#India- Inequality matters #poverty,what statistics say


 Radhicka Kapoor
 
Posted online: Tuesday, Mar 05, 2013 , FE
Given the average GDP growth of 8.5% during FY05 to FY10, the Eleventh Plan target of reducing poverty by 2 percentage points a year was disappointing
That poverty in India has declined between 2004-05 and 2009-10 is indisputable. Poverty estimates based on the Tendulkar poverty line released last year indicated that poverty headcount ratio declined by 8%, 4.8% and 5.7% in rural, urban and all-India, respectively, during this period. This worked out to an annual decline of 1.64% and 0.92% in rural and urban India, respectively. Given that the average growth rate of GDP during this period was about 8.5%, exceeding 9% in three of the five years, and that the Eleventh Plan aimed to reduce poverty by 2 percentage points a year, this pace of poverty reduction is indeed disappointing. If economic growth was the only factor that mattered for poverty reduction, we should have witnessed greater poverty reduction. Moreover, states with the highest growth rate should have performed the best in terms of poverty reduction. But state-wise poverty estimates indicate that this is not the case. For instance, Bihar and Chhattisgarh witnessed average growth rates of about 10% during this period, yet poverty declined by less than 1%.
While growth is unquestionably necessary for substantial poverty reduction, it appears that growth is getting weakly linked with poverty reduction. In other words, the growth elasticity of poverty (GEP) is not high enough. GEP gives the percentage change in a chosen poverty measure in response to a 1 percentage change in GDP or mean income and can be interpreted as the poverty reducing impact of growth. In the poverty literature, GEP is found to be a function of initial income distribution, and it has been shown that rising levels of inequality lower GEP. The rationale for this is that the higher the initial inequality, the lesser the poor will share in the gains from growth. Martin Ravallion explains this succinctly as: “Unless there is a sufficient change in the distribution, people who have a larger initial share of the pie will tend to gain a larger share in the pie’s expansion”.
The National Sample Survey (NSS) data point in the direction of rising inequality in India. The Gini coefficient for rural India increased from 0.27 to 0.28 between 2004-05 and 2009-10, with rural inequality rising in 11 states. The Gini coefficient for urban India increased from 0.35 to 0.37, with urban inequality increasing in 18 states. Moreover, the ratio of per capita income between the top 15% and bottom 15% of the population has risen from 3.9 to 5.8 in rural areas and from 6.4 to 7.8 in urban areas during this period. This indicates that not only is inequality between the two groups on the rise, but also that the benefits of economic growth have not trickled down to those at the bottom of the distribution. Importantly, this rising inequality has reduced GEP.
Moreover, these inequality measures need to be interpreted with caution as India measures inequality based on consumption rather than incomes, and consumption inequality tends to be lower than income inequality because of consumption smoothing by households. Also, the NSS estimates of consumption expenditure fail to capture the top income groups, thereby resulting in underestimation of inequality. Therefore, inequality in India is higher than what we believe by looking at these estimates.
Importantly, inequality of consumption is about ‘inequality of results’ and not ‘inequality of opportunities’, which may be more important but are much harder to measure. Such inequalities are associated with gender or caste, access to key social services, particularly healthcare and schooling and access to credit markets; and these tend to undermine productivity, retard growth and consequently impede the task of poverty reduction. To achieve a higher rate of poverty reduction and make the growth process more inclusive, India will need to address these inequalities in opportunities that impede poor people from participating in the growth process. This will require increased spending on education and health, and creation of quality jobs and social safety nets for the poor and vulnerable. Conditional cash transfers (CCTs), which reinforce focus on schooling and health, if designed and targeted appropriately, can also go a long way in addressing such inequalities of opportunity. Allowing children to move faster and higher up the education ladder than previous generations will enable them to enjoy better prospects in the workforce than their parents. Research at the International Poverty Centre has found that CCT programmes such as Bolsa Familia and Oportunidades were responsible for about 21% of the fall in the Brazilian and Mexican Gini coefficient, each of which fell by approximately 2.7 points between mid-1990s and 2000s.
Over the last few decades, India has lifted people out of poverty at an unprecedented rate, but the pace of poverty reduction is being seriously challenged by rising inequality, which hurts GEP.
This makes a strong case for prioritising distribution and making income distribution more equal before embarking on a high growth path. Moreover, increasing inequality could undermine the basis of growth itself by reducing social cohesion and undermining the quality of governance by increasing pressure for inefficient populist policies. That myopic political responses to growing inequality to assuage voters can have disastrous consequences for the economy is well explained in Raghuram Rajan’s book, Fault Lines: How Hidden Fractures Still Threaten the World Economy. It was to address the rising income inequality in the US that credit, in particular housing credit, was pushed on low income households fuelling the crisis. It is therefore imperative that in the quest for higher economic growth we do not ignore the perils of rising inequality, one of the most pressing problems we are likely to face in the coming decade.
The author is an economist with a keen interest in the field of poverty and inequality in developing countries

 

Mr “Money doesn’t grow on trees” spends Rs 7721 per head on dinner #Manmohansingh


 

image, courtesy -pagall patrakar at fakingnews.com

By Shankkar Aiyar

30th September 2012 , new indian express

History, they say, repeats itself, first as tragedy and then as farce. In India’s political economy, it is increasingly difficult to distinguish the tragedy from farce. Last Friday, the Prime Minister told the nation that money doesn’t grow on trees. This Saturday, the nation woke up to a new chapter in Manmohanomics. The country has been informed—thanks to an RTI query by Hissar-based Ramesh Verma—that the government spent Rs 28.95 lakh on the third anniversary celebrations of UPA II.

In a country where anyone earning Rs 22 per day (in rural India) is ineligible to be poor, the government spent Rs 7,721 per person on a dinner. By its own calculation that amount would have paid for a family’s annual consumption of cooking gas. The Prime Minister also said that the UPA has “been voted to office twice to protect the interests of the aam aadmi” but that didn’t stop the splurging of Rs 14 lakh on just the tent for the event. Isn’t it incumbent on a government that caps the number of cylinders per family—ostensibly to bring down subsidies and deficit —to observe a cap on what is a justifiable level of expenditure! Indeed, in keeping with the government’s inability to budget expenditure, of the 603 invited to the event, only 375 came.

The question that begs to be asked is not what the UPA II was celebrating but whether the UPA can choose to celebrate given the state of the economy. The question being asked is how did the economy reach where it has and who will be held accountable for this mess. This Friday, the Committee on Roadmap for Fiscal Consolidation submitted its report to the Ministry of Finance. The committee, led by the brilliant Vijay Kelkar, has minced no words in its assessment. More importantly, unlike most sarkari committees, it has eschewed the need for political correctness.

In its opening sentence, the report has declared that “the Indian economy is presently poised on the edge of a fiscal precipice”. It observes that fiscal deficit is likely to be 6.1 per cent, that current account deficit currently at 4.2 per cent could worsen and “sovereign credit downgrade and flight of foreign capital” are likely unless corrective steps are taken. The committee has warned against the classic “do-nothing approach” and emphasised that “growth slowdown is inefficient, inequitable, and potentially politically destabilising”.

The genesis of the crisis stems from profligacy and pathetic budget management. It is true that mandarins and ministers in the past have got away with numerical calisthenics. The budget of 2012-13 presented in March though takes the cake. Fudge is probably the most charitable description for what has been presented to the nation. Budget 2012-13 underestimates expenditure, borrowings and subsidies and overestimates revenues and growth.

Pranab Mukherjee’s budget for 2012-13 estimated that the government would borrow Rs 1,500 crore every day for the full year. The trend of the first half of the year shows the government has borrowed over Rs 2,000 crore every day between April and September. Subsidies rose from Rs 1.7 lakh crore in 2010-11 to Rs 2.16 lakh crore in 2011-12—for fertilisers, the government provided Rs 49,997 crore and spent Rs 67,198 crore; for food, it provided Rs 60,572 crore and spent Rs 72,823 crore; and on fuel, it provided Rs 23,640 crore and spent Rs 68,481 crore. Yet in its wisdom, total subsidies were capped at Rs 1.9 lakh crore. Indeed, the Rs 43,000 crore provided for fuel subsidies for this year was exhausted by August and even after the hike in diesel prices, fuel subsidies are expected to touch Rs 1 lakh crore.

The budget also overestimates tax revenues despite the previous year’s performance. In 2011-12, collections of corporation tax, income tax and central excise were less than estimated. Total tax collected in 2011-12 was Rs 31,000 crore less than estimated at Rs 9 lakh crore. That didn’t stop budget-makers from estimating tax collection at Rs 10.7 lakh crore. Every year since 2008, the Reserve Bank has been forced to accommodate the government through a multiplicity of instruments. Reserve money has shot up and so has net credit to government. The inflationary character of successive budgets could not have been a secret. The tradition is that every budget—at least the broad outline—is presented before the Cabinet and every finance minister takes the okay of the prime minister on details. It is inconceivable that the underestimation of reality and overestimation of fantastic hope were not noticed. Why didn’t the economist prime minister react?

Last week, Raghuram Rajan, the new chief economic adviser, declared confidently, “I don’t think we are anywhere near the 1991 crisis.” The confidence is obviously not shared by many. Not in the absence of political will. The Kelkar Committee Report observes that the economy is headed for a “perfect storm”—simply put, is teetering on the brink of a crisis. The do-nothing approach will result in high fiscal and current account deficits. High borrowings will crowd out investment. Given the uncertainty in global marts, foreign capital flows are fragile. Foreign exchange reserves are falling and the currency is especially vulnerable. “The combination,” the committee says, “is reminiscent of the situation last seen in 1990-91.”

Unless the government wakes up to the enormity of the crisis faced by India, the Rs 7,721 per UPA-person dinner could well be the last supper.

Shankkar Aiyar is the author of  Accidental India: A History of the Nation’s Passage through Crisis and Change

shankkar.aiyar@gmail.com

 

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