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Inclusive Growth in India: Past Performance and Future Prospects
B. Grewal, P. Malhotra & A. Ahmed , Centre for Strategic Economic Studies, Victoria University, Melbourne, Australia    01/03/2011 12:09:32 AM

  After three centuries of relative and often absolute poverty, India has in recent decades begun to return to its previous position as a global economic power, and this process has accelerated over the last few years. Growth in the Indian economy was quite low in the first 30 years of planning after Independence — from 1950 to 1980. Despite some fluctuations in the next two decades gradual but sustained improvement produced an average rate of growth of 5.7% per annum for the 20 years to 2000. Building on that base, the economy appears to have achieved take-off into a higher growth plane, with real GDP growth averaging 8.1% per annum in the three years 2003-04 to 2005-06, and the target growth rate of 8.5% over the 11th Five Year Plan period, 2007-12. While many challenges remain, the challenge of making India’s economic growth more inclusive by reducing entrenched poverty is a principal challenge. The aim of this paper is to examine India’s record in poverty reduction in recent years and to outline measures that might help to strengthen the channels through which the benefits of economic growth flow to the poor. The concept of inclusive or pro-poor growth is considered in section 2. A comparison of India’s performance in reducing poverty with some of the Asian countries follows in section 3. How India’s objective of more inclusive growth might be achieved in the future is discussed in section 4, before concluding the paper in section 5.

  II. Inclusive Growth
India’s government has made “inclusive growth” a key element of their policy platform, stating as a goal: “Achieving a growth process in which people in different walks in life… feel that they too benefit significantly from the process.” (Ahluwalia, 2007).
How a country may achieve a self-sustaining transition from traditional to industrial economies has been addressed by many contributions to development theory. Economic growth models do not establish or suggest, however, an explicit causal-effect relationship between a country’s rates of economic growth and the resulting poverty reduction, although policymakers often assume an implicit connection. The current literature provides some guidelines about conditions under which economic growth might be ‘inclusive’ or ‘pro-poor’, although how these concepts should be defined remains controversial. One view is that growth is ‘pro-poor’ only if the incomes of poor people grow faster than those of the population as a whole, i.e., inequality declines (e.g., Kakwani and Pernia, 2000). An alternative position is that growth should be considered to be pro-poor as long as poor people also benefit in absolute terms, as reflected in some agreed poverty measure (Ravallion, 2004).

  The nature of this debate can be illustrated in Figure 1, which depicts the share of GDP for the richest 30% population on the vertical axis and that for the poorest 30% of population on the horizontal axis. From a hypothetical base case scenario equilibrium represented by point A, potential benefits of a Pareto optimal growth strategy may be viewed to fall anywhere within the space bounded by the points BAC. For example, movement from point A to point B in Year 1 represents a situation in which economic growth has raised the GDP share of the rich population, without making the poor any worse off. Alternatively, movement from point A to point C depicts the case in which the benefits of ‘new growth’ have raised the plight of the poor, but without making the rich any worse off. Any point situated on the 45 degree line would make the rich and the poor equally better off by dividing the benefits of growth equally between the two groups. Any point lying in the blue triangle would depict the larger share of the benefit going to the rich, just as any point in the unshaded triangle would depict the larger share of benefits accruing to the poor. Kakwani and Pernia’s definition would require the impact of a pro-poor growth strategy to lie in the unshaded triangle (where the poor benefit more from growth), whereas Ravallion and Chen (2007) would accept growth to be pro-poor so long as the poor also benefit from growth (i.e., new equilibrium point lies anywhere to the North-East of point A, irrespective of which triangle). This is because by their definition, growth is still pro-poor, even if it results in greater inequalities. Indeed, that is precisely what has happened in India; the rich have benefited more than the poor from economic growth since 2000.

III. Poverty Reduction In India
The measurement of poverty has also been not without controversy. Much of the literature on poverty relies on different measures of income-based poverty: defined in terms of national or international poverty lines (e.g., US$ 1.00 per day or US$ 1.25 per day). Recent studies, including the United Nations Development Program (UNDP 2008), have embraced the concept of multidimensional poverty: which includes income, consumption expenditure, malnutrition, literacy, and other indicators of welfare.

Often, a country’s performance in reducing poverty may turn out to be very different depending on whether multidimensional poverty or income poverty headcount ratios are used. For example, while Indonesia’s performance in income poverty reduction between 2000 and 2008 was ranked at the top of the 15 countries studied by Habito (2009), that ranking dropped to fourteenth when the comparison was made using UNDP Human Poverty Index (HPI).
In India, poverty is measured in terms of household per capita consumption expenditure. Poverty lines, determined by the government for each Indian state are updated regularly. The latest poverty lines are based on the recommendations of the Tendulkar Committee Report (2009). At the national level, poverty line for rural population is Rs. 446.68 while for urban population it is Rs. 578.8. Based on these poverty lines, 37.2% of India’s total population was poor in 2004-05. In rural India, poverty was higher (41.8%) than in urban areas (25.7%). The Tendulkar Committee also updated the poverty lines for 1993-94 to allow comparisons to be made between the two periods. On the basis of these figures, it is possible to conclude that poverty headcount ratio for all India declined from 45.3% in 1993-94 to 37.2% in 2004-05. Thus, based on these figures one can safely conclude that growth in India has been pro-poor, as poverty has declined since 1993-94. Not everyone accepts this conclusion, however. The critics question the methodology used in the official estimates and argue that the actual number of poor is significantly higher than the official estimates and that poverty had actually increased between 1993-94 and 2004-05 (e.g., Patnaik 2010, and Mehrotra and Mander 2009).

In a recent study, Habito (2009) has published international comparisons of 15 Asian countries in reducing poverty. For 2000-2008, these comparisons paint a sobering picture of India’s performance in achieving inclusive growth in recent years, because India ranks 11th, followed by Philippines, Mongolia, Singapore and Myanmar. Ahead of India in this league were (in that order) Indonesia, Pakistan, China, Malaysia, Thailand, Vietnam, Sri Lanka, Nepal, Bangladesh and Cambodia. The comparisons are made in terms of the poverty elasticity of growth (PEG), which measures percentage reduction in poverty for every one percent of growth in GDP. In Indonesia, Pakistan and China, PEG exceeded one, implying that one percent growth in GDP resulted in more than one percent reduction in poverty. For the other countries that were also ahead of India in this comparison, the values of PEG ranged from -0.806 for Malaysia to -0.469 for Bangladesh. India’s PEG was -0.154, implying only modest reduction in poverty for every one percent increase in GDP. In terms of Figure 1, India’s new growth could be said to have moved from point A in 2000 to point D in 2008, signifying that both the poor and the rich benefited from growth, but that the rich benefited far more than the poor.

IV. Strategy for More Inclusive Growth
The empirical evidence about the relationship between economic growth and poverty reduction suggests that no particular development model is uniquely pro-poor and that the relationship can only be considered empirically, at the case-by-case level. Nonetheless, it should be possible to draw some general conclusions regarding the major sources of pro-poor growth. The international evidence suggests that the rates of poverty reduction have been helped by rapid growth in agriculture, public expenditure on social services, particularly education and health, infrastructure and the quality of governance. For example, Ravallion (2008) concludes that China’s success would not have been possible without strong state institutions implementing supportive policies and public investments: “China has had a tradition of building and maintaining the administrative capacities of governments at all levels, including the countless villages that were the frontline for implementing the crucial rural reforms that started in the late 1970s.” (p.17). He further adds that promoting agriculture and rural economy is crucial to pro-poor growth, particularly in the early stages, given the potential for small-holder farming to rapidly absorb unskilled labour.” Policies targeting social capital development and market reforms to address institutional and socio-cultural constraints should be adopted. The elements of the proposed strategy and the linkages among the various processes are summarised in Figure 2.

Growth in Agriculture
Recent literature suggests that while sustained economic growth must be a necessary condition for significant poverty reduction, it is not a sufficient condition: sectoral composition of economic growth also matters. Opinions differ, however, on which particular sectors are the sources of more pro-poor growth. Ravallion and Datt (1996) found that because poverty in most developing countries is concentrated in rural areas, growth in the agricultural sector and in the rural economy has been highly beneficial to reduce rural poverty. In another study of China, Ravallion and Chen (2007) found that the impact of the primary sector on headcount poverty reduction is 3.5 times higher than the impact of either the secondary sector or the tertiary sector; poverty reduction elasticity of agriculture is estimated at -7.85 as compared with the elasticity of -2.25 for non-agriculture. Virmani’s study of India (2007) and Topalova (2008) confirm the importance of growth in agriculture for reducing poverty. Suryahadi et al (2009) also find that growth in agriculture has been decisive in reducing poverty in Indonesia.

This literature confirms that growth originating in agriculture generates among the highest benefits for the poorest households and the unskilled workers. Construction industry is the next best source of poverty reduction — also because of its unskilled worker intensity. De Janvry and Sadoulet (2010) find that growth originating in agriculture is nearly three times more poverty reducing than growth originating in manufacturing and nearly double that of growth originating in construction.

Hasan and Quibria (2004) reported, however, that whilst agriculture was the most effective in poverty reduction in South Asia and Sub-Saharan Africa, poverty reduction resulted in East Asia more from the industrial sector and in Latin America from the services sector. Other studies (De Janvry and Sadoulet 2010, Habito 2009) have also added public investment in social services, particularly education and health, and the quality of governance to conditions most likely to reduce poverty.

India’s agricultural sector grew strongly in the wake of the Green Revolution. But, the contribution of agriculture to GDP has been on the decline in recent decades, dropping from 36 percent of GDP in 1980 to about 18 percent in 2007. The deceleration in agriculture has contributed to rural distress in many parts of the country and has affected both large and small farmers. The government of India has developed a strategy of accelerated growth, incorporating a near doubling of the rates of growth of agriculture, during the 11th Five Year Plan (2007-12). If it were to materialise, rapid growth in agriculture should generate more opportunities for the poor to get employment and earn income. Agricultural growth will also generate higher demand for industrial products and assist the budgetary situation of the governments through higher growth of tax revenues, which could then be used to finance various anti-poverty programs.

Infrastructure and Energy
Infrastructure continues to occupy central stage in India’s economic development strategies. The problem of energy scarcity is just one of the many infrastructure challenges facing India, as most other forms of infrastructure require substantial expansion and upgrading to meet the increasing demands of economic growth. The pressures on India’s infrastructure are coming from a variety of sources, including rapid expansion of trade, a new priority for higher growth of manufacturing, the rapid pace of urbanisation, the revival and diversification of agriculture and the need to improve conditions of the rural economy.

These pressures are manifested in serious bottlenecks in moving people and goods across the country, and in sub-standard access to power, drinking water and sanitation for the vast majority of India’s population. India’s infrastructure facilities compare rather unfavourably with several other Asian countries. The 11th Five Year Plan proposes to raise investment in infrastructure to between sevent percent and eight percent of GDP by 2012-13. Signalling a break from the traditional approach of keeping the provision of infrastructure within the public sector, the government of India has been keen to involve private sector investment in infrastructure.

The rejuvenation of agriculture noted above will also depend on ample supplies of water for irrigation, exacerbating the severe shortage of water in many parts of India, as well as the environmental risks associated with excessive extraction of underground water for irrigation. These pressures will be additional to those generated by rapid urbanisation for drinking water, sanitation and waste disposal.

Public Expenditure on Education
As noted above, several studies suggest that there is a correlation between inclusive economic growth and the level of public expenditure on social development (including education and health) (e.g., Habito 2009). Literacy is arguably the most significant factor in poverty reduction as it enhances employability. The role played by literacy has been found to be particularly notable by Ravallion and Datt (2002), who reported that nearly two-thirds of the difference between the elasticity of the headcount index of poverty to non-farm output for Bihar (the state with lowest absolute elasticity) and Kerala was attributable to the latter’s substantially higher initial literacy rate.

  In 2009, the Right to Education Act was passed, guaranteeing free and compulsory elementary education to children between six and 14 years old. The 86th Amendment to the Constitution of India makes education a fundamental right. The Act also obliges private schools to admit and educate at least 25 percent of children free of cost. Between 2003 and 2009, the number of enrolees in elementary education has increased from 57 million to 192 million (World Bank 2010). An estimated eight million children, who do not currently attend schools, are expected to benefit from the programme.

Literacy in India (for the age group five years and above) increased from just 18.3 percent in 1951, to 43.6 percent in 1981 and to 65.2 percent in 2005. However, the level of literacy varies significantly across states, genders and rural-urban areas. For example, Kerala has more than 90 percent literacy compared with Bihar at around 50 percent. There are large differences in urban — rural literacy rates in different age groups. It is disturbing, however, to note that literacy rate actually declined between 2001 to 2004-05 particularly in male literacy in most states including Kerala.

Public Expenditure on Healthcare
India’s public expenditure on health care, at 0.9 percent of the GDP, has been low even by developing country standards. The corresponding share is higher in Pakistan (1.0), Bangladesh (1.5), Nepal (1.5) Sri Lanka (1.8), and Bhutan (3.6) (UNDP 2004). India’s public expenditure on health has been not only low, but has declined from 1.05 percent of GDP to 0.91 percent in the same period (GOI 2006c). Thus, the growth in GDP did not translate into corresponding increase in public spending on health. By comparison, public health expenditure in most of the OECD countries averages around five percent of their GDP (WHO 2006). India not only spends less on overall health, but public expenditure favours the rich quintile of the Indian society (NRHM 2006). One consequences of this imbalance is that skilled health personnel attend just 16.4 percent of births among the poorest 20 percent compared with 84.4 percent in the richest 20 percent.

Only 35 percent of the population has access to medicines. At this stage of economic growth India needs to consider a new model to extend access to healthcare including medicines to its entire population. Malhotra (forthcoming) provides an equity-based healthcare model, which is affordable, implementable and sustainable. Less than three percent of India’s population has private health insurance. India’s attempts in recent years to provide health insurance for the poor have not been successful. Around 25 percent of the poor do not even seek healthcare because of the costs (World Bank 2002). A case study by Singh (2010) shows that even in the wealthy state of Punjab, healthcare costs have led to farmers’ sale of immovable assets and irrecoverable indebtedness.

A significant factor for the long term planning in healthcare is that Indians are now living substantially longer than a century ago and the population has slowly begun to age. The ageing factor plays a vital role in healthcare planning because the aged people are the major recipients of healthcare delivery. Table 1 shows that the share of the aged population increased 6.5 percent in 1981 to 7.4 percent in 2001, which is estimated to further increase to nine percent in 2016 (GOI 2006). Stark contrasts also exist in other health outcomes, such as infant mortality rate (IMR) and life expectancy. In Kerala for example, life expectancy for males and females is 70 years and 76 years respectively, followed by Punjab at 67.4 years for both. But in states like Bihar, Madhya Pradesh, Orissa, Rajasthan and Uttar Pradesh, life expectancy is in the range of 55-60 years.

Governance Issues
All the above initiatives require a major role of government at all levels in India. Effective government interventions at all levels are crucial to minimise the leakages resulting from sloppy implementation and bureaucratic corruption.

The growth of jobs in India depends mostly on the growth of business in the private sector. A vast majority of Indians are either self-employed or are employed in the unorganised sector. Perceptions of India’s business environment, especially of India’s bureaucracy continue to be unfavourable, and there are many reports of serious delays in getting official approval for business related procedures. One source often used for assessing the quality of business environments in different countries is the Doing Business series of reports published by the World Bank group. According to the International Finance Corporation Report Doing Business 2009 (IFC 2010), India is ranked 182nd of 183 countries in enforcing contracts, 175th in dealing with construction permits, and the second slowest country for closing a business. For starting a business, India’s ranking is 133.

It is worth noting, however, that India is a federal country in which business procedures and bureaucratic performance vary significantly from one state to another. It may be misleading to form an impression on the basis of any single measure that purports to abstract from regional differences, as the above rankings do. This is because some of the states — for example Tamil Nadu, West Bengal, Karnataka and Punjab — have made considerable progress in streamlining their government regulations. On the other hand, states like Bihar, Uttar Pradesh, Madhya Pradesh and Orissa have still a long way to go before being able to attract large scale business investments. And these states are precisely the ones which have a high concentration of India’s poor. These rankings are very low in a country that is aiming to increase business investment and capital inflows from abroad.

V. Conclusion
India’s record of achieving inclusive growth was examined in the context of the experiences of some of the Asian countries. These comparisons show that although India’s growth since 2000 has been beneficial to the poor, India’s achievements are fairly modest relative to the other Asian countries. This calls for a concerted effort to make India’s growth more inclusive in the future. Several measures are outlined to strengthen the sources of inclusive growth. The main thrust of inclusive growth strategies has to be on the following key areas: (i) employment and growth in agriculture; (ii) increased public expenditure on education and health; (iii) improved infrastructure; and (iv) more effective governance at all levels.  
  References and Additional Thinking
• Ahluwalia, M. (2007). Business Standard, 29th June 2007.
• Datta, P. (2004). The Great Indian Divide, Frontline, Volume 21, No.15, July 3-16.
• De Janvry, and Elisabeth Sadoulet (2010), ‘Agricultural Growth and Poverty Reduction: Additional Evidence’, World Bank Research Observer, 9(25), pp. 1-20.
• Government of India (GOI) (2006a). Census of India 2001: Population Projections for India and States 2001-2026, Technical Group on Population Projections, Office of the Registrar General, New Delhi.
• Government of India (GOI) (2006b). Morbidity, Health Care and the Condition of the Aged, NSS 60th Round, 507 (60/25.0/1), National Sample Survey Organization, Ministry of Statistics and programme Implementation, New Delhi.
• Government of India (GOI) (2006c). National Health Profile 2006, Central Bureau of Health Intelligence, Directorate General of Health Services, Ministry of Health and Family Welfare, New Delhi.Planning Commission of India. 2008. Eleventh Five Year Plan 2007-2012; Oxford University Press, New Delhi.
• Habito, CF 2009, Patterns of inclusive growth in developing Asia: Insights from an enhanced Growth-Poverty Elasticity analysis, ADBI Working paper no. 145, Asian Development Bank Institute, August.
• Hasan, R., and Quibria, M. G. (2004), ‘Industry Matters for Poverty: A Critique of Agricultural Fundamentalism’, Kyklos, 57(2), pp. 253-64.
• IFC (2010). Doing Business 2010: Reforming Through Difficult Times, The International Bank for Reconstruction and Development / The World Bank, Washington, DC.
• Kakwani, N. and Pernia, E. M. (2000). “What is Pro-poor Growth?”, Asian Development Review, vol. 18 (1), pp.1-16.
• Malhotra, P forthcoming, Impact of TRIPS in India: An Access to Medicines Perspective, Palgrave Macmillan, London, UK.
• Mehrotra, S and Mander, H (2009). “How to identify the poor? A proposal”, Economic and Political Weekly, vol. 44, no. 19, pp. 37-44.
• National Rural Health Mission (NRHM) 2006, National Rural Health Mission (2005 - 2012) Mission Document, Ministry of Health and Family Welfare, Government of India.
• Patnaik, U 2010, Trends in urban poverty under economic reforms: 1993-94 to 2004-05, Economic and Political Weekly, vol. 45, no. 4, pp. 42-53.
• Ravallion (2008) “Are there Lessons for Africa from China’s Success against Poverty?”, World Bank Policy Research Working Paper No. 4463, Washington, DC.
• Ravallion, M. (2004). "Defining pro-poor growth: a response to Kakwani,", International Poverty Centre, UNDP IPC One Pager, No. 4, November, United Nation Development Programme, Brasilia.
• Ravallion, M. and Chen, S. (2007). “China’s (Uneven) Progress Against Poverty”, Journal of Development Economics, 82 (1), pp. 1-42.
• Ravallion, M. and Datt G. (2002). “Why Has Economic Growth Been More Pro-Poor in Some States of India than Others?” Journal of Development Economics. 68:2, pp. 381– 400.
• Singh, N. D. 2010, 'Rural healthcare and indebtedness in Punjab', Economic and Politial Weekly, vol. 45, no. 11, pp. 22-5.
• Suryahadi, A., Suyadarma, D. and Sumatro, S. (2009). "The effect of Location and Sectoral Components of Economic Growth on Poverty: Evidence from Indonesia”, Journal of Development Economics, 89(1), pp.109-117.
• The Tendulkar Committee, (2009), Report of the Expert Group to Review the Methodology for Estimation of Poverty, Planning Commission, Government of India, New Delhi.
• Topalova, P. B. (2008). “India: Is the Rising Tide Lifting All Boats?”, IMF Working Paper No. 08/54, International Monetary Fund (IMF),Washington, DC.
• United Nations (2008). “Moving out of Poverty: progress from Bottom Up”, United Nations, New York.
• United Nations Development Program (UNDP) (2004). Human Development Report, United Nations Development Programme, Geneva.
• Virmani, A. (2007). ‘The Sudoku of Growth, Poverty and Malnutrition: Policy Implications for Lagging States”, Planning Commission Working Paper No. 2/2007-PC.
• World Bank (2002). India: Raising the Sights - Better Health Systems for India's Poor - Findings, Analysis and Options, World Bank, Washington, DC.
• World Bank (2010), World Bank provides US$1.05 billion to improve education in India-Support package marks the bank’s largest ever investment in education, Press Release Number 2010/304/SAR, 18th March.
• World Health Organization, (2006). The World Health Report 2006: Working together for health, World Health Organization, Geneva.

(After serving as the Founding Deputy Director for ten years (1993-2003), Professor Bhajan Grewal is currently a Professorial Fellow at the Centre for Strategic Economic Studies, and is also Director of the research program Governance and Regional Economies. He has published widely, including ten books and numerous research reports and articles. As Guest Editor for the journal Public Finance and Management, he published in 2010 an international symposium on Global Financial Crisis and Public Finances. Another symposium on China’s Public Finances was published in the same journal in two volumes, in 2008-2009. Professor Grewal has been also working on China’s economy and was the Team Leader of a study of China’s fiscal management reforms funded by the Asian Development Bank (ADB), which involved working closely with the Ministry of Finance in Beijing during 2003-04. The report of this project was published by the ADB in 2005, in both English and Mandarin. In 2009-10, Professor Grewal has worked on a study of China’s energy efficiency, examining the issues in the implementation of central Government policies at provincial and county levels. In China, he has also given seminars at the Chinese Academy of Sciences, Fiscal Science Research Institute of Ministry of Finance and the Chinese academy of Social Sciences. He has also been invited many times by the Asian Development Bank Institute in Tokyo to speak at international seminars and workshops on public finance and fiscal management. In 1992-93, he was awarded JSPS Fellowship by the Japanese Society for Promotion of Science, to conduct research and give seminars in Japanese universities. Professor Grewal has previously worked at the Punjabi University, India; the Australian National University; and James Cook University, where he was also Dean of the Faculty. Between 1983 and 1993, he was appointed Director of Revenue Policy and Intergovernmental Fiscal Relations in the Treasury Department of Government of Victoria.

Prabodh Malhotra has recently taken on a teaching role at the Department of Business Degree Program, Australian College of Kuwait, which is affiliated to the University of Tasmania. Prior to this, he taught at a number of universities in Australia including Swinburne University of Technology, Melbourne. More recently, he has been working on a number of research projects at the Centre for Strategic Economic Studies, Victoria University, Melbourne. Prabodh has a PhD in Economics and Master of International Business.

Abdullahi D. Ahmed is a Senior Lecturer in Finance at School of Commerce and Law, Central Queensland University where he is teaching advanced courses in finance and international macroeconomics and policy. Previously, he was a Research Fellow and Econometrician at the Centre for Strategic Economic Studies (CSES), Victoria University, Melbourne. He has worked on a variety of data intensive projects. He has published widely in areas of financial institutions and capital market development. Ahmed’s research work has covered areas of financial market reforms, trade policies and growth modelling, and issues of regional income convergence. Areas of his research interest cover international finance, strategic growth and change and technology and innovation in developing economies.

The views expressed in this article are personal and do not re?ect the official policy or position of the organization.)


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