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India: Country Partnership Strategy 2013-2017

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India: Country Partnership Strategy 2013-2017 Country Partnership Strategy: IND, 2013–2017 POVERTY ANALYSIS (SUMMARY) 1. Poverty incidence. From 1951 to 1978, India's poverty rate—the percentage of the population living below a given poverty line—fluctuated between about 45% and 62% with no clear trend.1 Beginning in the late 1970s, and broadly coinciding with an acceleration in the rate of economic growth, the poverty rate declined, from 43% in 1983 to 27.6% in 2004/05.2 An improved methodology for determining the poverty line, introduced in 2009, has led to a larger share of the population being counted as poor. However, poverty rates have declined even according to the new poverty line, from 45.3% in 1993/94 to 21.9% in 2011/12 (Figure 1). Further, while in 1983 about 55.5% of Indians lived below the $1.25 per day poverty line—the internationally comparable poverty line—this dropped to 32.7% in 2009.3 However, 68.9% of the population still lives under the $2.00 per day poverty line, indicating that a large proportion of population is vulnerable to economic shocks that may drive them back into extreme poverty. Figure 1: Poverty in India 420 50 405 45 390 40 375 360 35 345 30 330 25 315 20 300 15 285 10 poverty line below (million)poverty line 270 Number of people belowof peopleNumber 255 5 of populationPercentage 240 0 1993/1994 2004/2005 2009/2010 2011/2012 Note: Poverty is defined in terms of the poverty lines defined by the Expert Group 2009. Source: Government of India, Planning Commission. 2013. Press Note on Poverty Estimates, 2011-12. New Delhi; Government of India, Planning Commission. 2012. Press Note on Poverty Estimates, 2009-10. New Delhi. 2. Increased pace of poverty reduction. The pace of poverty reduction increased in recent years, from an average 0.74 percentage points per year between 1993/94 and 2004/05 to an average 2.18 percentage points per year between 2004/05 and 2011/12. This has coincided with a significant decline in the absolute number of poor people (as seen in Figure 1), from over 400 million in 2004/05 to about 270 million in 2011/12. In comparison, between 1993/94 and 2004/05, the number of poor remained generally unchanged at about 400 million, even as poverty rates declined. 3. Interstate disparities in incidence and reduction of poverty. The incidence of poverty varies widely across Indian states, ranging from about 40% in Chhattisgarh in 2011/12 1 These poverty rates are based on the poverty estimation method developed by the Expert Group 1993, whose method for reporting official poverty statistics has been in use since March 1997. Several methodological concerns with this approach led to the formulation of the Expert Group 2009, which developed a new methodology for updating poverty lines over time. 2 Since 1987, India's poverty estimates have been based on household expenditure surveys conducted over a 12- month period starting in July. Thus, the period 2004/05 covers July 2004 to June 2005. 3 The World Bank. PovcalNet database. http://iresearch.worldbank.org/PovcalNet/index.htm. 2 to less than 10% in a number of states. A wide variation is also seen in the performance of states with respect to poverty reduction. The poverty rate declined by about 25 percentage points between 2004/05 and 2011/12 in Odisha and Tripura, which have outperformed other states in poverty reduction. In contrast, the poverty rate declined by less than 10 percentage points in a few states including Assam, Chhattisgarh, Jharkhand, and Meghalaya during the same period. 4. Rural and urban poverty. In 2011/12, the poverty incidence in rural areas (25.7%) was higher than in urban areas (13.7%). However, between 2004/05 and 2011/12, poverty declined more rapidly in rural areas (annual average rate of 2.3 percentage points) compared to urban areas (annual average rate of 1.7 percentage points), suggesting that India’s urban and rural poverty rates are converging. 5. Inequality. The Gini Index, a popular measure of inequality, was about 32 in both 1983 and 1993/94 based on household consumption expenditure data. Thereafter, it increased to 36 in 2004/05 and to 37 in 2009/10. The increases in inequality are mainly an urban phenomenon, driven primarily by increased wages among people with higher levels of education.4 In comparison with other fast-growing emerging economies, these levels of inequality are not particularly high. However, non-income inequality in India (e.g., pertaining to health and education) has tended to be larger relative to other parts of the developing world.5 6. Progress towards the Millennium Development Goals. India is on track to achieve the Millennium Development Goal targets relating to enrollment in primary education, youth literacy, gender parity in education, trend reversal in HIV prevalence, and access to improved drinking water, and is on track with respect to income poverty reduction as well. However, India is likely to miss the targets for reduction in malnutrition, reduction in maternal and child mortality, and improved access to sanitation facilities.6 Causes of Poverty 7. Poverty in India results mainly from a lack of economic opportunities, limited access to available economic opportunities due to insufficient human capabilities, and lack of safety nets to minimize vulnerability to economic shocks. A. Limited Economic Opportunities 8. Low agriculture productivity and limited non-agricultural job opportunities. About half of India’s workforce is engaged in agriculture, which contributes only 14% to India’s gross domestic product (GDP); this illustrates the sector’s low productivity, and hence limited income- earning opportunities. Labor productivity in the agriculture sector has been estimated to be only 29% of labor productivity nationally.7 On the other hand, many non-agriculture sectors with high productivity levels—such as finance, insurance, and real estate; and transport, communications, 4 J Cain et al. 2010. Accounting for Inequality in India: Evidence from Household Expenditures. World Development. 38(3). pp. 282–297. 5 ADB. 2012. Asian Development Outlook 2012: Confronting Rising Inequality in Asia. Manila. 6 Government of India, Central Statistical Office. 2011. Millennium Development Goals, India Country Report. New Delhi; World Bank World Development Indicators 2012 (http://data.worldbank.org/data-catalog/world-development- indicators); ADB. 2012. Key Indicators for Asia and the Pacific 2012. Manila. 7 R. Hasan et al. 2012 Growth, Structural Change, and Poverty Reduction in India. New Delhi: India Resident Mission. 3 and business services—have limited potential for direct generation of jobs on a large scale for unskilled and semi-skilled workers. The manufacturing sector, which has considerable untapped potential, employs only 11% of the workforce while contributing 16% to India’s GDP.8 Moreover, about 80% of the manufacturing workforce is employed in the informal sector, where productivity and earnings tend to be low and firm size is often too small to benefit from productivity-enhancing technology. Private investment in the formal sector manufacturing has been concentrated in capital-intensive and skill-intensive sectors, and has largely bypassed the labor-intensive subsectors. Figure 2: Employment Shares and Labor Productivity Differentials across Sectors (2009/10) 800 700 FIRE (723) 600 PU (623) 500 REGMFG (395) 400 MIN (339) 300 GOV (266) TSC (208) 200 WRT (140) Sectoral Labor Sectoral CSP (112) productivity a asproductivity Share of Average of Average Share 100 AGR (29) UNREG (58) CONST (81) Labor Productivity (%) Productivity Labor 0 1 21 41 61 81 Employment (%) AGR = agriculture and allied activities, CONST = construction, CSP = community, social and personal services, FIRE = finance, insurance and real estate, GOV = public administration and government services, MIN = mining and quarrying, PU = public utilities, REGMFG = registered manufacturing, TSC = transport, storage and communications, UNREG = unregistered manufacturing, and WRT = wholesale and retail trade, restaurants and hotels. Note: the number in parenthesis reflects sector productivity as a percent of the national productivity. Source: Government of India, Ministry of Finance. 2013. Economic Survey 2012-13. New Delhi. 9. Two major factors that constrain the creation of economic opportunities are inadequate infrastructure and stringent regulations.9 Inadequate infrastructure can be a major constraint to poverty reduction. Various studies suggest that investment in infrastructure facilitates job creation by increasing agriculture and manufacturing productivity, and distributes the benefits of economic growth more evenly.10 B. Limited Access to Opportunities 10. Human capital accumulation. Poor nutrition, health and education, especially early in life, have historically limited efforts to rapidly reduce poverty. Poor sanitation has a detrimental effect on health early in life, and can lead to a loss of adult cognitive skills, and negatively impact labor productivity.11 In addition to health concerns, the educational and skills 8 Government of India. Ministry of Finance. 2012. Economic Survey 2011–12. New Delhi 9 Both factors are discussed in the Private Sector Assessment (accessible from the list of linked documents in Appendix 2). 10 R. Murgai and R. Zagha. 2010. Building Infrastructure for Accelerated Poverty Reduction. New Delhi. BS Books. pp 54-75; S. Fan et al. 2000. Government Spending, Growth and Poverty: An Analysis of Interlinkages in Rural India. American Journal of Agricultural Economics. 82(4). pp.1038–1051; S. Datta. 2012. The Impact of Improved Highways on Indian Firms. Journal of Development Economics. 99(1). pp. 46–57, J. Rud. 2011. Infrastructure Regulation and Reallocations within Industry: Theory and Evidence from Indian firms. Journal of Development Economics, 99(1), pp. 116–127. 11 D. Spears and S. Lamba. 2012. Effects of Early-Life Exposure to Rural Sanitation on Childhood Cognitive Skills: Evidence from India’s Total Sanitation Campaign. working paper (http://riceinstitute.org/wordpress/wp- content/uploads/downloads/2012/07/Spears-Lamba-TSC-cognition-May-2012.pdf) 4 development system has serious deficiencies.
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