Rich & Poor in India – Redistributing the Gains of Improved Economy

Rich & Poor in India – Redistributing the Gains of Improved Economy

Guest Column by Hari Sud

Careers in India’s political systems have been made or lost on one slogan – Vanish Poverty (Garibi Hatao). This slogan has been the buzzword of the ruling political party, since 1950. The irony is that the slogan makers were, very poor economic managers. From 1950 to 1998, India could boast of one or two achievements only i.e. food self-sufficiency and a bit of improved services to the village folks. In contrast, India failed on every other front. Economy slugged at a low 3.5% growth rate and population multiplied from 400 million in 1947 to 950 million in 1998. These additional mouths have to be fed, housed and provided economic means to make a living. Without that, civil disorder will be, the order of the day. Lucky for India , the political party then in power took control in 1998 and decided to redress all the above grievances. First and foremost on their mind was to accelerate economic growth. This they began by making friends with US. The latter is the prime mover of all economic activities in the world. Also the new leaders had a model in front of them. The Chinese had befriended US twenty years earlier and had gained a tremendous economic advantage. India had to do the same. In addition the economy had to be opened up for foreign competition and investment. Once this was achieved over five years, economy accelerated to 8% growth. Then the primary task before new government(s) was to work hard to redress rich and poor imbalance. Gains on economic front have to be felt by the poor also. For this entrepreneurship has to be encouraged at all levels. Skill base of the private sector becomes very useful. To harness private sector energies, they have to be allowed to retain some of the gains of prosperity. It is they, not the governments, who will pass on the benefits to the less fortunate. Governments in their capacity as overall managers have to ensure that the poor get the benefits of economic gains.

Before we discuss rich-poor income gap, we have to understand it and then quantify poverty. This subject is the favorite of economists worldwide. Huge amount of literature and studies have been conducted and advice offered. Much of it is academic in nature. Some simple concepts on the subject are discussed below.

How has the Poverty Curve Moved in last 50 Years?

There are many ways to measure poverty. Western economists prefer GDP and per capita income as a measure. GDP of less developed countries suffer a currency conversion disadvantage hence another measure – Purchase Power Parity (PPP) has been coined to recalculate GDP. Then again, GDP does not show what segment of the society is poor. It is a measure of overall prosperity of the nation. Indian politicians have their own formula for measuring poverty. They define poverty as lack of three meals a day, enough clothing and shelter. This is hard to quantify and a measure still harder to compare your performance with others. Hence, the Western economic measurement technique has been adopted. One such measure is called GINI coefficient (Index). It measures economic inequality in a country, with zero implying perfect equality and 1 indicating perfect inequality. Wealthy nations with high standard of living in the West, should have a value close to Zero and poor countries have close to One (It is usual to multiply the coefficient by 100 to get a more manageable number). This index, more or less, measures income distribution in a country. In 2005, India had a GINI Index of 37.8, indicating significant inequalities in income distribution. If this index for India increases in next ten years then it means that India has done a miserable job in income re-distribution. Fortunately it is at about same level for a number of years. That means 8% economic growth has provided equal relief to the poor and also made a few more millionaires. The same index for Brazil is 60. The latter indicates that there is a huge income disparity in the country. This leads to one conclusion that if high economic growth is accompanied by high GINI index then poverty reduction via economic progress has been entirely lost. This is true about Brazil.

The above Index is not the best measure of poverty and income mal distribution. Consider this – relatively poor countries of Eastern Europe have a GINI index close 25, but US has an index of 45. That means, income in Eastern Europe (formerly Communist ruled) is well distributed and in US it is not so well distributed. Does it mean that, that poverty has vanished from Eastern Europe ? Not true. It only indicates that low income there is well distributed, with no high-income millionaires/billionaires. At 45, the GINI Index does not state well about US. It only indicates that there are very many billionaires in US. Looking at the prosperity in US and opportunities for everybody, this concept fails to clarify the discrepancy. Hence let us look at other means to study and quantify poverty.

A number of studies undertaken in the last 50 years have tried to explain income disparity in multiple segments of a society in almost all the countries. These concepts are again hard to follow just like the GINI index above. Interestingly, there is an Australian study, which simplifies this concept. It divides a nation e.g. India into five income groups. Then it plots these income groups against incomes. Superimposed on this chart are the Word Bank’s one dollar a day (extreme poverty in 1986 dollar value) and two dollars a day poverty lines. A graph for every ten years starting from 1970 is plotted. The resulting chart gives a little better understanding of poverty. The Chart below shows that in 1970 & 1980, about 40% of the total population in India was below the $1 level. But there is a dramatic shift by the time 1998 rolls in. This percentage decreases to about 20%.

Income Distribution – India





Reference: Australian Government, Treasury reports on Poverty, inequality and Distribution of Income in G20.

The above also shows a definite shift in the incomes towards higher numbers. In fact poverty reduction has made a definite progress in last 20 years. A similar graph for 2005 (unavailable) will show a movement to the right indicating smaller segment below the poverty line and a bigger size of the middle-income group. This fact is evident in India as the middle-income group is making its presence felt.

The same graph as above plotted from available data for China shows similar results. Note that statistics is not the best-kept science in China and available data for China for 1970 and 1980 is confusing. Still let us plot it and see, what it tells us.

Income Distribution - China







Chinese chart is very similar to India’s chart. One glaring difference is that the Chinese chart (1998) has much bigger inverted bell with a flat top, indicating that a big percentage of people have graduated from $1 and $2 a day income to higher income bracket in last 20 years. The forgoing is evident from all reports emanating from China. There is a large population base of 200-300 million on the East Coast, which has distinctly better life style than the rest. They have to thank the Foreign Direct Investments for it.

Hence, both China and India have made enormous progress against poverty. If extreme poverty as per World Bank (in 1986 dollars) is defined as $1 a day, then shift of the graph towards right and its flattening as seen in 1998 graph for both China and India is a good sign. It would appear that still about 15 to 20% of the population is below the poverty line in 1998. One wonders where do the skeptics in the Western media get their figure of 350-400 million people in India below the poverty line.

Changes in India with Economic Progress

These changes are evident as you pass through rural as well as urban India . Slums are cohabitated with high-rise buildings in the cities. Even slums have a significant population of well to do residents except that they have not moved out. Rural India, although still poor, is much better off today than any time in the past. Thatched roofs have given way to slate or cement roofs. One-room hovel residents are dwindling rapidly. Roads and transport has reached the remotest corner. Electricity and clean water, barring a few exceptions are almost everywhere. Schools and medical dispensaries are every 3 miles. Prior to that it was always 10 miles for a primary school and 30 miles for a hospital. All the forgoing is a social change achieved with economic progress. This author hails from a remotest village in Himachal Pradesh. All the forgoing is clearly visible as the author observed during his visit last January. Much of this social change has been induced with self-help. Governments have lent a hand, but government efforts are always slow and cumbersome. Hence people have forced the change on themselves.

Have the Government Poverty Reduction Schemes worked in the Past?

Too many schemes have been implemented to reduce poverty in the past 50 years. None have worked. Bulk of the money is lost in bad management and other significant portion is lost in the bureaucratic hassle. Only scheme, which seem to work in the rural areas is upgrading of the agriculture and general availability of education. Both have provided a stable environment for progress. The urban areas have not done very well. The slum population has multiplied and crime rate has increased. Slum dwellers even if they could afford better living are unable to move out because housing and other facilities are too expensive. Few poverty reduction schemes specifically tailored for the urban areas are successful. Newer of the new schemes – National Employment Guarantees Scheme has been initiated recently. It guarantees employment of 100 days for anybody willing to work, especially in the rural areas. As a matter of fact it was an act of Parliament, which created this scheme in 2005. Funding of this scheme is 75% Central Government and rest from the State Government. In order to make it work, a huge civil bureaucracy is needed, which in itself will eat away the funds allocated. Hence apart from minor benefits here and there, especially during failure of the rains, success of this venture is unlikely. True impact on rural economy and poverty reduction will be when the agriculture is made even more productive. Current production of 2.5 tons of grain from a hectare is high as compared to twenty years back. But it is low compared to US and European standards. A 50% improvement in this sector with better water management, improved seeds and other agricultural inputs will go a long way to change the face of rural India. With higher agricultural productivity, poverty in villages will be a thing of the past.

Targeted poverty reduction programs in urban areas with development of infrastructure like sanitary & waste management, housing, and urban renewal investment etc. have a significant poverty reduction component. Each of these provides meaningful employment together with cleaning up of the cities. These schemes are low on government priority. Hence poverty in urban areas will stick around for a little bit longer.

Conclusion

A figure of 350 to 400 million poverty stricken people in India is false. It is a figure on which Western media and vested political circles thrive. They only wish to foul mouth India’s achievements. The figure is half or even third of that. One point, which needs to be borne in mind is that when the country attains 8% a year growth, income redistribution must go hand in hand. Otherwise the benefits of the national growth to the poor are lost and inequalities become more apparent. Government schemes on poverty reduction other than infrastructure upgrade in rural and urban areas never work. In urban areas industrial activity is already providing significant employment. This in itself provides the biggest push to the poverty reduction. Governments have to help to upgrade the lot of poor with more employment, housing and slums clearance etc.