Poverty Reduction in India: An Analysis of last three decades

The Rangarajan committee has pegged the new poverty line to monthly per capita consumption expenditure of Rs. 972 in rural areas and Rs. 1,407 in urban areas. This translates to daily per capita consumption expenditure of Rs. 32.4 in rural areas and Rs. 46.9 in urban areas.

The Rangarajan panel estimates that 30.9% of the rural population and 26.4% of the urban population were poor as per the new poverty line in 2011-12.

The Rangarajan poverty estimates are an upward revision from the earlier estimates based on Tendulkar poverty line based on which 25.7% of rural India and 13.7% of the urban India were poor in 2011-12.

While the Rangarajan committee computes higher poverty lines and consequently estimates higher levels of absolute poverty than the Tendulkar poverty line, what is striking is that the rates of poverty reduction obtained using these two poverty lines are roughly similar.

As per the new poverty line, poverty ratio for India declined by 8.7 percentage points over this period, while it declined by 8.1 percentage points as per the Tendulkar poverty line.

Similarly, the decline in rural and urban poverty ratios using the Rangarajan and Tendulkar poverty line are fairly similar. That the Rangarajan poverty lines, which are 19% and 41% higher in rural and urban areas respectively as compared to the Tendulkar poverty line, report roughly the same or even marginally higher rates of poverty reduction, both in terms of poverty ratio and the number of poor, makes it clear that the rapid poverty reduction observed over this period was not attributable to the fact that the Tendulkar poverty line was too low. The scathing criticism of the Tendulkar poverty line on these grounds was certainly uncalled for.

India is home to 26% of World poor. This means that the burden of global reduction in poverty hinges on the efforts of India. This also means that one of the key sustainable development goal- to end extreme poverty by 2030, hinges on India’s efforts to make strong inroads in reducing poverty.

The good news is that India has made major progress in the past several decades to eradicate extreme poverty by promoting pro-growth policies amongst its poor. The policy includes a well-functioning social security system, social sector schemes like, ICDS, MGNREGS, Mid-Day Meal, Housing for all etc.

India’s high economic growth is a key factor in reducing extreme poverty. The growth accelerated in the post economic reforms period of 1990s. After 1991, per capita income grew nearly two-and-a-half times in real terms compared to the preceding three-and-a-half decades — from 1.8% per year to 4.3% per year. India is now among the fastest-growing economies in the world.

India is also home to the largest number of people who have escaped poverty in recent years, after China, based on a poverty line set at $ 1.90 per person per day (in 2011 Purchasing Power Parity). Indeed, in contrast to the 1990s, the rate of decline in extreme poverty in India has not only outpaced the developing world as a whole, but also the middle- and lower middle-income countries as a group.

Reason for Poverty Reduction

The significant shift from farm work to non-farm income sources of income accelerated the decline in poverty in India. Non-Farm jobs pays more than agricultural labour.

The structural transformation of the Indian economy from agriculture to service and industry and from rural to urban areas have also contributed to decline in poverty.

The change associated with the structural transformation are primary drivers of the poverty reduction at the household level in the past decade. Increase in labour earnings was a major factor in reducing poverty. While both agricultural and non-agricultural income increased, the rise was most rapid for non-agricultural wages and salaried work. This was in turn linked to workers shifting out of agriculture toward wage/salaried non-agricultural work that yields higher earnings. The largest shifts occurred among the poorest, which was accompanied by rising wages in casual employment. In broad sectoral terms, rising income from the non-agricultural sector was the most important driver of the observed changes, contributing to nearly 46 per cent of national poverty reduction. 

In urban areas, self-employment opportunities and non-agricultural income were the predominant reasons for poverty reduction. In rural areas, on the other hand, shifts in employment away from agriculture contributed much more to poverty reduction. The pace of transformation was thus more rapid in rural areas.

Changes in the composition of household has also led to poverty reduction. This occurred as the number of working age member increased in the household. This demographic dividend makes more workers available at the macro level and complements the structural transformation of the Indian economy.

Thus, faster poverty reduction since 2005 appears to be closely linked to the pattern of structural transformation occurring in India. The falling dependency ratio and, crucially, the steep rise in wages for unskilled work, reinforced the effects of structural transformation.

A closer review of India’s experience in reducing poverty over the last two decades revealed that poverty in India is associated with lack of assets and deficient human capital. At the national level, close to 45% of India’s poor are illiterate, whereas another 25% have a primary education at most. Further down, several Indian states, including a few high-income ones, show stunting and underweight rates that are worse than the averages for sub-Saharan Africa. While multiple factors lie at the root of the nutrition challenge, the prevalence of diarrhoeal disease is thought to be one of the main culprits, and diarrhoea is triggered by poor hygiene.

Inter State Inequality is found to be one of the major reason of poverty in India. The poverty level depends on the region where people lived. Research findings show that across India, a range of top places offer much better opportunities to progress in life. These places are, however, very unevenly distributed over the map. Most of them are to be found in the north-western part of the country, or along the western and southwestern coasts. In the Ganga basin, on the other hand, and in low-income states more generally, such places are few and far between.

What makes these top places and catchment areas special is the job opportunities they provide. For, labour earnings are the primary drivers of poverty reduction in India. This is not to say that transfers and social programs are unimportant. But labour earnings, from both self-employment and wage employment, account for nearly 90% of household income. And their increase has been the most significant contributor to higher household expenditures per capita in recent years. Important distinctions also need to be made between types of jobs. Casual employment, such as daily work in construction, has been instrumental in lifting households out of poverty. Regular wage employment, whether formal or informal, has been the real ticket to the middle class.

The Future Challenge

While Indian economy has grown more rapidly in recent decades, the gains have been unevenly spread and some have lagged behind rest of the country. In particular the low- income states of Bihar, Chhattisgarh, Jharkhand, Madhya Pradesh, Odisha, Rajasthan and Uttar Pradesh continue to lag behind rest of India. The reason for their poor performance in poverty reduction are poor human capital development, poor infrastructure, lack of industrialisation, growth in these states are not inclusive

Admittedly, these states did experience greater absolute reductions in poverty after 2005. However, absolute changes can be misleading, given that initial levels of poverty and per capita incomes differed vastly across states. In relative terms, both growth and poverty reduction diverged across India’s states after 2005. As a result, today, the Low- Income States as a group — with Rajasthan as the exception — have a poverty rate that is twice that of other states.

Residents of these states spend fewer years in school, as evidenced by their low rates of secondary school completion. Moreover, working adults are far less likely to have salaried jobs — the jobs that bring more secure terms of employment. In addition, the rates of infant and maternal mortality in these states are amongst the highest in the country. And, while child malnutrition is high and often endemic even in the more prosperous parts of the country, the malnutrition levels in some LIS are far worse than the national average. Alarmingly, in Jharkhand, Bihar and Uttar Pradesh, close to half of all children under the age of 5 are ‘stunted’

To overcome these challenges, India needs to invest in human capital, infrastructure, manufacturing, Capitalizing on growing connectivity between rural and urban areas, and between the agriculture, industry and services sectors, creating more productive jobs, bringing women into labour force, uplifting the marginalised section, urbanisation and sustainable development of cities.

Criticism of Poverty Lines

The public disillusionment with the poverty line is essentially a result of the fact that in a growing economy such as India poverty can no longer be understood merely by the lack of ability to afford minimum subsistence, food, shelter and clothing.

The poverty lines, whether of Rs.32 or Rs.46 a day appear to be nothing more than a line of destitution or starvation. It seems insensitive to argue that a movement from below to above this artificially subsistence drawn line translates into an improvement in the material well-being of households.

Poverty lines and measures in any given setting will be socially acceptable only if they accord well with prevailing ideas of what poverty means in that setting. Revising poverty lines on the basis of different methodologies will not put an end to the criticism surrounding them, as these lines are based on the concept of absolute poverty expressed in terms of basic subsistence, as opposed to the concept of relative poverty. Relative poverty acknowledges that the definition of poverty should move with the times and change with general living standards. However, poverty lines based on this concept will not allow us to track the proportion of poor over time.

From the perspective of policymakers and academics, the purpose of a poverty line is to monitor poverty reduction. Once the definition of the poverty line is set, it cannot keep changing except adjusting for inflation.

The focus of policymakers, therefore, does not need to be on the level at which the poverty line is fixed, but how to accelerate the pace of poverty reduction and ensure that it is sustainable, and not simply a result of significant bunching i.e. a concentration of poor around the poverty line. In the event of bunching, even modest increases in income can pull large numbers of poor from below to above this line leading to rapid poverty decline. If the forces that pushed the poor above the poverty line are transitory, a large proportion of them could slip back into poverty if there is a sufficiently large negative shock.

For poverty reduction to be sustainable, we need policies that range from creating more productive jobs, delivering better education and health services and basic infrastructure to protecting the vulnerable. These will make the growth process more inclusive and increase the growth elasticity of poverty.

Importantly, while the link between growth and consumption poverty is rather direct, the relationship of growth with other dimensions of poverty such as malnutrition, sanitation or housing is far from being so. Hence, poverty reduction has to be strategized in a multi-dimensional framework.

Even though based on calorie approach, the poverty line is not a true indicator of malnourishment because of interpersonal variations in good habits.

The poverty line, quantified as a number is reductionist. It does not capture important aspects of poverty — ill health, low educational attainments, geographical isolation, ineffective access to law, powerlessness in civil society, caste and/or gender based disadvantages, etc. 

The poverty line provides the conceptual rationalization for looking at the poor as a “category” to be taken care of through targeted ameliorative programmes, ignoring structural inequalities and other factors which generate, sustain, and reproduce poverty. 

Poverty line derived from personal consumption patterns and levels do not take into account items of social consumption such as basic education and health, drinking water supply, sanitation, environmental standards, etc. in terms of normative requirements or effective access.

The head-count ratio based on the poverty line does not capture the severity of poverty in terms of the poverty deficit (total shortfall from the poverty line) or additionally the distribution of consumption expenditure among the poor. It is insensitive to mobility within the below poverty line group. It is also invariant to upward and downward mobility across the poverty line so long as such mobility takes place in equal measure. 

In a country of India’s continental size and diversity, poverty line based on aggregation at all-India level ignores State-specific variations in consumption patterns and/or prices. 

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