expenditures or calorie-intake data. In India, the Planning Commission computed poverty ratio on the basis of expenditure data. Based on the 55th Round (July 1999 to June 2000) conducted by the National Sample Survey Office, the percentage of people living below the poverty line is estimated at 27.09% in rural areas; 23.62% in urban areas; and 26.10% for the country as a whole. The data gives an estimate on the amount of money a person is required to spend to consume a minimum threshold amount of calories per day (2,400 in rural areas and 2,100 in urban areas), in addition to subsistence clothing and shelter.

In 2011, India had a new poverty line. A person spending less than R32 in urban areas and R26 in rural areas on food, health and education every day is poor. The Tendulkar committee reached this figure by calculating monthly cost on food, entertainment, school education and non-institutional health based on the National Sample Survey’s Consumer Expenditure Survey, 2004-05.

As the Indian economy develops, we should brace for a stricter poverty measure. For instance, in the US, a family of four earning less than $23,000 per annum is classified as poor. The US can go for higher poverty standard as it is developed. In India, with the economy slotted for around 7% growth, a realistic poverty line should embrace for a higher base level income/consumption than what it currently has. This means more number of poor people.

Our study points out that, over the last decade—which was a period of high income growth—two sub-sectors, agriculture and manufacturing, did not contribute much to the overall growth process. On the contrary, the services sector has been the major contributor for growth in India. We also find evidence of strong correlation between manufacturing and services. Most of the capital-intensive manufacturing activities such as automobile, oil refineries, etc, have a higher dependence on services such as telecommunication and banking. As manufacturing story in India is primarily automated, its correlation with agriculture and allied activities is rather weak. We also find that, with limited employment opportunities in the organised manufacturing and services sector in urban areas, migration from countryside is contributing to urban poverty.

So, which factors have largest effects in reducing poverty? It is access to banks and improvement in agriculture productivity. Increasing access to credit through provisioning of more bank branches by 1% can help reduce HCR (both urban and rural) by 0.21%. Since India has leapfrogged into the skill-intensive services sector, bypassing the manufacturing sector, there are two obvious policy choices. The first is to increase agricultural productivity so that return to the people dependent on the agricultural sector increases. The second is to remove capital market imperfections so that small entrepreneurial activities, and agriculture and agriculture-related allied activities such as fishing, dairying, etc, can grow and flourish.

Given these findings, all these interventions by the present government such as Make-in-India, Jan Dhan Yojana, and the MUDRA Bank are welcome moves. However, only time will tell whether the interventions will be able to equalise income distribution.

The author is with Mahindra Ecole Centrale. He is also a fellow, CUTS International, and ARTNet, UNESCAP researcher

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