Poverty and inequality after reforms
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India embarked on big-bang economic reforms 25 years back in 1991. It is well-known that GDP growth has been much higher in the post-reform period. However, GDP is only one metric. Ultimately, the success of reforms depends on whether the well-being of people, particularly that of poor, increased over time. In this context, let’s examine the impact of economic reforms on poverty and inequality.
There are two conclusions on trends in poverty. The first one, shown in a World Bank study by Gaurav Datt and others, is that poverty declined by 1.36 percentage points per annum after 1991, compared to that of 0.44 percentage points per annum prior to 1991. Their study shows that among other things, urban growth is the most important contributor to the rapid reduction in poverty even though rural areas showed growth in the post-reform period.
The second conclusion is that in the post-reform period, poverty declined faster in the 2000s than in the 1990s. The official estimates based on Tendulkar committee’s poverty lines shows that poverty declined only 0.74 percentage points per annum during 1993-94 to 2004-05. But poverty declined by 2.2 percentage points per annum during 2004-05 to 2011-12. Around 138 million people were lifted above the poverty line during this period. This indicates the success of reforms in reducing poverty. The poverty of Scheduled Castes and Scheduled Tribes also declined faster in the 2000s. The Rangarajan committee report also showed faster reduction in poverty during 2009-10 to 2011-12. Higher economic growth, agriculture growth, rural non-farm employment, increase in real wages for rural labourers, employment in construction and programmes like the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) contributed to higher poverty reduction in the 2000s compared to the 1990s.
Another issue discussed all over the world, whether it is the Arab Spring or Brexit, is rising inequality. According to a Credit Suisse report, the richest 1% owns half of all the wealth in the world. What happened to inequality in post-reform period India? The evidence shows that inequality increased in this period. The Gini coefficient measured in terms of consumption for rural India increased marginally from 0.29 in 1993-94 to 0.31 in 2011-12. There was a significant rise in the Gini coefficient for urban areas from 0.34 to 0.39 during the same period. However, consumption-based Gini underestimates inequality. If we use income data from the National Council of Applied Economic Research’s India Human Development Survey, the Gini coefficient in income (rural+urban) was 0.52 in 2004-05 and increased to 0.55 in 2011-12. In other words, inequality is much higher in India if we use income rather than consumption. If we consider non-income indicators like health and education, inequalities between the poor and rich are much higher.
What is the way forward? The conclusion is that poverty declined faster but inequality increased in the post-reform period. However, India still has 300 million people below the poverty line. What should be done to reduce poverty and inequality?
Policymakers must continue to follow the two-fold strategy of achieving high economic growth and direct measures through social protection programmes. The focus should also be on increase in urban growth and income as the share of urban poverty will rise with urbanization.
There can be several solutions, but let’s focus here on the two important measures: creating productive employment and providing quality education for reduction in poverty and inequality. There is a feeling that we should have some flagship programmes like MGNREGA to reduce poverty. No doubt these programmes are important for protecting the poor. But equitable growth is much broader than this and productive inclusion in terms of generating quality employment should be the focus of any inclusive approach. Employment focus is the major part of equity approach. Studies have shown that agricultural growth leads to reduction in poverty twice as that of non-agriculture. We need more diversified agriculture for raising the income of farmers. However, future employment has to be created in manufacturing and service. In this context, the Make in India initiative, focus on start-ups, Mudra, financial inclusion, etc., are steps in the right direction. Equally, service sector employment has to be promoted. Over time, the share of the organized sector has to be raised while simultaneously improving productivity in the unorganized sector. Youth unemployment is high. This is one reason for unrest and social tensions. The need for skill development and productive jobs to reap the demographic dividend is obvious.
For reducing inequality, some advocate measures such as redistribution of assets and wealth in favour of the poor via higher taxes for the rich. However, these may not be pragmatic solutions. The tax/GDP ratio has to be raised with a wider tax base. Fiscal instruments like public investment in physical and social infrastructure can be used to reduce inequality. The new generation wants equality of opportunity rather than redistributive measures. Everyone irrespective of caste, class and gender should have equal opportunities in education, health, employment and entrepreneurship. Economic and employment opportunities improve with education and skills. The new generation wants better quality in schools and higher education.
Finally, economic reforms should focus more on efficient delivery systems of public services. Many reckon that poor governance is the biggest constraint in achieving the aspirations of a new generation and reduction in poverty and inequality. A major institutional challenge is the accountability of service providers, particularly the public sector. Recent literature also focused on eradication of corruption for reduction in inequalities. Issues like electoral reforms, crony capitalism, election funding and corruption should be part of the reform agenda to reduce inequalities.
S. Mahendra Dev is director and vice-chancellor, Indira Gandhi Institute of Development Research, Mumbai.
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