FACTORS INFLUENCING POVERTY AND THE ROLE OF ECONOMIC REFORMS IN POVERTY REDUCTION

Journal of Social and Economic Policy, Vol. 11, No. 1, June 2014, pp. 83-91 FACTORS INFLUENCING POVERTY AND THE ROLE OF ECONOMIC REFORMS IN POVERTY REDUCTION N. NARAYANA * Poverty is a situation of helplessness due to low income and lack of opportunities to earn income. Addressing the problem of poverty is important since poverty causes suffering, ignorance, poor health, hunger and criminal behaviour. High level of poverty is again mainly due to growing unemployment, socio-political set up, and income inequalities, Poverty has become one of the serious socio-economic challenges facing societies. The paper examinesthe factors causing poverty and efforts made by the government to reduce poverty through economic reforms in India which have vast ramifications in creating conditions to strengthen sources of income by restructuring the economy. INTRODUCTION Poverty is one of the central issues in the Millennium Development Goals (MDGs). Poverty is the root cause of low quality of life and loss of human dignity and justice. Economic poverty can be defined as a low standard of living e.g. One s low ownership of properties compared with the prevailing standards of living in the community concerned, or one s income lays below the poverty line (B.R. Schiller, 2003). India, after independence,laid more emphasis to reduce poverty. As the population has been growing rapidlyduring the last 50 years, this has also increased the demand for goods and services in the country significantly.in addition to this, agricultural growth is inadequate due to low productivity caused by small holdings, lack of adequate access to credit from organised financial institutions, farmers are still adopting traditional methods of cultivation, more or less stagnant cropping pattern etc. Low production in agriculture is also because of prevalence of underemployment and disguised unemployment resulting in underutilization of human resources in rural sector. This has brought down production in agricultural sector s performance and responsible for fall in the standard of living of people. Economic progress is also slowed down in India creating a gap between level of availability of goods and services and the requirements of goods and services resulting in poverty.inflation in the form of continuous and steep price rise has adversely affected the poor. Evidently, inflation has benefited a few people in the country but not the persons in lower income group who find it hard to get their minimum needs. Rising unemployment continuously is one of the serious causes of poverty as the number of jobseekers is increasing higher compared to the rate of the expansion of employment opportunities. Added this, there has been paucity of capital and entrepreneurship as these play an important role in accelerating economic growth. * Professor of Economics, University of Botswana, Private Bag UB 705, Gaborone, Botswana, E-mail: narayana@mopipi.ub.bw

84 N. NARAYANA Faster economic development is also possible if the socio-political set up is conducive. We have rigid socio-cultural system in the form of caste system and traditions and customs besides difficult laws of inheritance which are coming in the way of faster development and aggravating the problem of poverty.political interests take upper hand in policy formulation and in framing the development plans. Hence, it is evident that the planning in India is failing to tackle the problems of poverty and unemployment. One of the main objectives of all the Five-Year Plans has been the reduction of poverty. To All household surveys constituted by the Government of India on poverty have indicated the details on the efforts made by the country to reduce poverty. As a part of India s philosophy to achieve socialistic pattern of society, poverty reduction has become an integral part of the country s economic growth and development. It is evident from experience that reducing poverty requires coordinated macroeconomic and sectoral reforms at all levels of Government. The present paper analyses the efforts made by the Central and State Governments to reduce poverty in India through fiscal and sectoral reforms. Although the percentage of population living in poverty has been reduced since the 1970 s, the progress made over a period of time has been uneven across the states. The number of poor has continued to rise with the growth of population. The poverty rates fluctuated during the period 1951-55 and 1970-74. Then from 1973-74 to the mid-1980s, poverty incidence declined fairly from its earlier range 54% in 1973-74 to 38% in 1986-87, a decline of about 2% per annum (Ravallion and Datt 1996). In 2012, figures indicate that the rate of poverty is at 25 per cent. Poverty reduction slowed down in the late 1980s, probably due to poor weather conditions and the downturn in agricultural production. However, the public distribution system and antipoverty programmes kept poverty from rising and the incidence of poverty dropped sharply in 1990s, for reasons that are not altogether clear. As the prevailing macroeconomic situation was unfavourable in 1991-92, a transitory worsening of poverty incidence occurred with the balance of payment crisis, decline in growth and stabilization measures. The increased poverty incidence has also been related to other factors such as poor harvests, limited agricultural imports, and large agricultural procurement in the following year that kept food prices high. By 1993-94, the incidence of poverty had fallen to 35% and further to 28% by 2000. This is a remarkable achievement as it is well below the 53% level of the early 1970s (World Bank 2001). The intensity of poverty is reduced in India. In the process of decline in poverty, a greater percentage of the people who had previously were living below the poverty line have improved to move themselves above the poverty line. The process has also improved the consumption of those far below the poverty line. However, some comparator countries seem to have been more successful than India in reducing poverty. For example, Indonesia reduced poverty from the 70% range in the early 1970s to below 10% in the early 1990s. Even after the East Asian crisis, Indonesia s poverty was still less than 20% (World Bank 1999). Indian poverty is mostly visible in rural sector compared to urban areas. But changes in urban and rural poverty followed a similar trend during the last 40 years

FACTORS INFLUENCING POVERTY AND THE ROLE OF ECONOMIC REFORMS IN POVERTY REDUCTION 85 but rural poverty has come down slightly in recent years. This indicates growth of urban poverty can be construed to the migration of rural poor to the urban areas. In the early 1990s, poverty rose faster in the rural than the urban areas, and then did not decline as expected. FACTORS INFLUENCING POVERTY What is most important, based on the experience of countries, is the factors that reduce poverty. These are faster growth, especially agricultural growth that raises not only agricultural wages but also tends to reduce the price of food items, lower rate of inflation, development of infrastructure and human development. Most anti-poverty programmes seem to have had little sustained impact on poverty reduction, though they certainly eased the impact of the 1987 drought. Rural to urban migration also seems to have played only a small role (Ravallion and Datt 1996; World Bank 1997 and 1998). Regarding the role of economic growth, India s sustained decline in poverty began as GDP growth picked up from the 3.5 per cent that characterized the country in the early years. A decomposion of the changes in poverty into a growth component and a distribution component shows that the rise in growth in mean consumption accounts for about 87% of the cumulative decline in poverty and changes in distribution account only 13% (Datt 1997). The new experiments in agriculture such as green revolution technology, development of irrigation facilities and infrastructure together with rising rural wages have enhanced employment opportunities in rural non-farm sector in states such as Punjab and Haryana,. These states maintained highest GDP per capita up. This growth of GDP per capita is implied in the India s industrial development as there has been increased employment of skilled rather than unskilled labour.. This situation hasimpacted n labour demand in urban sector. The approach to poverty reduction by developing human resources, across Indian states, is noticed in Kerala state. This state has been exporting skilled manpower to other countries mostly to the gulf and deriving benefit from remittances, even though its GDP growth was not particularly rapid. This evidence supports the contribution of human development to poverty reduction (World Bank, 2011). Inflation had a negative effect on poverty. Higher inflation in India is often associated with poor harvests and a relative rise in the price of food. The poor people are doubly hit, as their consumption is largely food, and their wages rise less than prices in years of poor harvest. In addition, there is traditional macroeconomic argument that the inflation hits the poor hardest because relatively more of their assets are held in the form of currency. International evidence supports the importance of a stable macroeconomic environment for growth and poverty reduction, for example in East Asia (World Bank 2012). DIVERGENCE IN POVERTY REDUCTION BETWEEN STATES Poverty reduction in India is uneven as prosperousstates managed to reduce poverty, while poorer states made less progress in poverty reduction. However, some poorer

86 N. NARAYANA states like Kerala made major progress in poverty reduction and growth.. Other states where poverty incidence fell substantially include West Bengal, Andhra Pradesh, Orissa, and to a lesser extent, Gujarat and Tamilnadu. Notably poor performers include Bihar and Uttar Pradesh. The stronger performing states typically managed to reduce poverty at a rate of 1.5% to 2.0% per annum. Poor performers rarely averaged above 0.5% per annum. The states poverty rankings vary with alternative indicators. However, Bihar, Madhya Pradesh, and Uttar Pradesh generally have among the highest rates of poverty, whichever index is used, and Kerala, Haryana and Punjab have the least (UNDP, 2001; World Bank 2001). The differential performance among states appears to have increased in the 90s. The rates of rural poverty reduction began to diverge in the late 1970s. The rate of progress in the five northern and eastern states were somewhat slower in the late 1970s.The divergence increased in the 90s as poverty started falling slowly in the low income states. By 1997 the gap in poverty incidence between the two groups of states had reached nearly 18% points and poverty incidents in the low income states was over 50% higher than poverty in other large states. By way of comparison, in the1980s, the gap was 7-8% points. This large cross state differential in poverty reduction reflects partly due to lower growth in the poor states. Most of the states that began the 1970s with relatively low per capita GDP had slower growth in GDP and its three main components agriculture, industry and services- than the middle and higher income states. The poor states also generally have the worst human resource indicators. Infrastructure is recognized as a particular problem in the poor states. The differentials in private GDP growth and public investment in infrastructure and human capital partly reflect weak legal and regulatory frame works for business; and problems of governance, law and order, and weak institutional capacity more generally. Finally, the lagging states, despite allocations of central funds that favoured them in per capita terms because of their low per capita incomes, suffered from fiscal problems (Dreze, J. P. and P. V. Srinivasan). This was particularly the case in 1990s, because of lack of fiscal adjustments and increased debt service payments coincided with a decline in overall central grants and loans to the states and rise in interest costs. These fiscal problems led the states to reduce their capital and human resource spending as a percentage of GDP. THE ROLE OF STATES IN REDUCING POVERTY States in India play a key role in devising and implementing policies to reduce poverty, to promote human development and stimulate growth. In addition, under the Indian Constitution, they are assigned significant responsibilities in major sectors such as agriculture, industry, infrastructure, education, health, social welfare and tax and expenditure policy at the state level. Finally, the states increasingly large fiscal deficits mean their fiscal policy is an important factor not only in their own performance but also in maintaining India s overall fiscal sustainability. Improvement in the states economic and fiscal management is therefore essential for rapid poverty reduction, faster growth and sustainable development. Development in the states has influenced the efforts and the contribution of the states to reduce poverty. On an average, the higher income states grew faster than

FACTORS INFLUENCING POVERTY AND THE ROLE OF ECONOMIC REFORMS IN POVERTY REDUCTION 87 other states from 1980-81 to 2000, with the exception of Tamil Nadu and Rajasthan. This divergent growth pattern widened the gaps in per capita income among the states, despite the Government s efforts to achieve balanced development across states. Since 1990, Maharashtra, Gujarat and West Bengal in the category of high-income states, and all middle-income states have accelerated their growth because of their initial leads in economic reforms, good governance, infrastructure and human resources. As a result, the gap in per capita income has widened since 1991. However, growth slowed down in the poorer states after 1991. Bihar, the poorest state, actually experienced a decline in per capita income. Growth also slowed down in the richest states like Punjab and Haryana in 1991.These states were probably less able to take advantage of the new opportunities created by the central government reforms, weak governance, inadequate infrastructure and human resources. In the case of Punjab and Haryana, growth was restricted by the limited reforms in agriculture and issues of sustainability. The slow-growing, poor states (Bihar, Orissa, UP, and Madhya Pradesh in the 1980s) constitute about 40% of India s population. Unless these states improve their performance, it will become increasingly difficult to accelerate poverty reduction and development in India. The states improvement will have to come primarily through their own efforts, given their major roles in human development, infrastructure, and governance. The poor states have already received favorable treatment in central government s transfers and loans. Further redistribution from the Centre is unlikely, given their lack of adequate performance and the Centre s desire to reduce its large fiscal deficit. However, the Central government could support state reforms through its own reforms to improve governance, the civil service and the compensation system, to improve further inter-governmental fiscal relations, and to modernize the tax and industrial incentive system. The states will need considerable improvements in governance, institutions, and the regulatory environment, and in their physical and social infrastructure. In turn, this will entail cuts in state public sector deficits through cuts in inefficient undertakings and, in many cases, inequitable subsidies to power, irrigation and secondary and tertiary education; increases in public infrastructure and human development spending; and supporting reforms in power, irrigation, and the regulatory framework in general, in order to encourage private investment. Andhra Pradesh has emerged as a leading reforming state. It has demonstrated that, with sustained political commitment, states can improve their policy environment, put their economies on a higher growth plan, and narrow the disparities with the higher income states regardless of their initial conditions. Some of the lower income states (UP, Rajasthan and Madhya Pradesh) are showing increasing commitment to reforms. Successful implementation of these reforms could substantially decrease overall poverty in India. Balanced regional growth has always been an objective of successive Indian Government and is supported by redistributive transfers to the states. Nonetheless, on average, the middle and high income states grew faster than the low income states

88 N. NARAYANA from 1980-81 to 1996-97 (Table 1).The high income states average growth rate per capita (3.9% per annum) was almost twice the low-income states (2.1%); the middle income states average growth rate per capita (3.2%) was nearly 50% higher. Consequently, ranking of the states by per capita income has changed only marginally since 1980-81 as shown in the Table 1.The significant changes took place between 1980-81 and 1990-91. From 1980-81 to 1990-91, Rajasthan and Tamil Nadu realized the highest growth rates of 4.7% and 4.1% per annum respectively. Rajasthan invested heavily in public infrastructure. Tamil Nadu had excellent initial conditions in terms of human resources and the irrigation sector where most of the potential investment was completed. Their rapid growth rates moved Rajasthan up from the low to the middle-income group (from thirteenth to ninth in ranking), and Tamil Nadu from the middle to the high-income group (from eighth to fifth). Table 1 Indian States (14 Largest) Real Per Capita Income Growth Rates Growth Rate (%) States Rank 1981 1991 2001 1991 2000 2011 High Income States 3.2 6.1 3.9 Punjab 2 3.3 2.8 3.1 Maharashtra 1 3.7 7.4 4.4 Haryana 3 3.9 2.6 3.2 Gujarat 4 3.3 8.6 4.2 West Bengal 6 2.1 4.9 3.2 Middle Income States 3 4.2 3.2 Karnataka 7 3.1 3.4 3.6 Kerala 8 2.2 4.9 3.0 Tamil Nadu 5 4.1 5.2 4.3 Andhra Pradesh 10 2.6 3.8 2.9 Madhya Pradesh 11 2.6 4.1 2.4 Low Income States 2.8 1.8 2.1 Uttar Pradesh 12 2.6 1.8 2.2 Orissa 13 0.9 1.5 1.6 Rajasthan 9 4.7 3.9 4.3 Bihar 14 2.6-0.7 1.0 Average of 14 States 3 4.4 3.2 Note: Using the 2012 based GDP series Source: CSO; World Bank 2012 After 1991, growth differentials accentuated, with growth increasing in the highincome states of Gujarat, Maharashtra and West Bengal, and in the middle-income states, except Rajasthan. At the same time, growth slowed down in most of the lowincome states, as well as in the two highest income states in 1990-91, Punjab and Haryana. The policy environment changed significantly after 1991 with the central government s liberalization of the trade and investment regime. These reforms and other policy changes allowed the states of larger role in determining their

FACTORS INFLUENCING POVERTY AND THE ROLE OF ECONOMIC REFORMS IN POVERTY REDUCTION 89 development paths and attracting investment. Gujarat, Maharashtra and most of the middle-income states were able to take greater advantage of the new conditions of the better initial conditions, governance, infrastructure and human resources, than the low-income states. Moreover, the poorest states, with the exception of Orissa, failed to improve their state-level policies to offset their initial disadvantage in attracting new investment.as a result, their growth has slowed down and in Bihar, the poorest state, GDP per capita actually declined. Punjab and Haryana, with their dependence on agriculture where limited reforms occurred, also experienced slower growth. The widening growth differential naturally translates into a widening dispersion of states per capita incomes, an unusual result compared to other countries. As Table 2 shows, dispersion of average per capita income among the 14 major states, measured by standard deviation, has increased from 0.29 in 1980-81 to 0.40 in 2010-11. In 1980-81, the highest state per capita income (Punjab) was 2.8 times the lowest (Bihar). This ratio increased to 4.3 in 2010-11. If the trend continues, the ratio would reach 7.5 in the next 15 years. Table 2 also shows that dispersion has increased in all three major sectors (agriculture, industry, and services), and accelerated after 1991. Table 2 Standard Deviation of States Per capita Output Year States GDP Agriculture Industry Services 1980-81 0.29 0.33 0.37 0.33 1981-96 0.29 0.34 0.37 0.34 1996-97 0.30 0.38 0.36 0.34 1997-98 0.29 0.34 0.36 0.34 1998-99 0.30 0.33 0.36 0.34 1999-00 0.31 0.36 0.39 0.35 2000-01 0.31 0.36 0.39 0.33 2001-02 0.31 0.39 0.37 0.34 2002-03 0.31 0.37 0.37 0.33 2003-04 0.33 0.37 0.37 0.34 2004-05 0.33 0.37 0.37 0.34 2005-06 0.33 0.39 0.35 0.36 2006-07 0.36 0.40 0.39 0.37 2007-08 0.36 0.39 0.40 0.40 2008-09 0.38 0.39 0.44 0.40 2009-10 0.39 0.40 0.45 0.42 2010-11 0.40 0.44 0.45 0.42 Source: CSO, Annual National Income Accounts What is needed to reduce poverty in states is the accelerated labor-intensive development, particularly in the four poorest states (Bihar, UP, Orissa, and Madhya Pradesh). These states constitute almost 40% of the population and they have been a heavy drag on the efforts to reduce poverty and on national economic and social development. Speeding up India s development will depend heavily on better performance in these states. The states improved performance will depend largely on their own efforts, given their major roles in human development, intra-state infrastructure, and the intra-

90 N. NARAYANA state regulatory framework. For example, the states like Bihar and Uttar Pradesh that receive large loans and transfers from centre, fund only about 35% of their revenue expenditures, with 65% coming from the centre. It is unlikely that large increases in support will be forthcoming given the need for overall fiscal prudence and the problems with many states previous use of transfers. However, the central government can provide a supportive overall framework that contributes to sustainable rapid growth in output and labour demand, including improved governance, reduced international trade restrictions, internal deregulation, improved infrastructure, a sound financial system, and fiscal and monetary prudence. Accelerated development in the states will depend on more public and private investment to speed up growth, greater efficiency in the use of investment, and improved human development. In general, efforts are needed to improve governance and institutions, for example, strengthening transparency, increasing accountability in service delivery, reducing opportunities for discretion, and improving expenditure management and tax administration. Physical and social infrastructure needs improvements, which will entail supporting reforms in state finances, power and irrigation, and the regulatory framework in general. Such reforms and development spending will create an investment friendly environment to attract private capital needed for growth (Govinda Rao et al., 1999). Fiscal decentralization needs to match the ongoing devolution of powers with fiscal resources to enable local governments to spend on public goods and services for which they are responsible. The central government intends to increase its dialogue with the states on fiscal reform and plan implementation and devout more attention to periodic fiscal surveillance and implementation of agreed commitments by the states. It is felt that a more intense dialogue within the spirit of cooperative federalism will encourage better accountability and commitment of state governments to their constituents. This new initiative, which involves policy conditionality by the central government for their resource transfers to the state, is a welcome development and a good initial step towards rationalizing and modernizing the system of intergovernmental transfers. CONCLUSION India reduced poverty substantially since the mid-1970s, as growth rose and human development indicators improved. However, poverty rates in the rural areas declined marginally and in urban areas, the decline is slowed down. This may be the result of the higher average food inflation rate in the 1990s and later.. There are also concerns as the changing pattern of agricultural is reducing the demand for labour in agriculture and thereby contributing less for poverty reduction than in the past. Some states have benefited from economic reforms to increaseeconomic growth and reduction of poverty, when other stateds are lagging behind due to poor implementation of programmes and lack of proper use of fiscal resources with a comprehensive approach to reduce poverty. The higher growth has brought down poverty reduction in some states but the poorer states in particular need to undertake fiscal reforms that would lead to faster growth and poverty reduction.

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