What caused the decline in poverty in India?

The recently released figures by the NSSO shows that the percentage of population living below the poverty line in India declined by over 15 percentage points from 37.2% in 2004-05 to 21.9% in 2011-12. The poverty rate fell 9.8 percentage points to 13.7% in urban areas, and 16.3 percentage points to 25.7% in rural areas. In absolute terms, the number of poor declined by 33% from 407.2 million people to 269.7 million people in the same period.

The estimates are based on a percapita daily poverty line of Rs 27.2 and Rs 33.3 (2011-12 base year) for rural and urban areas respectively, which are higher than the equivalent World Bank standard for PPP-adjusted poverty line of $1.25 percapita per day. This translates to a monthly income of Rs 4080 and Rs 5000 respectively in rural and urban areas for a family of five. This poverty line was fixed based on the recommendations of the Suresh Tendulkar Committee which based its calculations on expenditures like food calorie intake, health, education etc.

Obviously some of these figures are suspect. But despite all debate about this and whether the reduction constitutes a significant achievement, it cannot be denied that the rate of poverty reduction has increased sharply in the last decade. Taking the same standard, the rate of decrease in poverty more than doubled from 0.74 percentage points annually in the 1993-94 to 2004-05 period to 2.08 percentage points in the 2004-05 to 2011-12 period. As the Business Standard reports, Indian economy grew at 6.2% in the former ten years and 8.4% in the latter eight.

The more interesting thing about this trend is what caused this reduction, or more specificially, what were the respective contributions of economic growth and redistributionary policies. While there have been conjectures and wild speculation about the possible causes, none of them are backed by any rigorous empirical evidence. Its exploration will be one of the more interesting academic research projects, with implications for development policy making itself.

In this context, Pronob Sen, Chairman of the National Statistical Commission, had this to say about the debate between growth and redistribution,

The growth acceleration certainly was a major factor, but it would not have had this kind of impact if two other developments had not occurred. The first is that there was a terms of trade shift in favour of agriculture, which began in 2004 and continued to gain strength thereafter. Over the period, my rough estimate is that the terms of trade improvement added somewhere between 3 to 4 percentage points annually to real agricultural income growth.  The second is that rural wages rose rapidly, indeed faster than agricultural prices, which led to a distributional shift away from land owners towards landless labour.  As a result of these two factors, the high GDP growth rate “trickled down” to the poor, especially the rural poor, much faster and to a larger extent than would have been the case otherwise.

The genesis of the terms of trade shift appears to be the large increase in minimum support prices by the UPA government, but its continuation, and indeed acceleration, is a more complex story. The distributional changes certainly increased the marginal propensity to consume of the country as a whole, but also appeared to have triggered off an unprecedented change in dietary patterns... The rural wage increases, I believe, are due substantially to the implementation and roll-out of Mahatma Gandhi National Rural Employment Guarantee Scheme (MNREGA) since 2006, but other factors have also played a part. In particular, the rural roads programme -- Pradhan Mantri Gram Sadak Yojana (PMGSY) has opened up rural work opportunities which simply did not exist earlier. 

Now let me indulge in my two cents of speculation. Economic growth, at least in the short to medium-term, can result in poverty reduction by two channels - trickle down growth and redistribution policies. Trickle down growth, or rising tide lifting all the boats, is build on the foundation that the overwhelming majority of the poor are equipped with the human capacity to access the opportunities that arise from economic growth. But it is well known that the typical poor Indian, especially in rural areas, suffers from both human resource capability deprivation - education and health standards, and livelihood skills - and physical infrastructure deficit that are essential to make use of the opportunities presented by growth. In fact, even among its emerging market peers, India comes out very poorly in its human resource development scores.

In recent years, there have been a sharp increase in redistribution policies like NREGA, minimum support prices, public distribution system, social welfare pensions, and so on. Massive amounts have been spent and its coverage has expanded as state governments have diluted the eligibility requirements to increase its electoral appeal. It is inevitable that, even with all its leakages, these transfers contribute towards income growth and therefore poverty reduction. The fact that poverty fell much steeper in rural areas and in the poorest states, even discounting for the base effect, may lend some credence to this view. In the circumstances, the argument that Pronob Sen makes about the redistribution policies having hastened the process of economic growth tricking down to reduce poverty appears compelling.

What should be a matter of concern is whether the reduction is sustainable. It needs answers on two dimensions. One, will those who have come out of poverty continue to remain so once they lose access to the redistribution programs? Two, have the dynamics of this poverty reduction process (productivity increases, changes in consumption patterns etc) created the conditions to move the economy into a high growth trajectory?

I am inclined to answer in the negative on both. And this is an indictment of the particular nature of the redistribution policies we have been following. It has been like band-aid on a gangrene. We need to be discussing and debating such second-order issues of growth instead of arguing over the relative merits of non-issues like the relative superiority of growth and redistribution. What should be the design of redistribution policies that ensure sustainable poverty reduction? What structural reforms are necessary to make economic growth more inclusive and thereby sustainable?