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Poverty Reduction, Issues, Modalities and Strategies in India

Dr. Tarun Das1

Economic Adviser, Ministry of Finance
Government of India
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(a) Current Poverty Level and Situation

Poverty ratios are estimated by the Planning Commission on the basis of the consumer
expenditure surveys conducted by the National Sample Survey Organisation (NSSO).
The latest survey data are available for the 55th round covering the period July 1999 to
June 2000. Despite high population growth, the headcount ratio declined from 55 percent
in 1973 to 26 percent in 1999 for all India i.e. at a rate of 1.1 percentage point per annum.
The decline was fairly uniform across rural and urban areas. Rural poverty, which
accounts for 75 percent of the overall poor, declined from 56 to 27 percent in 1973-1999,
while urban poverty dropped from 49 to 24 percent during the same period. Interstate
differentials of poverty also narrowed, although these still remain high. While only 6
percent of population in Punjab lives below the poverty line, the incidence of poverty is
as high as 43 percent in Bihar.

The absolute number of the poor declined by only 61 million from 321 million in 1973
to 260 million in 1999 due to population growth from 600 million in the early 1970s to
991 million in 1999. In fact, the number of poor remained stable around 320 million in
1973-1994 and declined to 260 million in 1999 due to reduction of poverty ratio by 10
percent in 1993-1999. This shows favourable impact of economic reforms and high
economic growth on the incidence of poverty and employment in 1990s.

Table-B.1 Estimates of Incidence of Poverty in India 1973-1999

Year Poverty Ratios (%) Number of Poor (Million)
______________________ _________________________
Rural Urban Combined Rural Urban Combined
1973-74 56.4 49.0 54.9 261 60 321
1977-78 53.1 45.2 51.3 264 65 329
1983-84 45.7 40.8 44.5 252 71 323
1987-88 39.1 38.2 38.9 232 75 307
1993-94 37.3 32.4 36.0 244 76 320
1999 27.1 23.6 26.1 193 67 260

Prepared for the United Nations Economic and Social Commission For Asia and Pacifica (UN-ECAP),
Bangkok, Thailand as inputs for the ESCAP Economic and Social Survey for 2004.

It may be noted that the official poverty ratios are basically “deprivation indices” as the
poverty line takes into account mainly “bare biological needs” (calorie intake of 2400 per
capita per day for rural areas and 2100 per capita per day for urban areas). It does not
consider adequately needs on health, education, housing, transport, water, power,
sanitation etc. not to talk of minimum entertainment and social, cultural and religious
needs. Poverty line assumes fixed consumption basket over time and regions, although it
takes into account price differentials among the states.

The determination of poverty line also assumes continuous relationship between calorie
intake and money income levels, which is not supported by facts. Since there are
differences in consumption habits among the states and there does not exist an optimal
consumption basket, neither the uniform calorie norm nor the substitution of calorie
norms by monetary norms is justified.

Table-B.2: Poverty incidence and growth rates in India

and selected Asian countries (in percent)
Country Poverty Poverty Annual Average Average
ratios Ratios Reduction GDP growth GDP growth
1975 1995 In 1975-95 1970-1980 1980-1995
% Point

India 54.9 26.1 1.1 3.2 5.6

China 59.5 22.2 1.9 5.0 11.1
Indonesia 64.3 11.4 2.6 7.8 6.6
Korea 23.0 5.0 0.9 9.0 8.7
Malaysia 17.4 4.3 0.7 7.8 6.4
Philippines 35.7 25.5 0.5 6.2 1.4
Thailand 8.1 0.9 0.4 7.2 7.9
Source of data: For India, Planning Commission; for others World Bank Report on
Social Consequences of the East Asian Financial Crisis, September 1998.
Note: For India, poverty ratios refer to the years 1973 and 1999 respectively.

India’s progress in fighting poverty is modest when compared with some of Asian
countries (like China and Indonesia), which experienced faster economic growth (Table-
B.2). It is, therefore, often argued that a sustained and long lasting solution to the
problem of poverty depends on creation of opportunities for broad based economic

More than three-fourths of the poor live in rural areas. Economic groups most prone to
poverty are rural households (mainly landless agriculture labour and marginal farmers),
urban casual labour and the self-employed engaged in petty services.

Poverty is generated by many factors such as unemployment, ill health, and lack of
access to productive assets. Demographic factors also interact with socio-economic and

environmental factors. Gender, literacy, land-ownership, employment status, religion and
caste are closely related to poverty. Some social and religious groups do not believe in
family planning and have large family size.

The spatial distribution of poverty in India is highly uneven; linkages between

urbanisation, state domestic product and poverty ratios are weak testifying the complexity
of the phenomenon of poverty; and urban poverty is both an outflow of poverty from the
rural areas as also an autonomous phenomenon.

The poor are caught by unfavourable forces at the local, national, and global levels that
combine to form a three-tiered poverty trap. At the local level, factors include skewed
distribution of land and other assets, physical weakness, higher fertility rate, and
relatively lower power to fight against corrupt institutions. These are reinforced at the
national level by various policies ranging from tax laws to interest policies that are
generally pro-rich. At the global level, the poor are held down by a mix of oppressive
factors such as tied grants, falling export prices and rising capital flight.

The culture of poverty theorists argue that poverty breeds poverty and a poor family has a
high probability of staying poor as these families are associated with high risks of ill
health, high fertility rates, inadequate education, low skill, irregular sources of livelihood,
low productive jobs, insecure shelter, limited accessibility to basic services and lack of
dynamism. With the progress of urbanisation, traditional joint families progressively
broke down into micro families, which are economically less viable. A general
improvement in health services led to an increase in the expectation of life and a larger
proportion of aged persons. A decline in the infant mortality and maternal mortality rates
increased the proportion of labour force in total population and that of females in the
reproductive age group. But the growth of employment generally lagged behind the
growth of labour force.

Various studies by the World Bank (1997, 2000, 2003) made the following observations:

(a) There are sharp disparities in poverty ratios between states, between men and
women, and between city and countryside.
(b) Although the Central government adopted a policy of growth with social justice,
no state government effectively combined both policies to encourage growth and
develop human resources and physical infrastructure.
(c) Agricultural investment, not agricultural subsidy, reduces poverty. Differentials
in agricultural growth and rural wages were major factors, which led to different
levels of poverty across Indian states (Ravallion and Dutt). Green revolution,
better irrigation and infrastructure were associated with rising rural wages and
increased rural non-farm employment, such as in Punjab and Haryana, which had
the highest per capita GDP and lower poverty.
(d) Investment on human capital reduces the extent of poverty. The human resource
approach to poverty reduction across Indian states is exemplified by Kerala,
which exported relatively skilled labour internationally and benefited from
remittances, even though its GDP growth was not rapid.

(e) Degree of urbanisation was found to be less significant to affect poverty across
states, reflecting the capital-intensive, import-substituting nature of India's
industrial development, its requirements for skilled rather than unskilled labour,
and labour market regulations that limited the growth of organised employment.
(f) Inflation is a "harsh tax" on the poor because their incomes are not generally
indexed to prices.

(b) Improvement in human development indicators

Increased availability of health care services resulted in continuous reduction of

death rate, birth rate and infant mortality rate over the years (Table-B.3). The trends
are consistent with the view that rapid economic growth brought about an
improvement in living standards of people in general. Despite significant progress,
indicators of human development such as life expectancy, literacy and medical care in
India lag far behind those in East Asian countries.

There are wide inter-State variations in indicators of human development. For

instance, in Kerala the life expectancy at birth at 72 years and overall literacy at 90
are significantly higher than those in the States like Bihar, Madhya Pradesh, Orissa,
Rajasthan and Uttar Pradesh (Table-B.4), but comparable with those in China,
Malaysia, Indonesia, Thailand and Sri Lanka which made significant progress in
human development (Table-B.5).
Table-B.3: Basic Indicators of Human Development

Year Life expectancy Literacy rate Birth rate Death rate Infant mortality rate
at birth (years) (Per cent) Per 1000 Per 1000 Per 1000

1951 32.1 18.3 39.9 27.4 146

1961 41.3 28.3 41.7 22.8 146
1971 45.6 34.5 41.2 19.0 129
1981 50.4 43.6 33.9 12.5 110
1991 59.4 52.2 29.5 9.8 80
2001 63.5 65.4 25.8 8.5 68
Source: Economic Survey 2002-03, Ministry of Finance.

Table-B.4: Selected Indicators of Human Development for Major States

State Life expectancy at birth Literacy rate Infant mortality rate per
(years) (Percent) 1000

Andhra Pradesh 60.6 44.1 66

Assam 54.9 52.9 75
Bihar 58.5 38.5 72
Gujarat 60.1 61.3 62
Haryana 62.9 55.9 68
Karnataka 61.9 56.0 53
Kerala 72.0 89.8 13
Madhya Pradesh 54.0 44.2 97
Maharashtra 64.2 64.9 48
Orissa 55.5 49.1 95
Punjab 66.4 58.5 52
Rajasthan 58.0 38.5 86
Tamil Nadu 62.4 62.7 54
Uttar Pradesh 55.9 41.6 85
West Bengal 61.5 57.7 55
All India 59.4 52.2 72

Table-B.5: Indicators of Human Development in Selected Asian Countries

Country Life expectancy at birth Infant mortality rate per Adult literacy rate
(years) 1000 (Per cent)

China 69.2 38 82
Indonesia 64.0 47 84
India 61.6 73 52
Kerala state (India) 72.0 13 90
Malaysia 71.4 11 84
Philippines 67.4 32 95
Pakistan 62.8 95 38
Korea, Republic 71.7 6 98
Singapore 77.1 4 91
Sri Lanka 72.5 17 90
Thailand 69.5 31 94

(c) Gender related issues

Despite significant progress, indicators of human development, such as life expectancy,

literacy, school enrollment and medical care, in India lag far behind those of most East
Asian countries. Still more than 35 of the adult population are illiterate.

Wide gender disparities also exist in India with regard to economic, health and
educational attainment. More than 40 per cent of India’s illiterates are girls or women.
The incidence of infant mortality and child malnutrition is more pervasive for females;
however, female life expectancy at birth has improved during the last decade and now
exceeds male life expectancy. The generally poorer health of women is caused by dual
work burdens in production and reproduction tasks and skewed pattern of intra-household
food allocation in favour of male members. Regional variations are also observed in
gender disparities correlated to poverty incidence.

Female unemployment rates are generally higher than male unemployment rates
though differences narrowed down over time and were nearly eliminated in rural
areas in 1999-2000. Female unemployment rate in urban areas at 9.8 percent was
more than the male unemployment rate at 7.2 percent underlying the need to create
employment opportunities for females in urban areas.

(d) Increase in Real Wages for agricultural labour.

Average real wages for unskilled agricultural labour, which reflect economic conditions
of agricultural labourers, declined by 6.2 percent in the crisis year 1991-92, but increased
in subsequent years except in 1994-95 (Table-B.6). Increase in real wages along with
agricultural growth contributed to a reduction of poverty and income inequality.
However, there were no uniform trends across the States implying that local conditions
exert significant influence on agriculture wages.

Table-B.6 Change in real wages for unskilled agricultural labour

Year Percentage change

1991-92 -6.19
1992-93 +5.21
1993-94 +5.61
1994-95 -0.39
1995-96 +0.72
1996-97 +1.64
1997-98 +2.50
1998-99 +3.45
1999-2000 +3.50

(e) Inequality in India

In the absence of comprehensive income surveys in India, household expenditure surveys

conducted by the National Sample Survey Organisation since 1950 are used to have some
idea of income distribution depending on the assumptions regarding savings in different
expenditure brackets. There is some bias with regard to rich households, which are under
represented in both rural and urban areas. The concept of consumption expenditure used
in the surveys has undergone significant changes over time and there is substantial
discrepancy between total consumption expenditure estimated from the surveys and that
obtained from the national accounts of the Central Statistical Organisation.

There are various studies on the extent of income inequality in India, but these studies
vary widely regarding the concept of income receiving unit, time period, assumption
regarding savings profiles, and estimation procedures for various inequality measures. So
it is very difficult to draw any meaningful conclusion regarding the extent and trend of
income inequality over time in India. However, it can be observed that the degree of
inequality in India is almost the same as in the case of developed countries and there is
some evidence that the degree of income inequalities had a declining trend during 1977-
1989 followed by an increasing trend since then (Das 1997). It is observed that
distribution of consumption expenditure in the urban sector is more uneven than that in
the rural sector, and the Gini coefficient for all India lies in between the Gini coefficients
for the rural and urban sectors.

Inequalities of income and consumer expenditure are mainly due to the inequalities in
assets or wealth distribution among the individuals. There are very few studies on the
distribution of wealth and assets in different states of India, and the studies are outdated.
A study by Basu (1976) indicated that the degree of inequality in asset distribution
remained almost stable during the years 1961-1971 although there were variations in
different states. For the wealth distribution, a study by Jakhade and Shetty indicted a
decline in the Gini index from 0.72 in 1960-61 to 0.68 in 1966-67. Another study by
Bagchi and Das (1977) indicated a decline in wealth inequality from 0.73 in 1960-61 to
0.64 in 1972-73 in the rural sector, and from 0.59 to 0.58 in the urban sector.

The extent of business concentration (i.e. the concentration in the size distribution of
firms) is another source of inequalities in income and wealth. An extensive study on the
size and concentration of the factory sector in India done by Sandesara (1979) indicated
that the average size of the factory and concentration in all the industries declined in
1951-1970 and concentration in industry varied inversely with employment and directly
with the average size of the factory.

Although recent trends of wealth and asset inequalities and the degree of business
concentration are not available, the fiscal and development policies of the government
had always attempted to reduce such inequalities. The ongoing economic reforms and
structural changes in industry, trade, financial and public sectors must have also reduced
economic concentration through abolition of regulation, licensing and undue protection
and enhancing competition among firms.

As regards regional disparities, there is some evidence that rural incomes are generally
less unequal than the urban incomes and the disparities between rural and urban incomes
have widened over time. Although the rural sector has lower inequality, it has higher
poverty ratios in most of the states. Several studies on the inter-state inequalities indicate
that there has been a reduction of inter-state inequality during 1950-51 to 1960-61
followed by a gradual increase in inter-state disparities during 1960-61 to 1980-81.
However, since 1981 there had been some reduction of inter-state inequalities due to
larger central transfers of both plan and non-plan resources to the poorer states
recommended by the successive Finance Commissions due to their special weightage to
poverty reduction and backward states.

(f) Redistribution Policies

Removal of wealth and income inequalities, socio-economic injustices and assurance of

minimum levels of living have been among the most important Directive Principles laid
down in the Indian Constitution. Right from the inception of planning in 1951, Indian
planners had attached great importance to issues relating to equity and redistribution.

The income of a household is the sum of what it earns from the various income-earning
assets, which it commands, e.g., land, capital and labour. Therefore, the distribution of
income across households is the resultant of two factors: (i) the distribution of income-
earning assets across households; and (ii) the rate of return of these assets.

Government adopted progressive tax systems for redistribution of income, wealth and
property, and various employment generation and anti-poverty programs. Before reforms
in 1991, government introduced strict licensing, controls, regulations and anti-trust laws
restricting size and growth of firms to reduce business concentration. Wage-income
policies were formulated for the organised labour to ensure equity. However, government
had to operate under several social and political constraints.

All direct taxes are progressive, and the maximum tax rates have been reduced
significantly in 1990s. Indirect taxes like excise and customs duties are determined in
such a way that the mass consumption goods are generally exempted from the payment of
indirect taxes, and the luxury products are taxed at higher rates. Commercial banks are
directed to lend at least 40 percent of their lending to the priority sectors, which include
agriculture, small-scale industries, small transport operators. There is also a reservation
policy for the small-scale sector, although many items having export potentials had been
dereserved in post reforms period.

The agricultural development and policies led to some undesirable consequences. First, it
has created interregional disparities in agricultural production, especially food grains
production. Second, it has led to interregional disparities among different social groups
such as landowners, tenants and landless laborers. It is generally observed that some
states such as Punjab and Haryana, which enjoyed assured and better irrigation facilities,
recorded higher growth rates of food grains production, compared with other states.

In agricultural prices, government policy is to provide relatively high support prices for
food grains and to distribute the procured grains with large subsidy. Since the major part
of marketable surplus of grains is controlled by big farmers, the high support prices
mostly help them rather than small farmers. The statutory stipulation of minimum wages
in industry or agriculture is virtually inoperative in the vast unorganized nonunionized
sectors where the overwhelming majority of the poor work. Similarly inoperative is the
rent control legislation in protective tenancy reforms in agriculture.

As regards direct provision of basic services for the poor, there was some progress in the
last two decades, but facilities in proportion to minimum needs remain meager. Apart
from the problem of inadequate delivery system, finance was a major constraint.
Whenever financial situation got worse, social welfare programs were the first casualties
to be shelved. There is some evidence that the upper-income groups were able to
appropriate a disproportionate share in social services (particularly education, health,
transport, communication, and low-cost housing).

In sum, problems of poverty and inequality in India remain intractable, not because
redistributive policies were inadequately considered in the planning models. At the micro
level, specific programs were ill conceived and uncoordinated and there were
administrative inefficiencies. The major constraint was rooted in the socio-political
system dominated by a complex constellation of forces representing the rich farmers, big
business, elite, bureaucrats and unionized workers of the organized sector, who wanted to
protect their vested interests.

(g) Factors Affecting Poverty at the Macro Level

An econometric exercise is carried out at the macro level for India on the basis of time
series data on poverty ratios and related variables for the period from 1977-2000. While
data on all other variables were available for all the years, poverty ratios were available
only for the years 1977-78, 1983, 1987-88, 1993-94 and 1999-2000 during which NSSO
conducted large sample surveys on household consumption expenditure. For the purpose
of fitting multiple regression lines, poverty ratios for the intervening years, for which no
surveys were conducted, were estimated on the basis of linear interpolation.

The following potential variables were considered to influence the poverty ratio:
• Per capita income;
• Growth rates of overall GDP and its three main components viz. agriculture and allied
sectors, industry and services
• Shares of agriculture, industry and services in GDP
• Growth rates of private sector GDP and its three main components viz. agriculture,
industry and services GDP in the private sector
• Shares of private sector in agriculture, industry and services GDP
• Growth rates of overall GDI and its components in agriculture, industry and services
• Growth rates of private sector GDI in agriculture, industry and services
• Shares of private sector in agriculture, industry and services investment
• Human capital (life expectancy, literacy rate and population growth rate);
• Physical capital (private and public investment);
• Macroeconomic stability (WPI and CPI inflation rates and gross fiscal deficit);
• Government size (share of social sector in central government expenditure);
• Inequality (Gini coefficient of expenditure).

The best fitted linear and log-linear regression equations; given in Tables B.7-A, B.7-B,
B.8-A and B.8-B; indicate that poverty ratios are strongly influenced by the per capita
income and expenditure inequalities at the macro level. While the incidence of poverty
varies inversely with the per capita income, it is positively correlated with the degree of
inequality. The Per capita income and Gini ratios account for 97 per cent variations in
poverty ratios over time (Tables B.7-B and B.8-B).

When other socio-economic and demographic variables are included as additional

determinants of poverty, there is little improvement in the R-square of the regression
equations, and the coefficients of per capita income and Gini index continue to retain
their signs and their significance (Tables B.7-A and B.8-A).

The other variables that are significant in the multiple regression equations include the
growth rate of population, inflation rate, share of social sectors in government
expenditure, literacy rate, expectation of life, share of service sectors in GDP, and share
of private sector in gross domestic investment. However, agricultural growth, overall
GDP growth and share of private sector in GDP do not have significant influence on
poverty, as these variables had mixed trends in the period.

Poverty ratio is negatively correlated with the share of social sectors in central
government expenditure, share of service sectors in overall GDP, share of private sector
in gross domestic investment and human development indicators such as literacy rate and
expectation of life. On the other hand, poverty ratio varies directly with the population
growth rate, inflation rate and gross fiscal deficit. The results confirm the following
observations made in many studies by the World Bank:

(a) An increase in per capita income is essential for reduction of poverty, as it

generates extra income that can benefit the poor.
(b) Educational achievement facilitated by public investment in health allows the
poor to participate in the economic growth process through employment.
(c) Inflation had negative effect on poverty reduction. Higher inflation in India is
generally associated with monsoon failures and a relatively higher rise in
foodgrain prices. The poor are doubly hit, as their consumption basket is
predominantly food, and their wages rise less than prices in years of poor
(d) Services sectors are the fastest growing sectors in the Indian economy and
account for more than fifty per cent of GDP. These sectors have in general higher
employment elasticity. Their growth, therefore, helps in poverty reduction.

(e) An increasing share of private sector in total investment leads to poverty

reduction, as private investment is more productive in many sectors.
(f) A reduction of fiscal deficit also helps in poverty reduction, as it does not lead to
crowing out of private investment.

Table-B.7-A: Determinants of Poverty at the Macro Level:
Linear Multiple Regression Equations
Poverty ratio as the Dependent variable
(All India time series data for the period 1977-78 to 1999-2000)

Independent variables Equation-1 Equation-2

Coefficient t-statistic Coefficient t-statistic
Constant 425.9 456.1
Per capita national income -0.002 2.58 -0.002 5.11
Growth rate of real GDP at factor cost 0.027 0.84
Growth rate of population 2.740 4.49 3.049 5.38
Inflation rate based on WPI 0.008 0.38
Gross fiscal deficit as percentage of GDP 0.123 1.60 0.085 1.11
Share of social sectors in central govt. expend. -1.358 4.78 -1.39 5.11
Literacy rate -1.407 6.02 -1.26 7.38
Expectation of life -7.281 5.51 -7.68 5.86
Growth rate of agricultural GDP -0.018 1.28
Share of service sectors in overall GDP -0.466 2.34 -0.54 4.21
Share of private sector in overall GDP 0.217 1.25
Share of private sector in gross domestic invest. -0.067 3.42 -0.07 4.18
Gini ratio for consumer expenditure 43.801 4.16 44.06 4.11
Time (1977-78=1) -6.929 6.31 -6.96 6.34
R squared 0.999 0.999
No. of observations 23 23

Table-B.7-B: Determinants of Poverty at the Macro Level:

Linear Multiple Regression Equations
Poverty ratio as the Dependent variable
(All India time series data for the period 1977-78 to 1999-2000)

Independent variables Equation-3 Equation-4

Coefficient t-statistic Coefficient t-statistic
Constant 47.861 41.594
Per capita national income -0.002 3.25 -0.004 24.81
Gini ratio for consumer expenditure 29.813 1.96 82.290 3.27
Time (1977-78=1) -0.540 4.51
R squared 0.985 0.969
No. of observations 23 23

Table-B.8-A: Determinants of Poverty at the Macro Level:
Log-Linear/ Semi-log Multiple Regression Equations
(All India time series data for the period 1977-78 to 1999-2000)

Independent variables (Log of) Equation-1 Equation-2

Log-Linear Semi-log
Log of Poverty ratio Poverty ratio as the
as the Dependent Dependent variable
Coefficient t-statistic Coefficient t-statistic
Constant 41.43 1290
Per capita national income -0.651 5.59 -7.07 2.69
Growth rate of real GDP at factor cost 0.003 0.73
Growth rate of population 0.021 1.96 1.88 1.96
Inflation rate based on WPI 0.014 3.08
Gross fiscal deficit as percentage of GDP 0.025 1.87 1.09 0.44
Share of social sectors in central govt. expend. -0.043 1.98 -0.90 8.06
Literacy rate -3.979 9.00 -114 3.44
Expectation of life -3.622 3.17 -156 1.95
Growth rate of agricultural GDP -0.003 0.83
Share of service sectors in overall GDP -1.078 5.79 -31.6 5.77
Share of private sector in overall GDP 0.190 0.61
Share of private sector in gross domestic invest. -0.052 2.04 -3.56 3.23
Gini ratio for consumer expenditure 0.161 1.95 8.68 1.96
Time (1977-78=1) -0.139 6.50 4.32 4.92
R squared 0.999 0.999
No. of observations 23 23

Table-B.8-B: Determinants of Poverty at the Macro Level:

Semi-Log Multiple Regression Equations
Poverty ratio as the Dependent variable
(All India time series data for the period 1977-78 to 1999-2000)

Independent variables (Log of) Equation-3 Equation-4

Semi-log Semi-log
Coefficient t-statistic Coefficient t-statistic
Constant 144.99 317.96
Per capita national income -10.82 1.98 -29.79 24.41
Gini ratio for consumer expenditure 3.386 1.95 14.20 1.96
Time (1977-78=1) -0.592 3.53
R squared 0.980 0.968
No. of observations 23 23

(h) Factors Affecting Poverty Across States

A World Bank study (World Bank 2000) on India on the basis of inter-state and inter-
temporal data suggests that the major factors in reducing poverty are (a) faster growth,
particularly agricultural growth that raises agricultural wages and tends to depress the
(relative) price of food, (b) lower inflation, (c) infrastructure, and (d) human resource
development, notably female literacy.

In this paper an attempt is made to study the econometric relations between poverty and
other variables at the state level on the basis two sets of data:

(a) The first set of regressions uses panel data for 16 major States and All India for four
years 1983, 1987-88, 1993-94 and 1999-2000 (having 68 observations) for each of
Rural, Urban and Combined sectors.
(b) The second set of regressions uses pooled panel data for all the sectors and all the
years (having 204 observations).

Although such a cross-state and inter temporal regression analysis (TableB.9-A to B.11-
B) faces some daunting challenges such as state and time-specific effects, omission of
relevant variables, endogeneity of explanatory variables, and uncertainty about the
effectiveness of the underlying statistical model, the results need special attention.

(a) Per capita state domestic product and the Gini ratio for consumer expenditure have
significant correlations with the poverty ratio for different states. As in the case of
macro level relations, while poverty ratio varies inversely with per capita income, it
varies directly with the consumption inequality across the states.
(b) The other variables that have significant influence on the poverty ratio across the
states include rate of unemployment, degree of literacy, expectation of life, old-age
dependency ratio, and degree of urbanisation.
(c) As expected, poverty ratio varies directly with the rate of unemployment and old age
dependency ratio in all the sectors.
(d) Poverty ratio is inversely related to expectation of life in all sectors implying that an
improvement in health conditions and reduction of mortality rates have a positive
contribution to poverty reduction.
(e) However, certain results appear to be counter-intuitive. First, there is a positive
correlation between poverty and literacy in all the sectors. This relationship may
simply imply that an improvement in the degree of literacy is associated with greater
poverty after taking into account the improvement in per capita income or reduction
in the unemployment rate. In other words, literacy reduces poverty through
improvement in employment and income earnings, and its major impact is captured
by the income and unemployment variables. Second, rural poverty is inversely
related with the degree of urbanisation. This suggests that urbanisation leads to
growth of agro-based and food processing industries which provide more
employment opportunities for the rural unemployed.

Table-B.9-A: Determinants of Poverty across States
Log-Linear Multiple Regression Equations
Log of Poverty ratio as the Dependent variable
(Panel Data for 16 major States and All India
for four years 1983, 1987-88, 1992-93,and 1999-2000)

Independent variables (log of) Rural sector Urban sector Combined

Coeffici t- Coeffici t- Coeffici t-statistic
ent statistic ent statistic ent
Constant 30.454 15.164 19.34
Time (catch-all variable, 1983=1) 0.060 0.93 -0.007 0.16 -0.016 0.46
Per capita consumption expenditure -0.019 6.82 -0.023 9.50 -0.016 7.43
Rate of unemployment 0.247 2.57 0.004 1.97 0.212 2.80
Literacy rate 0.612 1.96 0.926 1.55 0.265 1.09
Expectation of life -6.453 3.93 -3.429 2.45 -3.037 2.74
Old-age dependency ratio 0.773 2.21 0.121 0.51 -0.837 2.60
Gini ratio for consumer expenditure 1.346 2.81 0.150 1.97 0.629 2.00
Degree of urbanisation -0.380 2.12 0.466 4.93 0.032 1.98
R squared 0.856 0.793 0.831
No. of observations 68 68 68

Table-B.9-B: Determinants of Poverty across States

Log-Linear Multiple Regression Equations
Log of Poverty ratio as the Dependent variable
(Panel Data for 16 major States and All India
for four years 1983, 1987-88, 1992-93,and 1999-2000)

Independent variables (log of) Rural sector Urban sector Combined

Coeffici t- Coeffici t- Coeffici t-statistic
ent statistic ent statistic ent
Constant 25.183 20.233 19.574
Time (catch-all variable, 1983=1) 0.027 0.49 -0.022 0.54 -0.016 0.45
Inequality adjusted pc consum. Exp -0.030 8.42 -0.029 9.51 -0.022 8.56
Rate of unemployment 0.242 2.62 0.046 1.53 0.211 2.77
Literacy rate 0.574 1.91 0.861 1.41 0.244 1.01
Expectation of life -5.674 3.59 -4.616 3.42 -3.334 3.06
Old-age dependency ratio 0.901 2.26 0.237 1.95 0.775 2.47
Degree of urbanization -0.272 2.01 0.311 3.65 0.043 2.17
R squared 0.864 0.780 0.820
No. of observations 68 68 68

Table-B.10-A: Determinants of Poverty across States
Log-Linear Multiple Regression Equations
Log of Poverty ratio as the Dependent variable
(Panel Data for 16 major States and All India
for four years 1983, 1987-88, 1992-93,and 1999-2000)

Independent variables (log of) Rural sector Urban sector Combined

Coeffici t- Coeffici t- Coeffici t-statistic
ent statistic ent statistic ent
Constant 42.610 34.831 33.397
Time (catch-all variable, 1983=1) 0.297 3.11 0.220 2.65 0.199 3.56
Per capita Net state domestic prod. -0.749 4.23 -0.684 4.26 -0.595 5.60
Rate of unemployment 0.125 2.28 0.006 2.00 0.138 2.12
Literacy rate 1.135 2.92 0.509 0.57 0.692 2.29
Expectation of life -9.623 5.42 -7.117 3.89 -6.217 5.83
Old-age dependency ratio 1.797 3.50 0.839 2.71 -0.182 0.53
Gini ratio for consumer expenditure 1.018 1.96 0.701 2.00 1.144 2.84
Degree of urbanisation -0.351 2.01 0.296 2.32 0.101 1.96
R squared 0.803 0.760 0.789
No. of observations 68 68 68

TableB.10-B: Determinants of Poverty across States

Log-Linear Multiple Regression Equations
Log of Poverty ratio as the Dependent variable
(Panel Data for 16 major States and All India
for four years 1983, 1987-88, 1992-93,and 1999-2000)

Independent variables (log of) Rural sector Urban sector Combined

Coeffici t- Coeffici t- Coeffici t-statistic
ent statistic ent statistic ent
Constant 36.207 32.590 29.750
Time (catch-all variable, 1983=1) 0.128 1.83 0.099 1.55 0.065 1.40
Inequality adjusted pc NSDP -0.0006 6.26 -0.0005 4.28 -0.0005 6.11
Rate of unemployment 0.161 1.96 0.145 2.07 0.195 2.16
Literacy rate 0.991 2.80 -0.285 0.34 0.481 1.65
Expectation of life -9.860 5.96 -7.371 4.07 -7.101 6.34
Old-age dependency ratio 2.035 5.08 0.891 2.83 0.472 2.01
Degree of urbanisation -0.226 1.96 0.341 2.89 0.072 2.00
R squared 0.820 0.680 0.754
No. of observations 68 68 68

Table-B.11-A: Determinants of Poverty across States
Log-Linear Multiple Regression Equations
Log of Poverty ratio as the Dependent variable
(Panel and Pooled Data for 16 major States and All India,
stratified by rural, urban and combined
for four years 1983, 1987-88, 1992-93,and 1999-2000)

Independent variables (log of) Equation-1 Equation-2

Coefficient t-statistic Coefficient t-statistic
Constant 26.290 24.833
Dummy (0 for Urban, 1 for National, 2 for Rural) -0.298 4.66 -0.271 5.42
Time (catch-all variable, 1983=1) 0.125 0.12 0.093 0.93
Per capita consumption expenditure -0.017 9.91
Inequality adjusted per capita consump. Exp. -0.025 12.19
Rate of unemployment 0.241 4.07 0.227 3.96
Literacy rate 0.295 1.40 0.328 1.61
Expectation of life -5.465 5.74 -5.280 5.94
Old-age dependency ratio 0.448 2.21 0.367 1.96
Gini ratio for consumer expenditure 0.649 2.50
Degree of urbanisation 0.119 2.12 0.108 1.98
R squared 0.710 0.727
No. of observations 204 204

Table-B.11-B: Determinants of Poverty across States

Log-Linear Multiple Regression Equations
Log of Poverty ratio as the Dependent variable
(Panel and Pooled Data for 16 major States and All India,
stratified by rural, urban and combined
for four years 1983, 1987-88, 1992-93,and 1999-2000)

Independent variables (log of) Equation-1 Equation-2

Coefficient t-statistic Coefficient t-statistic
Constant 38.18 33.307
Dummy (0 for Urban, 1 for National, 2 for Rural) -0.241 3.50 -0.337 6.06
Time (catch-all variable, 1983=1) 0.226 4.37 0.094 2.40
Per capita net state domestic product (NSDP) -0.658 7.18
Inequality adjusted per capita NSDP -0.0006 8.76
Rate of unemployment 0.117 2.09 0.160 2.46
Literacy rate 0.823 3.39 0.575 2.47
Expectation of life -8.161 8.51 -8.393 8.92
Old-age dependency ratio 1.019 4.76 .243 6.53
Gini ratio for consumer expenditure 0.861 3.07
Degree of urbanisation 0.005 2.00 0.076 2.01
R squared 0.685 0.690
No. of observations 204 204

(i) Protective safety nets

In India, positive discrimination in favour of the scheduled castes (SCs). Scheduled Tribes
(STs) and Other Backward Classes (OBCs), minority ethnic groups women etc. as an
instrument of social justice has been heritage of the liberation struggle and a constitutional
obligation endorsed by judicial sanctions. Social security has been listed in the Concurrent
List of the Constitution signifying the responsibility of both the Centre and the States in
this sphere. The task of providing meaningful social security continues to be challenging
in view of financial and operational constraints, high incidence of poverty, unemployment,
illiteracy and the large size of labour force in the unorganized and informal sectors.

The permanent social security benefits provided through legislative measures like
Minimum Wages Act, Industrial Disputes Act, Workmen’s Compensation Act, Employees
State Insurance Act, Employees Provident Fund & Miscellaneous Provisions Act,
Maternity Benefit Act, and Payment of Gratuity Act, etc. cater to mainly organised urban
labour comprising only 8 per cent of the total labour force. Most of the states have pension
schemes for the old and disabled, but due to eligibility criteria of income and age, only 9
percent of old-age population gets the benefit of pension. Most of the States implemented
the Minimum Wages Act, but the levels of minimum wages and coverage vary from state
to state. Some special employment Programmes are also being implemented by some state
governments like the Employment Guarantee Scheme in Maharashtra and the self-
employment Scheme for Registered Unemployed in West Bengal.

Immediately after the independence, the Government enacted the Industrial Dispute Act
(IDA), 1947 for protection of workers. IDA permits lay-off, retrenchment and closure in
all undertakings, which do not employ more than 100 workers. In the case of larger units,
as per the Act, no retrenchment, lay-off or closure is allowed without taking prior
permission from the government and the affected workers not being served at least three
months’ notice in writing indicating reasons for such actions.

In addition, in order to mitigate the possible adverse impact of economic reforms, a

National Renewal Fund (NRF) has been established to fund schemes for compensation,
retraining and redeployment of workers affected by restructuring. The NRF is being
financed partly by disinvestments of government equity in public enterprises and partly by
contributions made by the World Bank and individual country donors. Since its inception
in 1992 the Fund has financed the voluntary retirement of 100,000 workers who have
opted for voluntary retirement.

Some important initiatives taken over the years to improve the well-being of the
weaker sections like the scheduled castes, as well as Other Backward Classes include: (I)
Reservation of jobs to the extent of 22 per cent for SCs/STs in both public and private
sectors, (ii) Reservation of 27 per cent of jobs for Other Backward Classes (OBCs) in the
Central Government and Public Sector Undertakings, excluding the creamy layer. (iii)
Setting up a National Commission for Backward Classes, (iv) A scheme for education
complexes in low literacy pockets for improving literacy among tribal women, (v) setting
up of a National Backward Classes Finance and Development Corporation to promote

economic and other development activities of the backward classes. (vi) Raising of the
share capital of the National Scheduled Castes and Scheduled Tribes Finance
Development Corporation. (vii) Providing rice and wheat to the tribal dominated areas at
concessional prices even lower than the public distribution prices. (viii) Special
Component Plan for Scheduled Castes and Integrated Tribal Development Projects in
selected states, (ix) Establishment of the Tribal Cooperative Marketing Development
Federation, and (x) creation of new Ministry for tribal welfare in October 1999 by the
coalition government.

Commercial banks are required to lend at least 40 per cent of their credits towards the
priority sectors consisting of small-scale industries, agriculture, retail trade, small
transport operators etc. Banks also provide loans at concessional interest rates to the
weaker sections, minority communities and persons affected by natural calamities, riots,
disturbances etc.

All insurance companies, both life and general, are wholly nationalized, and play a major
role for providing social security in the form of various schemes such as insurance for life,
floods, fire, earthquakes, riots, war risks, accidents etc. In recent years, they have
introduced several special schemes such as Medi-claim Policy, Comprehensive Crop
Insurance Scheme (CCIS), Social Security Scheme for Poor Families in the age group of
18-60 (to provide personal accident insurance), Hut Insurance Scheme for Poor families in
rural areas (to provide fire insurance cover for huts and belongings of landless labourers),
Railway passengers Insurance Scheme (to cover cases of deaths and injuries to bona fide
passengers on account of terrorist attacks, bomb blasts etc.), Professional Indemnity
Insurance, Teak wood Insurance, Tea Plantation Insurance etc. A Social Security Fund
has been set up with contributions from the Government and the Life Insurance
Corporation for the purpose of providing social security through group insurance on the
lives of persons forming part of weaker and vulnerable sections of the society.

In the last few years, group insurance schemes for landless agricultural labourers, life
insurance scheme for integrated Rural Development Program (IRDP) beneficiaries and
group insurance for certain categories of workers belonging to weaker sections of a the
society have been introduced. In 1999 the government launched a new Crop Insurance
Scheme replacing the existing Comprehensive Crop Insurance Scheme and widened its
scope to cover almost all food and non-food crops and to help farmers to stabilize their
incomes particularly in disaster years.

(j) Rural development and poverty alleviation programs

Growth with social justice had been primary objective of Indian planning since its
inception in 1951, and several anti-poverty measures are in operation for decades
focusing the poor as the target groups. These include welfare programs for the weaker
sections, women, children, and a number of special employment programs for self- and
wage employment. Ongoing economic reforms since 1991 strengthened these programs
to generate more employment, create productive assets, impart technical skills and raise
the income levels of the poor.

Government relied mainly on two approaches for poverty alleviation: the first based on
the anticipation that economic growth will have a “trickle down effect” on the levels of
living of all groups; and the second that direct anti-poverty programs are also required.
Government shifted public expenditure away infrastructure and industry towards social
sectors, and improved targeting of subsidies through changes in the public distribution
system. Central government expenditure on social sectors (comprising education, health,
water supply, sanitation, housing, slum development, social welfare, nutrition, rural
employment and minimum basic services) as a ratio to total expenditure increased from
7.7 percent in 1990-91 to 11.3 percent in 2003-04, and as a ratio to the GDP increased
from 1.3 percent to 2 percent over the same period (Table-B.12).

Trends of expenditure on social services and total expenditure by the general government
(Centre and States combined) in 1990-2003 given in Table-B.13 indicate that:

(a) Despite fluctuations, total expenditure of the general government as a percentage

of GDP increased from 27.4 per cent to 29.7 percent in 1990-2003.
(b) There was significant increase in social services expenditure from 5.9 percent of
GDP in 1990 to 8.2 percent in 2003, but the increase was basically for other social
services except health and education which as a percentage of GDP virtually
remained invariant over.
(c) The share of social services in total expenditure increased from 21.5 percent in
1990 to 27.4 percent in 2003 due to substantial increase in the share of other
services from 4.6 per cent to 12.9 per cent in total expenditure at the expense of
shares of education and health in 1990-2003.
(d) Composition of social services expenditure indicates that the share of education in
it declined from 56 to 36 percent that of health from 22 to 17 percent, while share
of other expenditure more than doubled from 22 to 47 percent in 1990-2003.

Table-B.12 Expenditure on Social Sectors by the Central Government

Year Total Expenditure Expenditure on Expenditure on

As percent of GDP social sectors social sectors
as percent of As percent of GDP
Total expenditure

1992-93 17.4 7.8 1.4

1998-99 16.0 10.5 1.7
1999-00 15.4 10.0 1.7
2000-01 15.5 11.1 1.7
2001-02 16.0 11.1 1.8
2002-03 16.7 11.3 1.9
2003-04 17.0 11.5 2.0
Source: Budget Documents of the Ministry of Finance.

Table-B.13: Trends of expenditure on social services and total expenditure
Of the general government (Centre and States combined) in 1990-2003

I T E MS 1990 1995 1998 1999 2000 2001 2002 2003

Actual Actual Actual Actual Actual Actual RE BE
Finance of Centre & States (Rs.Bln)
Total expenditure 1557 2931 4654 5428 5865 6534 7519 8113
Expenditure on social sector 334 781 1282 1471 1618 1767 2059 2242
Education 187 346 588 623 657 687 748 816
Health 75 143 267 256 279 298 342 364
Others 72 292 427 593 681 782 970 1062
As percentage of GDP:
Total expenditure 27.4 24.7 26.7 28.0 27.9 28.5 30.7 27.3
Expenditure on social sector 5.9 6.6 7.4 7.6 7.7 7.7 8.4 7.5
Education 3.3 2.9 3.4 3.2 3.1 3.0 3.1 2.7
Health 1.3 1.2 1.5 1.3 1.3 1.3 1.4 1.2
Others 1.3 2.5 2.5 3.1 3.2 3.4 4.0 3.5
As % of total expenditure:
Expenditure on social sector 21.5 26.6 27.6 27.1 27.6 27.1 27.4 27.4
Education 12.0 11.8 12.6 11.5 11.2 10.5 9.9 9.9
Health 4.8 4.9 5.7 4.7 4.8 4.6 4.5 4.5
Others 4.6 9.9 9.2 10.9 11.6 12.0 12.9 12.9
As % of expend. on social sector
Education 56 44 46 42 41 39 36 36
Health 22 18 21 17 17 17 17 17
Others 22 37 33 40 42 44 47 47
Memo item:
GDP at current mp (Rupees billion) 5687 11880 17410 19369 21043 22960 24510 27543

Source: Various Volumes on State Finances published by the Reserve Bank of India.

Anti-poverty programs have been strengthened over the years to generate more
employment, create productive assets, impart technical and entrepreneurial skills and
raise the income level of the poor. Most of the poverty alleviation and employment
generation programs are targeted towards the rural development, as majority of the poor
live in rural areas. Major programs, which were operational during 2001-2003, include
the following:

(i) Jawahar Village Development Program: introduced in April 1999 as successor

to Jawahar Rozgar Yojana for generation of productive employment for the rural
unemployed poor that result in the creation of durable community assets.
(ii) The Golden Jubilee Village Self-Employment Scheme, which was introduced in
April 1999 as a result of restructuring and combining the Integrated Rural
Development Program and allied programs along with Million Wells Scheme into
a single self-employment program. It aims at promoting micro enterprises and
helping the rural poor into self-help groups (SHG). The scheme covers all aspects
of self-employment like organisation of rural poor into SHG, their capacity
building, training, development of infrastructure and clusters, financial assistance
through bank credit and subsidy and marketing support.

(iii) Employment Assurance Scheme (EAS) started on the 2nd October 1993 aims at
creating economic infrastructure and community assets for sustained employment
for at least 100 days of unskilled manual labour for poor rural households in
drought prone areas, desert areas, tribal and hilly areas. The scheme was
restructured in 1999-2000 to make it a single wage employment program.
(iv) Integrated Village Employment Program launched in September 2001 aims at
providing wage employment in rural areas and food security along with creation
of durable social, economic and community assets.
(v) The National Social Assistance Programme is a centrally sponsored scheme
launched on the 15th August 1995 with 100 per cent Central funding to the States
and Union Territories for providing social assistance to the poor households
affected by old age, maternity, and death of sole bread earner.
(vi) The Prime Minister’s Village Development Scheme: introduced in 2000-01 for
village level development in 5 critical areas viz. Health, primary education,
drinking water, housing and rural roads.
(vii) The Golden Jubilee Commemorative Employment Scheme: The Urban Self-
Employment Program and the Urban Wage Employment Program are the two
special schemes under this program. It was introduced in December 1997 by
consolidating various programs operated earlier for alleviation of urban poverty.
(viii) Indira Awas Yojana aims at providing housing units free of cost to the members
of the scheduled casts and scheduled tribes and free bonded labour below the
poverty line.
(ix) Samagra Awas Yojana was launched as a comprehensive housing scheme in
1999-2000 with a view to ensuring integrated provision of shelter, sanitation and
drinking water.
(x) Food for Work Programme launched in February 2001 and aims at augmenting
food security through wage employment in drought affected rural areas. Wages
are paid partly in kind (i.e. foodgrains) and partly in cash.
(xi) Annapurna launched in April 2000 provides foodgrains at highly subsidised
prices (Rupees 2 per kilogram of wheat and rupees 3 per kilogram of rice) to the
senior citizens who donot get pensions.
(xii) Krishi Shramik Samajik Suraksha Yojana launched in July 2001 provides social
security benefits to agricultural labourers on hire.
(xiii) Shiksha Sahayog Yojana launched in 2002 provides educational allowance for
study in classes 9th to 12th to children of parents living below the poverty line.
(xiv) (Targeted) Public Distributed System (PDS) provides foodgrains to the poor
households at subsidised prices, which are even lower than the subsidised prices
of foodgrains supplied to the other households.
(xv) Integrated Child Development Services provides an integrated package of
services comprising supplementary nutrition, health, immunisation, health check-
up and referral services, pre-school non-formal education and health to children
below six years.

(k) Progress and issues in poverty reduction efforts

The relations between poverty and other variables lead to the following policy

 Higher growth rate of national income than that of population is essential for
poverty reduction as it provides extra income for distribution among the poor
without affecting the well being of the relatively richer households.
 While growth in per capita income is a necessary condition for poverty reduction, it
is by no means sufficient. It is also important to focus on creating an enabling
environment for the poor to participate in, and benefit from, the growth process. The
pro-poor public policies include creation of employment opportunities and
enhancing the level of health, education and skill of the poor.
 A stable macroeconomic environment, characterized by low inflation and
sustainable level of gross fiscal deficit makes it possible for the poor to safeguard
their purchasing power.
 The reduction of government deficit allows banks to provide more funds for private
investment, which is more productive and more efficient. It also allows the
government to devote more scarce resources to investment in social sectors. .

Most evaluations of the poverty alleviation programs, done by the government or others,
conclude that these programs are not very effective in reducing poverty. They suffer from
ill defined and multiple objectives, limited targeting, under-funding, complex
administration, high administrative costs and leakage, lack of proper accountability and
adequate monitoring. A recent study of the Public Distribution System (PDS) suggested
that only 25 percent of food grains actually reach the poorest 40 percent of the
population, and administrative costs account for 85 percent of total expenditure and
therefore far outweigh the income gains to the poor.

One of the better-targeted programs is the Integrated Child Development Services. Food
for works program is also more successful at targeting the poor and improved their living
standards at a relatively low cost.

As unemployment is the root cause of poverty and the population growth in India is very
high, there should be more emphasis on family planning. For an urban family a child is
born by parental planning and family size is limited to the necessary minimum. On
contrary, in rural India a child is regarded as an asset and is expected simply because of
normal life cycle progressions.

Government is trying to change this environment by suitable public policy on education,

health and family welfare, and economic incentives for micro families. But these
measures have marginal impact on the net reproduction rates and the family size as socio-
cultural-religious environment put a constraint on the effectiveness of family planning.
Female education, awareness and better standard of living would create the required
consciousness among the people that smaller families are desirable. If the needs for

health and family welfare services are fully met, it will be possible to achieve substantial
decline in the family size and enable the families to improve quality of life.

Low productivity of small landholders leads to poverty, low energy in-take and under
nutrition, which in turn prevents the development and creates a vicious circle. In most of
the States, non-farm employment in rural areas has not grown very much and cannot
absorb the growing in labour force due to high population growth. Those who are getting
educated specially beyond the primary level do not wish to do manual agricultural work.
They would like better opportunities and more remunerative employment in rural areas.
This can be done by developing agro-based and rural resource-based enterprises.

Government provides several fiscal and monetary incentives for the small-scale
industries, many of which are based on agricultural goods and rural resources. But these
small industries suffer from lack of modern technology, adequate bank credits, skill
labour and efficient network of markets. It is imperative that a program of skill
development, vocational training and technical education is adopted on a large scale in
order to generate productive employment in rural areas for those living there. The entire
gamut of existing poverty alleviation and employment generation programs may have to
be restructured to meet the newly emerging demand for employment.

It is observed that investment on rural infrastructure and agricultural extension services

reduces poverty to a greater extent than agricultural subsidies, which are not properly
targeted and enjoyed by the rich farmers. Roads, well-designed irrigation systems, flood
control, rural electrification and telecommunications and the economic use of fertilizers
can make inroads against rural poverty.

While some states were able to take advantage of the stabilization and economic reforms
to speed up growth and poverty reduction, others lagged behind due to poor governance,
insufficient infrastructure, lack of human development and lack of fiscal adjustment.

Agriculture, which may have lost its impetus in reducing poverty, remains the least
reformed and most distorted sector. Lack of reforms of labour and product markets limit
both the rate of growth and its labour intensity.

International experience indicates that the cost recovery for basic social services does not
generate much revenue and adversely affects the utilization rates, especially by the poor.
Therefore, any attempt to raise the services charges to cover full cost for the provision of
basic services will be counter-productive and is to be avoided to the maximum extent
possible. When imposed, cost recovery should improve quality and exempt the poor.
When cost recovery occurs, revenues should go a special fund to be reinvested in the
social sectors.

In the education sector, at the higher level, there is a case for greater cost recovery, but
the political economy constraints may go against the enhancement of user charges. In
countries like Malaysia and Sri Lanka, lower level services have been delivered free of

charge for decades on the principle of universality, and even the World Bank was
persuaded against the imposition of user charges.

While the level, efficiency and equity of social expenditure matters, there is need to
ensure effective utilization of existing resources. Expenditure levels cannot be increased
without improved absorptive capacity. In this respect, the involvement of the community
appears to be extremely important in order to improve absorptive capacity, transparency
and the appropriate monitoring of expenditures.

There is a wide scope for strengthening the public-private partnership in the delivery of
health care services. There is also a wider scope for more involvement of India’s several
thousand Non-Government Organisations (NGOs) for implementation of many
government schemes in social sectors.

In sum, India needs to reformulate an anti-poverty strategy that is fiscally sustainable and
more finely targeted to those who cannot benefit from the opportunities offered by
growth. Safety nets should focus on those who either cannot participate in the growth
process (for reasons of extreme deprivation or vulnerability combined with poverty) or
face continuing exposure to risks.

Effective safety nets that insure rural poor against the income fluctuations, such as public
works programs, are very effective in overcoming important market failures, and need to
be strengthened and widened.

(l) Future agenda on poverty reduction with special reference

to the United Nations Millennium development goals

The UN Millennium Development Goals (MDG) - global targets that the world’s leaders
set at the Millennium Summit in September 2000 are an ambitious agenda for poverty
reduction. The targets include the following:

(i) Halve, between 1990 and, 2015, the proportion of people whose income is less
than one dollar a day.
(ii) Halve, between 1990 and 2015, the proportion of people who suffer from hunger.
(iii) Ensure that by 2015, all children will be able to complete a full course of primary
(iv) Eliminate gender disparity in primary and secondary education preferably by
2005 and to all levels of education no later than by 2015.
(v) Reduce by two-thirds, between 1990 and 2015, the under-five mortality rate.
(vi) Reduce by three-quarters, between 1990 and 2015, the maternal maternity ratio.
(vii) Have halted by 2015, and begun to reverse the spread of HIV/ AIDS.
(viii) Have halted by 2015, and begun to reverse the incidence of malaria and other
major diseases.
(ix) Integrate the principles of sustainable development into country policies and
programmes and reverse the loss of environmental resources.

(x) Halve by 2015 the proportion of people without sustainable access to safe
drinking water.
(xi) By 2020, to have achieved a significant improvement in the lives of at least 100
million slum dwellers.
(xii) Develop further an open, rule-based, predictable, non-discriminatory trading and
financial system.
(xiii) Address the Special Needs of the Least Developed Countries. Net ODA as
percentage of DAC donors’ GNI is targeted to be raised to 0.7 percentages in
total, and 0.15 per cent for LDCs.
(xiv) Address the special needs of landlocked countries and small island developing
(xv) Deal comprehensively with the debt problems of the developing countries through
national and international measures to make debt sustainable in the long run.
(xvi) In co-operation with developing countries, develop and implement strategies for
decent and productive work for the youth.
(xvii) In co-operation with pharmaceutical companies, provide access to affordable,
essential drugs in developing countries.
(xviii) In co-operation with the private sector, make available the benefits of new
technologies, especially information and communications.

India is committed to achieve the UN MDG targets by 2015. According to the Human
Development Report (UNDP 2001) India is one of the 11 countries in the world that is
on track to meet the UN MDG while 70 other countries are lagging or slipping. The
report acknowledges the significant reduction of poverty ratio from 36 per cent in 1993-
1994 to 26 per cent in 1999-2000, and also significant improvement in literacy rate.
There has been continuous increase in the share of expenditure on social services of the
Centre, States and Union Territories taken together in their total expenditure from 14.4
per cent in the Sixth Five Year Plan (1980-1985) to 21.7 per cent in the Ninth Five Year
Plan (1997-2002).

In this respect, it may be mentioned that since 1991 India has undertaken a number of
reforms in industry, trade, financial and fiscal sectors to improve efficiency, productivity
and competitiveness of Indian industries and to impart dynamism to the overall growth
process. These reforms had a human face from the very beginning and had been further
deepened through second-generation reforms initiated in 2000.

These reforms have placed India on a higher growth profile with faster reduction of
poverty and malnutrition, improvement in literacy rate, improvement in overall
employment growth, moderate rate of inflation, favourable balance of payments and
increase in overall levels of living of the Indian people. However, on fiscal front the
progress is not adequate implying problems for sustainability of growth in future. There
are serious constraints on infrastructure development. There are also problems relating to
widening of inter and intra regional and sectoral disparities and inter-personal
inequalities. Therefore, the objectives and scope of second-generation reforms are to
remove these constraints for higher growth alongwith inter sectoral and inter regional
equity and social justice.

Under second-generation reforms government is allocating more and more resources for
the development and utilisation of human resources. Suitable targets for the reduction of
poverty, hunger, mortality and illiteracy rates have been incorporated in the Tenth five-
year Plan (2002-2007).

The Approach Paper to the Tenth Five-Year Plan (2002-2007), which outlines a strategy
to achieve a GDP growth rate of 8 per cent, has a specific focus on human development.
The Approach Paper stipulates that growth in per capita GDP should be accompanied by
significant improvement in human development indicators and basic services to the
people such as basic health, education, drinking water and sanitation. It also includes the
expansion of economic and social opportunities for all individuals and groups, reduction
in disparities and a greater participation of people in the decision making process.

The Plan indicates the following monitorable targets:

 Reduction of poverty ratio by 5-percentage point by 2007 and by 15 percentage

points by 2012.
 Providing gainful high quality employment to the addition to the labour force over
the Tenth Five-Year Plan.
 All children to go to schools by 2003, and all children to complete at least five
years of schooling by 2007.
 Reduction of gender gaps in literacy and wage rates by at least 50 per cent by
 Reduction in the decadal rate of population growth between 2001 and 2011 to
16.2 per cent.
 Increase in the literacy rate to 75 per cent during the Tenth Five-Year Plan.
 Reduction in the infant mortality rate to 45 per 1000 births by 2007 and to 28 by
 Increase in the forest and tree cover to 25 per cent by 2007 and 33 per cent by
 All villages to have sustained access to potable drinking water within the plan
 Cleaning of major polluted rivers by 2007 and other notified stretches by 2012.

The attainment of these targets not only necessities a substantial allocation of resources
for the social sectors but also involves an enhanced role for the government in the
provision of social services and development of urban and rural infrastructure.