Essays on Indian Household Savings, Poverty and Inequality Within the Context of Economic Growth
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Essays on Indian household savings, poverty and inequality within the context of economic growth Submitted by Angeliki Dimopoulou For the degree of Doctor of Philosophy Of the Department of Economics Royal Holloway, University of London 2019 0 Declaration I, Angeliki Dimopoulou, hereby declare that Chapters I, II, III, IV and V of this thesis are entirely my own research work. Signed………………………………….(Angeliki Dimopoulou) Date: 1 Abstract This thesis addresses Indian household behaviour towards savings and explores the effects of economic growth on poverty and inequality. In the second chapter, using data from the Indian Household Consumer Expenditure survey, I show that vulnerable Indian households do not treat gold jewellery as a luxury good, but as a substitute to for savings. Households in rural locations, with irregular income, with illiterate heads and with casual or agricultural labour as the main source of income have higher expenditures on gold. This can be explained by the Permanent Income Hypothesis. Households mitigate future uncertainty by accumulating gold to smooth out future income shocks. I test two alternative hypotheses for high levels of spending on gold in India. I find limited support for an alternative hypothesis that high levels of gold expenditure simply reflect expenditures on dowries, a form of cultural preferences stemming from religion. I find no evidence of a second alternative hypothesis, namely that intra-household bargaining power, measured by the by wife’s relative education level, influences gold purchases. Finally, using Engel curves, I examine whether these results are due to anomalies in the Indian data by examining expenditures on food, a normal good. In the third chapter, I deal with non-random sampling of the Indian Household Consumer Expenditure Survey, by adjusting the median annual per capita consumption. While comparing absolute and relative methodologies for calculating poverty rates in India, I show that the World Bank methodology produces higher absolute poverty rates than the relative 60% of the median annual consumption methodology; spatial analysis used for robustness, confirms that neighbouring states present very different poverty rates, emphasising the effects of local legal and welfare systems in every Indian state. I then use a logit maximum likelihood model to show how 5-Year Indian GDP growth, preceding the 2009-2010 Household Consumer Expenditure Survey used for this chapter, has had a lagged effect on enhancing the chances of poverty in Indian households. This is more prominent in the case where the relative methodology is used for estimating poverty. Furthermore, I show how households in Indian 2 states that have experienced Services-led GDP growth in particular, are more prone to be poor, both in the case of 5-year and 3-year growth, where the absolute methodology is used to draw poverty lines. Where the relative methodology is used, shorter-term Services-led growth seems to benefit Urban households only, in relation to poverty. In the fourth chapter I use the economic growth observed in India in the 2000s, to assess its impact on inequality amongst urban households. I also deal with non-random sampling in Round 66 of the Household Consumer Expenditure surveys, by assigning probability weights. I find that inequality has decreased overall from 1994-95 to 2009-10, while the difference in inequality between the bottom and top of the expenditure distribution amongst urban population has increased. Using intra-decile analysis, I find that inequality within the bottom 10% of the urban population has decreased, while at the same time inequality within the lower middle class has increased. I test the effect of economic growth on inequality, within the Marginal Productivity Theory model; I find no support at State level. I find that States with high percentage of casual labour, as part of their urban population, are more likely to experience in increase in inequality, while there is also some support around growth in the Services sector to have a positive effect on increasing inequality, within the 5-year time frame. Finally, I find no support for Social Security and Welfare government spending to have an impact on inequality, at State level. 3 Acknowledgements I would like to express my gratitude to my supervisor Prof. Andrew Seltzer for all his support, comments and guidance for the past seven years. To my husband and best friend, Neerav, for listening to my ideas and supporting me through all the excitement and strain of independent research and for being by my side with endless supply of coffee during late evening and weekend-long studying. To my parents, Takis and Marina and my sister Foteini, who have always encouraged me to ask questions, seek more knowledge and strive to explore what interests me. To my fellow PhD students in Royal Holloway, Chiara, Sarah and Tanya, for being good friends and sharing this journey with me. To my colleagues in Global FX and Ofgem for showing interest in my project and supporting the flexible work schedule needed, to complete this thesis. 4 Contents Contents ...................................................................................................................................... 5 List of Figures............................................................................................................................ 8 List of Tables ............................................................................................................................. 9 Chapter I .................................................................................................................................... 10 Introduction ............................................................................................................................ 10 Chapter II ................................................................................................................................... 16 1. Introduction .................................................................................................................... 16 2. Theoretical Framework ................................................................................................ 22 a. The permanent income hypothesis ........................................................................ 22 b. Implications of PIH within the Indian context ........................................................ 23 c. Cultural implications: the case of dowries ............................................................. 25 d. Intra-household Bargaining Power ......................................................................... 26 3. Data ................................................................................................................................. 28 4. Engel Curves ................................................................................................................. 34 5. Econometric Model ....................................................................................................... 40 a. Permanent Income Hypothesis ............................................................................... 40 b. Cultural Influence Hypothesis: the case of dowries ............................................. 41 c. Intra-household Bargaining Power ......................................................................... 41 d. Coefficients discussion............................................................................................. 42 6. Results ............................................................................................................................ 45 7. Food Consumption as a Robustness Check ............................................................ 48 8. Conclusion ..................................................................................................................... 50 Chapter III.................................................................................................................................. 52 1. Introduction .................................................................................................................... 52 2. The Indian Growth Story .............................................................................................. 57 3. Theoretical Framework ................................................................................................ 61 a. Defining Poverty ........................................................................................................ 61 b. Absolute Poverty Threshold: living on $1.90 per day, the World Bank approach ............................................................................................................................ 63 c. Relative Poverty Threshold: living on 60% of median income ........................... 64 4. Data ................................................................................................................................. 67 5. Estimating Poverty in India and Econometric Model to assess the impact of GDP growth ..................................................................................................................................... 73 5 a. Using the World Bank methodology to estimate poverty .................................... 73 b. Using 60% median consumption to estimate poverty ......................................... 73 c. Econometric Model ................................................................................................... 74 6. Results ...........................................................................................................................