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Photo: Ramesh Pathania/Mint
Photo: Ramesh Pathania/Mint

Can gains in the poverty battle be sustained?

Government estimates show a steep decline in poverty from 37.2% in 2004-05 to 21.9% in 2011-12. What can be done to continue the process?

A couple of days ago, at an election rally in Assam, Prime Minister Narendra Modi said his fight was not so much against the opposition as against poverty. He knows, of course, that government estimates show a steep decline in poverty from 37.2% in 2004-05 to 21.9% in 2011-12, an achievement that has earned India praise from many quarters, including the World Bank. What is more important is: what has led to this dramatic fall in the poverty headcount and what can be done to continue the process?

Everybody knows rapid economic growth is essential. But is it the whole story? A World Bank research paper published this month offers new insights. The paper, Why did poverty decline in India? by Carlos Felipe Balcázar, Sonal Desai, Rinku Murgai and Ambar Narayan, says a lot of things, but the answer ultimately boils down to “a poverty reduction process shaped mainly by structural transformation, whose key elements appear to be: falling dependency rates; a shift from agriculture toward non-agricultural wage employment and a reduced reliance on agricultural income in rural areas; rising labour productivity; and rising incomes from remittances that may indicate greater migration and spatial mobility of workers".

Trouble is, some of these trends may have slowed down substantially after 2012.

Chart 1 shows the proportion of income of households from various sources and how the importance of these sources changed between 2005 and 2012. Note that for both urban and rural households, the proportion of income coming from self-employment has come down and also that coming from agricultural wages. The biggest jump has been in non-agricultural wages and in remittances. In particular, for rural households, there has been a big increase in non-agricultural wages.

What has driven the increase in rural non-agricultural wages? On the demand side, it is primarily the boom in construction during those years—most studies say the Mahatma Gandhi National Rural Employment Guarantee Scheme is too minuscule to have made much of a difference. Many researchers say the construction sector has been one of the main sources of job growth for the masses. Job opportunities in urban areas too made some difference, as shown by the rise in remittances to rural areas. As the research paper underlines, “The dominant role in poverty reduction played by the expansion of employment and earnings in the non-agricultural sector, and particularly that of wage/salaried employment in this sector, provides important clues about policy imperatives for poverty reduction."

Chart 2 shows the growth in construction over the past decade. Notice the double-digit growth in the sector during the boom years before the financial crisis and again in 2011-12. The problem is that recent years have seen a sharp fall in the growth of the construction sector. This fall has been in spite of the efforts of the present government to boost road construction. The slowdown in construction activity in the private sector, particularly because of the overhang in real estate, is obviously having a major impact. That will have a damaging effect on jobs available to unskilled rural labour. Add two years of drought, the low increases in minimum support prices and the drying up of water reservoirs and it’s a toxic mix for rural folk.

While the construction boom helped boost the real incomes of unskilled labour, the after-effects are being felt today in a glut of inventory, in excess capacity in a host of industries and in the deterioration of balance sheets. CMIE data show a steady deterioration in the interest cover for firms in the construction and real estate sectors and also in the construction materials segment.

What are the likely effects of the slump in construction on poverty? Says the World Bank paper, “Since average and median consumption per capita are close to the national poverty line, even small shifts in welfare can lead to big changes in poverty rates, but leave many of those who move out of poverty highly vulnerable to falling into poverty." Given the circumstances, it is likely that, after 2012, the poverty headcount may even have gone up. Who are the most vulnerable? The researchers say Adivasis and Dalits are those most at risk of falling back into poverty.

Manas Chakravarty looks at trends and issues in the financial markets. Comments are welcome at capitalaccount@livemint.com

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