Kamna Kathuria

India - The Emerging Giant

by Arvind Panagariya
Declining Poverty The Human Face of Reforms
Phases I and II: 1950s to 1980s Failed Poverty Alleviation
India focused on poverty alleviation since independence, with both growth
and equity central to the first few Five-Year Plans implemented by socialist
India.
Despite this focus, no significant reduction in poverty during the first 25 years
(no trend in poverty levels calculated by the NSS National Sample Survey).
Failure to reduce poverty rate attributed to slow growth, early concentration
in heavy industry, and confusion of poverty alleviation with equity.
Focus on diversification into more capital-intensive production led India
farther away from areas where the country had a comparative advantage.
Instead of requiring profits to be reinvested, the government confined big
business to alleviate poverty:
o The most labor-intensive products were only produced by smaller
firms, preventing potential generation of employment.
Phases III and IV: Liberalization and Poverty Decline
From 1981-1988 (phase III), the growth rate rose to 4.8% from 3.2% and
poverty ratio fell ten points to 38.5% from 1977-78 to 1987-88.
Were liberalizing reforms good for the poor in phase IV (1988-2006)?
In initial surveys, poverty ratios fluctuated and thus the data was inconclusive
regarding the effect of liberalizing policy on poverty.
The 55th round (1999-2000) of the survey showed a significant decline in
poverty, but the recall period for the questionnaire had changed, introducing
doubts about the validity of its findings.
Revised estimates: Sundaram and Tendulkar adjusted the 50 th NSS survey to
make them comparable to the 55th, and Deaton and Dreze did the opposite.
Sundaram and Tendulkar find the magnitude of reduction to be greater
between the 50th and 55th rounds than in the preceding ten years.
Deaton and Dreze, using only the goods for which the reporting period of 30
days is consistent across surveys, reconstruct the 55 th survey to be
comparable to the 50th, and find similar results.
o They also adjusted poverty lines to make them internally consistent
across surveys by constructing new price indices.
o Mean per-capita expenditures were also much higher in NAS than NSS
data. This is partially adjusted for by Deaton and Drezes new price
indices, because consumption rises more sharply here than under the
official approach.
How did trade liberalization affect poverty ratios?
Stolper-Samuelson effect: in a labor-abundant economy like India, removal of
protective trade barriers will entice producers to switch to making laborintensive goods instead of import-competing ones. Demand for labor and
consequently wages will increase.
Topolovas study on trade barriers finds that increased openness led to a
larger increase in districts where tariffs fell more, but she fails to account for:
licensing, non-traded goods, and non-random sampling. Adjusting for these,

Kamna Kathuria

Hasan et al. find that gains from trade exceed short-run employment
problems faced by workers.
How were employment and wages affected?
Unemployment rates have a high margin of error in NSSO estimates, no firm
inferences can be drawn of the effect of growth on unemployment rates.
Agricultural wages were measured on three series: Agricultural Wages in
India (AWI), Cost of Cultivation of Principal Crops (COC), and NSSO data. In
COC and NSSO, wages have exhibited an accelerating pattern, although they
have not in AWI.
How were social and human development indicators affected?
Literacy rates have increased across the board.
Gender gaps have generally decreased since the 1990s, and education for
women has increased as well.
Farmer suicides in India have been increasing and many critics have pointed
to economic reform as the cause. The suicides have been concentrated in
certain states. However, no causal connection between reform and suicide
has been established, although major causes include family problems, crop
failures, and addictions like drinking and gambling.
Inequality A Lesser Problem
Inequality via national income distribution
Deaton and Dreze calculate a rise in urban inequality from 1994-2000 but a
stable or slightly decreasing level of rural inequality.
o Leads them to conclude that poverty reduction could have been 1.7%
higher had growth been distribution neutral
Panagariya is skeptical of policies that make equity and eliminating inequality
their central concern as it can have adverse impacts on both growth and
poverty reduction.
o Uses example of socialist India and Indira Gandhis reforms during a
slow-growth era to support his skepticism.
Regional inequality
Using per-capita incomes across states, regional inequality has increased in
India.
Using the national HDI, there is no evidence of rising interstate inequality.
In general, growth has benefitted all states; some have just grown faster than
others.
There is no strong case for government intervention in alleviating interstate
inequity.
Urban-Rural Inequality
Average per-capita consumption between 1993-94 and 1999-2000 rose 8.7%
in rural India and 16.6% in urban India, evidencing the rural-urban divide.
For Panagariya, this form of increase in inequality should be least
disturbing.
Connections and Criticisms

Heller: poverty in Kerala has fallen faster than any other state in India despite
low levels of growth

Kamna Kathuria

Varshney: political reality is that Indians believe reforms have benefitted only
the rich and the poor are the votes.
Sen and Dreze: Growth accompanied by progressive distributional change
and social development is better than growth alone; reforms of a different
kind.
What about Nepal and Bangladesh, and even Brazil?
Examples of very similar countries with much slower growth but better
improvement on MPI: multidimensional poverty index
Doesnt account for negative effect of inequality on growth rates