Pathways to Reducing Poverty and Sharing Prosperity
Source: Flickr, Asian Development Bank

India is home to the largest number of poor people in the world, as well as the largest number of people who have recently escaped poverty. The World Bank recently released a report providing an overview of poverty in India and highlighting the pathways through which poverty has been reduced in India over the past two decades. This synthesis brings together insights from research conducted by the World Bank on India’s experience in reducing poverty and sharing prosperity.

As an overview, the report notes that India has made tremendous progress in combating poverty over the past two decades, with poverty rates falling from 45 percent in 1994 to 22 percent in 2012. Moreover, rates of poverty reduction have accelerated in recent years and occurred at three times the rate from 2005 to 2012 as compared to the decade prior to 2005. The report highlights that though poverty rates fell at a similar pace in urban and rural areas, 80 percent of the poor still live in rural areas and nationwide, 270 million people still live in poverty. The report demonstrates that poverty in rural areas is generally associated with smaller landholdings with 82 percent of the poor in rural areas owning less than 1 hectare of land. The report also illustrates how the distribution of poverty varies depending on geographical location, for instance, 7 low-income states in India (Bihar, Chhattisgarh, Jharkhand, Madhya Pradesh, Orissa, Rajasthan and Uttar Pradesh) are home to 62 percent of India’s poor but only 45 percent of India’s population.

India’s socio-economic indicators (such as health and education) have also improved consistently over the past two decades, however the report suggests that progress could have been more rapid.  In some cases, countries that had human development indicators (HDI) at comparable levels to India in the early 1990’s currently have better HDI levels. For instance, in 1994, child and infant mortality rates were higher in Nepal, Bangladesh and Cambodia than in India, but they were lower in 2014. A particular area of concern remains undernourishment among children. Some Indian states, including a few high-income ones, show stunting and underweight rates that compare poorly with the averages for low and middle income countries. The report highlights that the prevalence of diarrheal disease is thought to be one of the main reasons behind these high levels of malnutrition. Diarrhea is triggered by poor hygiene and in 2015, 60 percent of the Indian population lacked access to improved sanitation and 44 percent practiced open defecation.

The report also shows that the distribution of poverty and rates of poverty reduction in India vary significantly according to population groups with certain population groups consistently lagging behind the rest of the country. Households belonging to the Scheduled Tribes and Scheduled Castes have much higher rates of poverty, worse socio-economic indicators and slower reductions in poverty. These groups are sizeable: in 2012, Scheduled Tribes accounted for 9 percent of India’s population and Scheduled Castes for 19 percent. At 43 percent, Scheduled Tribes have the highest poverty rate among all social groups, twice as high as the India average.

The report argues that economic growth and poverty reduction is increasingly driven by the secondary and tertiary sectors and not just driven by improvements in the agricultural sector. Between 2005 and 2012, the share of total GDP from agriculture declined from 19 percent to 14 percent and agricultural jobs were reduced by nearly 34 million. In parallel, employment in the non-farm sector grew at an annual rate of 3.6 percent, adding about 50 million jobs in total. The construction sector alone accounted for nearly half of the expansion in non-farm employment. This construction boom was felt most in rural areas and especially among the unskilled causing an unprecedented rise in real wages for unskilled labor between 2005 and 2012. The report identifies this rise in real wages for unskilled labor as one of the main drivers of reductions in poverty. The report also finds that as most new jobs are being created outside of agriculture; in 2012, for the first time, more than half of the people working in India are not employed on the farm.

While agriculture has continued to be an important source of livelihoods, over the past two decades fewer days were consistently spent working on the farm and there was a significant shift towards non-farm activities. This shift was more noticeable among households that escaped poverty. The dynamism of construction activity in rural areas, together with higher minimum support prices and favorable terms of trade in agriculture, resulted in higher incomes for the rural poor and also contributed to a closing of the rural-urban wage gap between 2005 and 2012.

Despite these impressive results, the report highlights that not enough jobs are being created in India to sustain long-term significant reductions in poverty. For instance, between 2005 and 2012, the working age population grew by 1.9 percent per year, however, net job growth was only 0.6 percent per year. The report highlights that in the long run, in order to sustain poverty reductions additional (and better) jobs need to be created. The authors note that a significant drop in the female labor force participation rate in recent years (from 49 percent in 2005 to 36 percent in 2012). This trend was also discussed in a recent blog on gender and labor use in agriculture. The authors provide a number of possible explanations for this trend, including: increased time spent in education by women, men’s incomes have risen leading to less of a necessity for women to  work, and a lack of suitable jobs for women. This reduction in female labor force participation hampers poverty reduction efforts as economic inactivity prevents rises in short-term living standards, limits women’s economic decision-making capacity, and slows down progress towards gender equality. Gainful work by women is generally correlated with better development outcomes, including greater investments in children’s health and education. The report highlights the need for improvements in access to work for women in India.

In conclusion, the report highlights that the deficit in employment opportunities experienced during 2005-2012 is also strongly linked with the rural sector. More and better jobs have been created in urban areas over the past two decades. Major urban centers with vast catchment areas, such as Delhi, share their prosperity deep into surrounding places and belonging to a large urban cluster is an important predictor of future growth. Moreover, the report highlights that social and financial inclusion also contributes to faster local growth. For instance, places that grow faster had a larger share of households with access to finance. Conversely, various forms of social exclusion appear to be detrimental to subsequent growth. For example, places with low literacy rates and primary school enrollment, or with large gender gaps in educational attainment, grow more slowly.

The World Bank has published 12 blogs related to the report, they can be accessed here.

The full report can be accessed here.

By: Bas Paris

Photo credit:Flickr, Asian Development Bank