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Poverty amidst plenty?

Print edition : Mar 04, 2000 T+T-

Recent data on the continuing high incidence of rural poverty has led to confused official responses, but the underlying causes of the poverty situation are easy to identify.

THE persistence of large-scale poverty, especially in the rural areas, is probably the single most damning indictment of the Indian economic development process. While widespread rural poverty has been a continuing feature, the varying trends over time a lso indicate the implications of specific economic strategies over particular periods.

That is why the recent evidence on the extent of rural poverty in the 1990s has generated so much interest. Official as well as most other estimates of poverty are based on the data on consumption expenditure collected by the National Sample Surveys of t he Central Statistical Organisation. While these consisted of very large five-yearly surveys until the late 1980s, there have also been smaller annual samples conducted for most years in the 1990s, for which the results are now available until early 1998 .

It is generally accepted that these annual surveys provide statistically relevant and reliable indicators at the all-India level. For the 1990s, they have revealed a disturbing tendency. Thus, over the 1970s and 1980s there was a relatively sharp reducti on in the incidence of rural poverty from about 55 per cent of the rural population in 1973-74 to around 34 per cent in 1989-90. But this process of falling rural poverty has been halted, if not reversed, during the 1990s. Not only has the incidence of a bsolute poverty never gone below 34 per cent over this period, it has in fact risen to much higher levels in individual years, to as much as 42 per cent.

This lack of further progress on the poverty reduction front may seem puzzling, especially because official figures point to a rather robust rate of growth of income during the 1990s. In fact, the discrepancy between the apparent persistence and even inc rease in rural poverty, and the apparently high economic growth rates, has led some analysts to question the data on poverty.

This is especially common among the votaries of the marketist economic "reforms" of the 1990s. While these were not specifically directed at employment, or poverty reduction, the stated expectation of policy-makers over this period was that liberalising markets, easing the conditions for entry and operation of foreign investors and encouraging exports especially in agriculture, would all contribute to more employment generation and lower poverty. The lack of correspondence between this perception and th e apparent reality as revealed by the evidence on poverty has been resolved by supporters of the new policies, by simply rejecting the NSS data for being based on "thin" samples or for underestimating the true consumption in the rural areas.

THE first criticism has already been dealt with (since it is accepted that these surveys yield results which are statistically valid at the all-India level), but the second deserves closer attention.

If the NSS consumption estimates are correct, there could be two possibilities for explaining the discrepancy between rural poverty and GDP growth over the 1990s: first, if per capita consumption has not risen along with income; and second, because inequ alities in the distribution of income and consumption expenditures have increased.

Real per capita consumption in the rural areas, as revealed by the NSS, rose sharply between 1972-73 and 1989-90, but declined subsequently, with the trend level having at best stagnated. It is true that the NSS is known to underestimate overall consumpt ion in the country, so that aggregate consumption by its estimates is lower than that coming out of the national income estimates of the CSO. It is also true that this gap did widen between 1972 and 1990 when poverty fell. But there is no strong evidence of any further widening of this gap during the 1990s, with the current value of consumption expenditure growing at roughly the same rate in the CSO and NSS estimates.

Similarly, the index of inequality in the distribution of consumption expenditure shows that (considering only the available NSS round which pertain to a full year to exclude possible seasonal effects) rural inequality fell steadily between 1972-73 and 1 990-91, and has since then fluctuated wildly around a rising trend. That is, not only has the decline in the inequality in consumption expenditures been halted in the 1990s, but there is evidence of a rise in such inequalities. This would have definitely contributed to the persistence in the incidence of poverty.

However, what really matters is not the current value of consumption, but the prices at which this occurs. So it is important to look at what has happened to the relevant price deflator. Deflated by the prices of all consumer goods, including those consu med by the rich, the CSO shows rising consumer expenditure per capita. But if the consumption expenditure estimates - whether of the NSS or of the CSO - are deflated using the variables appropriate for the poor, such as the consumer price index for agric ultural labourers, then a sharp picture emerges of stagnation in per capita terms.

This is because food, which accounts for a major part of the consumption of the poor, has experienced especially large increases in price over the 1990s. This in turn is part of the overall macro-economic strategy of encouraging agricultural exports and reducing per capita spending on food subsidies. Thus, it becomes clear that one of the reasons for the stagnation in real per capita consumption and therefore of the incidence of rural poverty during the 1990s is the adverse consequence that rising food prices have had for the poorer sections of India's population.

THE other feature which helps explain the extent of rural poverty has to do with employment generation possibilities in the rural areas. Calculations of the probable share of the rural sector in total national income suggest that the share of the rural a reas in total incomes has fallen quite sharply. This is not only because agricultural incomes have grown slower than non-agricultural incomes but also because the share of non-agricultural incomes in total rural incomes, which rose sharply between 1977-7 8 and 1990-91 has stagnated since then. (This argument and the calculations on which it is based are elaborated upon in C.P. Chandrasekhar and Jayati Ghosh, "The Poverty Puzzle", Macroscan in The Hindu Business Line, February 22, 2000, also availa ble at the following website: www.macroscan.com)

The new series of national income estimates with base year 1993-94 shows a much higher rate of growth for agricultural output, but close examination reveals that this is strongly related to the much larger weight provided for fruits, vegetables and flori culture, which also are shown to have much higher growth rates than other agricultural produce. As a result, fruits and vegetables are now estimated to account for more than 50 per cent of the increase in total value of crop output during this period. Wh ile this may even be a true reflection of the agricultural reality, if it is an overestimate of the role of this category of crops, then the output data may also reflect an upward bias.

Thus, the available data currently suggests the following: the rate of growth of per capita output in real terms in the rural sector has sharply decelerated from 3.1 per cent in the 1980s to 1.8 per cent in the 1990s. This is a result of the combination of a collapse in rural non-agricultural employment and a significant deceleration in agricultural growth other than in the category "fruits and vegetables". This is important also because one reason why rural poverty declined during the 1970s and 1980s w as that income earning opportunities in the rural non-agricultural sector expanded substantially, driven mainly by a large expansion of government expenditure in the rural areas.

The 1980s represented a period when, along with a rapid increase in all sorts of subsidies and transfers to households from government, there was a very large increase in expenditure on the rural sector by the State and Central governments, and this was also a period when the expenditure on rural development expanded manifold. More generally, throughout the period political developments tended to give rural interests greater power and they were able to command an improvement in the historically low shar e of government expenditure benefiting the rural areas. Nearly 60 per cent of all new government jobs created accrued to rural areas during the decade and accounted for 80 per cent of the new regular jobs being created in the countryside.

Even for the less well off and rural poor, the agency of the state was important at the margin, in terms of rural employment and income generation schemes. More than one-fifth of all casual labour days spent on non-agricultural activity in the late 1980s in rural India were on public works programmes of the government. This was critical in increasing both access to lean-season incomes and boosting the bargaining power of rural labour.

In this context, it is not difficult to see why the macro-economic policies of the 1990s should have contributed to the reversal of two important processes in the rural areas in the 1980s: the diversification of employment and the reduction of poverty. I n addition to other policies, this strategy involved the following measures which specifically related to the rural areas:

1. Actual declines in Central government revenue expenditure on rural development (including agricultural programmes and rural employment and anti-poverty schemes), such that there has been an overall decline in per capita government expenditure on rural areas.

2. Very substantial declines in public infrastructure and energy investments which affect the rural areas. These have not related only to matters like irrigation but also to transport and communications which indirectly contribute significantly even to a gricultural productivity, besides being an important source of rural non-agricultural employment.

3. Reduced transfers to State governments which have been facing a major financial crunch and have therefore been forced to cut back their own spending, particularly on social expenditure such as on education and on health and sanitation, which had provi ded an important source of public employment over the 1980s.

4. Reduced spread and rising prices of the public distribution system for food.

5. Financial liberalisation measures which effectively reduced the availability of rural credit.

Thus, in the 1990s, several of the public policies which contributed to more employment and less poverty in the rural areas in the earlier decade have been reversed, and the consequences in terms of lower non-agricultural employment and higher poverty ar e already evident. The trends in rural poverty are no paradox, but simply reflect the effects in the countryside of neo-liberal macro-economic policies at work.