Tag Archives | poverty reduction

Infographic – Growth and Poverty in India

A lot of heat was generated in the Sen vs. Bhagwati debate that took place a few months ago, along with some rays of light. The same followed after the release of the latest poverty numbers. Here’s a look at how Indian states have fared in both economic growth and poverty reduction between 2004-05 and 2011-12.

Poverty and Growth in India - A Story in Five Charts

Gross Domestic Products are the most common estimates of economic growth. GDPs of Indian states (called “GSDP”) matter, but bigger states obviously have larger GDPs. To compare states, one needs to look at GDP per person (“per capita” for those who like to use Latin). It should be noted that GDP per person is different from the average or median income.

In the 2000s, states raced against each other on per capita GDP. While almost all states grew well, not all of them could keep pace with others close to them. The chart below shows you how state rankings have changed between 2004-05 and 2011-12.

GSDP Slopes

Between 2004-05 and 2009-10, the biggest relative gains were made by Sikkim and Uttarakhand, with Punjab, Arunachal Pradesh, Jammu & Kashmir and Karnataka losing significant ground.

If the same chart is made for how states have fared on poverty reduction, a different picture emerges. States have been ordered below based on the percentage of population in the state that lives below the poverty line.

Poverty ratio Slopes

There appears to be a lot more dynamism in poverty reduction, perhaps because there are several states that are much closer to each other. Between 2004-05 and 2009-10, the biggest relative gains in poverty reduction relative to each other were made by the states of Andhra Pradesh, Rajasthan, Maharashtra, Himachal Pradesh and Orissa. While no state’s poverty headcount increased in this time period, the relative underperformers were Assam, Delhi, Jammu & Kashmir, Jharkhand and Karnataka.

Note that the states of Arunachal Pradesh, Goa, Manipur, Mizoram, Nagaland, Sikkim, Puducherry and Tripura were removed from this list as their 2004-05 poverty numbers were based on poverty lines of other states (like Assam and Maharashtra) and hence the numbers are not comparable to the 2011-12 numbers. Some news stories and opinion pieces had erroneously talked about how several northeastern states had worsened in poverty. Such observations are sadly mistaken.

The two charts from earlier tell us only about relative performance of states – using their closest competitors as benchmarks. However, absolute performance on growth and poverty reduction matter just as much, if not more. The next few graphs examine just that: examining the growth in GSDP per person, and reduction on poverty in percentage points between the years 2004-05 and 2011-12.

Poverty and Growth - States

The above graph shows a clear correlation between economic growth and poverty reduction.Higher the growth, higher is the poverty reduction observed. The only major outlier to this is the National Capital Territory of Delhi – which is so because Delhi started with a low poverty rate of 13.1 percent in 2004-05. The graph also clearly shows that the high poverty reduction, high growth state of Uttarakhand is far removed from all the other states.

On Uttarakhand, many are quick to jump to the conclusion that this high “reckless” growth caused the disaster earlier this year. What we can conclude from data is that Uttarakhand grew exceptionally well in the past decade and reduced poverty equally rapidly, but failed to reduce any vulnerability it had to natural disasters. Had an event like the Kedarnath disaster happened a decade ago, there would be a lot fewer residents, tourists and property to be affected as greatly.

The next two graphs look at comparable groups of states: large, higher income states and lower income states of India.

Poverty and Growth - Higher Income States

When both growth and poverty reduction are looked at in concert, Maharashtra and Andhra Pradesh come off as the best perfomers, well above the national average on both parameters. It is also noteworthy that while Gujarat grew faster than Maharashtra in terms of its GSDP during the 7 year period under consideration, Maharashtra did slightly better on a per person basis.

Following on the previous charts, Punjab and Karnataka’s poor performance comes as no surprise. Karnataka grew quickly in the early 2000s with the IT boom, and hasn’t quite been the same since. Punjab’s agrarian prosperity also seems to have peaked, with insufficient dynamism in services or manufacturing sectors to sustain high growth.

Poverty and Growth in India - Lower Income States

Odisha had the highest rate of poverty reduction in India of all states, and is among the top performers alongside Bihar, Rajasthan and MP among the lower income states. Chattisgarh grew well, but failed to reduce poverty as much as the other lower income states, and Jharkhand did poorly on both fronts.

Economic growth is clearly necessary but not sufficient for poverty reduction. Our conversations on economic growth have to evolve from “Growth or Something else” to “Growth AND Something More“. What can be observed over each of the last three charts is the absence of states on the “Low Growth, High Poverty Reduction” quadrant. Evidently, there are many states who grew well, but failed to provide sufficient public goods for significant poverty reduction. However there are no states that managed to reduce poverty to a great extent without strong economic growth during the mid 2000s. What has been well known in economist circles is confirmed again for Indian states.

Between 2004-05 and 2011-12, the Indian economy grew at an average rate of about 8.5 percent (CAGR, Compound Annual Growth Rate), and thus at 6.7 percent per person. Indian states were spread around this number. In 2013 the growth rates have fallen to about 5 percent nationally – and there are no signs of going back to an 8 percent growth rate in the near future. It is not difficult to imagine how abysmal poverty reduction will be over the next few years. We may end up failing another generation of India’s poor.

Postscript. There are some caveats to keep in mind, while interpreting the performance of individual states. First, while poverty reduction and growth are compared across the same time period, there can be a lag between the two. New wealth generated can take time to percolate through the economy. Second, GSDP numbers are generated by state economics and statistics departments based on central guidelines. The competence and independence of different states’ economics departments can vary a lot, and it is possible that GSDP numbers from some states could be overestimated.

Third, there are many discrepancies between poverty ratio numbers calculated from NSS surveys from  2009-10 and 2011-12. States such as Bihar show little poverty reduction between 2004-05 and 2009-10, but phenomenal decrease in the next two years. While 2009-10 was a drought year and might have underestimated the overall reduction in poverty, the planning commission needs analyse and provide clarifications on the latest state-level poverty numbers presented. However, these caveats do not affect the overall observation that there are no Indian states that grew poorly but reduced poverty greatly.

Many thanks to Dr. Mukul Asher for discussions that helped shape this piece.

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Lines in the sand

The latest poverty figures for India show that it has declined to just 22 percent as of 2011-12, based on data from the National Sample Survey. At a time when information such as this is coming out, many including my colleagues have asked why heavily subsidised food grains are aimed at some 67% of the population, when only 22 percent are poor. This is a question that cannot be asked often enough, but it is important not to make the mistake of linking any government schemes to the poverty line.

The ‘poverty line’ is a line in the sand. There is always a certain amount of arbitrariness to it. However, its primary (and perhaps only) purpose is to see how many people cross it over time. There are two main reasons why this line is tricky to draw: first, we are not a country where all citizens and residents pay income tax. So there are no direct ways to measure income. We measure incomes indirectly, based on surveys of what people consume – through national sample surveys. Warts and all, these surveys still provide the best information we can get on people and their habits. It was this data on consumption that was used by the economist Suresh Tendulkar to revise the ‘poverty line’ based on expenditure on food, education, health and a few other things.

The second reason why the line is tricky to draw is because the cost of these items of expenditure changes. Not only that, but people’s preferences (especially for food) are also changing with time. It helps to look at the poverty line as a rubber band that’s stretched and held taut, while people move across it. Over time, the rubber gets fatigued and droops a little, and needs to be made taut again, to accurately make a line that is comparable to the older one. To look at this as numerical jugglery or falsehood is just plain wrong.

This objective drawing of the line has shown that since the 90s, millions upon millions of Indians have crossed above the poverty line from below. The same was shown to be true for the most recent period of 2004-05 to 2011-12 as well, with the latest numbers.

Linking schemes with entitlements and benefits to this poverty line is an exercise that will ruin the objectivity of the line, and subject it to more political pressures than what it already subject to. The ideal situation is one where using NSS data, economists can come up with robust inclusion and exclusion criteria (like owning a refridgerator, for example) that is capable of doing two things with reasonable accuracy: select ~22 percent of the  population, and have the highest achievable overlap with those considered below the poverty line. This is notionally done even today for most schemes targeted at the poor, but the criteria are updated very slowly and the extent of mis-targeting is immense.

Just today, an argument is made in the Hindu that the government of India is slowly rejecting the legitimacy of the Tendulkar line and various departments are de facto drawing a much higher poverty line, one which includes about 65% of the Indian population below it.

We can argue endlessly about what “true” poverty is, whether the Tendulkar line only represents “kutta-billi” poverty, to use NC Saxena’s colourful phrase, and whether the de facto attempt at redrawing this is more “humane”. What matters is this: even and especially if the criteria for the Tendulkar poverty line is low, 22 percent of India lives below it. And they do so whether we lump them with 45 to 50 percent of the population above them or not. Economic growth, education and better provision of public goods are steadily increasing incomes and prosperity across India.

The simple question is: while people are pulling themselves out of poverty, do we support 1 in 5 people with some form of welfare with the limited resources at the state’s disposal, or do we use those same resources to support 3 out of 5 people? Which is more humane? And let us not forget, it is those same resources that are also used to provide better public goods and services.

We need an objective, consistent poverty line to reliably measure the outcome of poverty reduction. And we need to target welfare schemes only to those who need it the most.

Addendum. My colleague Nitin Pai also writes in The Acorn on the use and misuse of poverty lines.

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