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Inclusive Growth, poverty and Economic Development in India

Prof. S.Mahendra Dev, Chairman, Commission for Agricultural Costs and Prices, Government of India

Introduction
Since independence, significant improvement in Indias economic and social development. In the post-reform (since 1991) period, India has done well in some indicators such as balance of payments, resilience to external shocks, service sector growth, significant accumulation of foreign exchange, Information technology (IT) and stock market, improvements in telecommunications etc. GDP growth was around 8 to 9% per annum in the period 2004-05 to 2007-08. Investment and savings rates were quite high 32 to 36%.

Need for Inclusive Growth


However, exclusion continued in terms of low agriculture growth, low quality employment growth, low human development, rural-urban divides, gender and social inequalities, and regional disparities etc. There is now recognition that inclusive growth should be achieved in order to reduce poverty and other disparities and raise economic growth. 11th Plan (2007-12) advocates for inclusive growth. Even at international level, there is a concern about inequalities and exclusion and now they are also talking about inclusive approach for development. In this presentation, I will be discussing issues and challenges for achieving inclusive growth.

Elements of Inclusive Growth


Five interrelated elements of inclusive growth. Poverty Reduction and increase in quantity and quality of employment Agricultural Development Social Sector Development Reduction in regional disparities Protecting the environment

Poverty
Income poverty and non-income poverty We concentrate here on income poverty The official poverty lines are anchored to a fixed commodity basket corresponding to the poverty line (Rs.49.09 per person per month at 1973-74 prices for rural areas and Rs.56.64 for urban areas). The suggested rural commodity basket by the Expert Group contained 2400 kcal per capita per day in rural areas and the urban food basket had 2100 kcal per capita per day in 1973-4. For subsequent years, poverty line is updated with consumer prices.

Trends in Poverty (%): India


Year 1973-74 1983 1993-94 2004-05 Rural 56 46 37 28 Urban 49 41 32 26 Total 55 45 36 28

Number of poor (in million)


Year 1973-74 Number (million) 321

1983
1993-94 2004-05

323
320 302

Poverty
Income poverty declined from 55% in the early 1970s to 28% in 2004-05. Although there has been progress in decline, still more than 300 million below poverty line. World Bank Estimates: 42% below $1.25 poverty line. ADB 65% with $1.35 poverty line 80% of the poor are from rural areas. Poverty concentrated in few states (Bihar, Uttar Pradesh and Madhya Pradesh and Orissa, Chattisgarh and Jharkhand) Concentrated among agricultural labourers, casual workers, Scheduled Castes and Scheduled Tribes

Determinants of Rural Poverty


Agricultural Growth Relative food prices Rural non-farm sector Rural wages Governments development expenditure Infrastructure Human Development

Percentage budget share of cereals


Year Rural Bottom 30% 53.7 39.4 Rural Urban Urban Top 30% 13.4 9.5 Top 30% Bottom 30% 29.5 38.9 18.2 27.6

1970-71 1990-91

1993-94
2004-05

35.7
29.3

15.7
12.5

25.6
20.6

8.2
6.3

Percentage budget share of food (cereals+non-cereals)


Year Rural Rural Urban Urban Top 30% 62.5 48.1 43.8 Bottom 30% 1970-71 84.1 1990-91 73.7 1993-94 69.8 Top 30% Bottom 30% 71.3 80.0 59.4 52.6 70.7 66.4

2004-05 66.1

47.5

59.9

34.5

Movement in Indices of Commodity Prices India vs International:Cereals

300
257.9

250

237.4

231.1

200
158.7

150
121.3 100 106.7 114.1 118.6 120.4

122.6

100
100

50 2005 2006
India WPI

2007

Year

2008 Qtr I

2008 Qtr II

2008 Qtr III

International (IMF Indices)

Movement in Indices of Commodity Prices India vs International:Wheat


300
269.9

250

227.3 208.4

200
167.4

150

125.8 113 100

120.7

124.6

125

128.8

100
100

50 2005 2006
India WPI

2007

Year

2008 Qtr I

2008 Qtr II

2008 Qtr III

International (IMF Indices)

Movement in Indices of Commodity Prices India vs International:Rice


350
331.1

300
261.5

250

200

179.2

150
115.5 100 105.5 102.1 108.4 113.5 115.8 117

100
100

50 2005 2006
India WPI

2007

Year

2008 Qtr I

2008 Qtr II

2008 Qtr III

International (IMF Indices)

Reasons for low domestic food prices


India insulated domestic food prices from the recent high global food prices Reasons are the following -- high oil and fertilizer subsidies -- Duty cuts, export bans -- Administrative measures on hoarding, ban on futures markets -- Procurement, buffer stock and public distribution of food

Policies for Poverty Alleviation


India adopted two pronged approach -- Growth approach: all three sectors contribute agriculture, industry and services -- Direct approach : Safety nets or anti-poverty prog. -- Self employment progra. (womens groups), wage employment progra, food subsidies, nutrition programmes for children, old age and maternity benefits -- Public Distribution System Subsidized food -- National Rural Employment Guarantee Scheme (NREGS) Giving 100 days of wage employment to the poor

Employment
Sector Agriculture 1961 75.9 2004-05 56.4

Industry
Tertiary

10.6
12.4

18.2
25.4

Total

100.0

100.0

Problems in Employment
Share in Ouput and Employment of different sectors Agriculture: 20% in GDP, 57% in Employ. Industry: 23% in GDP,18% in Employ. Services: 57% in GDP, 25% in Employ. Employment growth increased in recent years but quality is low. Problem of working poor Poverty is much higher than unemployment

Problems in Employment
There are 458 million workers in India in 2004-05 Out of this 423 million workers are informal/unorganised workers (92%). Growth in employment more in unorganised sector. Thus, quality of employment is a problem Workers in this sector do not have social security. Government is trying to provide minimum social security to unorganized workers

Inclusive Growth: Agriculture


Concerns in Agriculture --Deceleration in growth from 3.5% during 1981-97 to 2% during 1997-2005. Decline in yield growth. -- Land and water problems, vulnerability to world commodity prices, farmers suicides, 45% of farmers want to leave agri but no where to go. ----Disparities in growth across regions and crops: growth rate declined more in rainfed areas.

Problems in Indian agriculture

Long term factors: Steeper decline in per capita land availability. Shrinking of farm size Slow reduction in share of employment (still 55%) Main problem is low labour productivity in agriculture. Gap between agri. and non-agri. is widening. We should blame non-agriculture (industry and services) for not absorbing workers from agriculture.

Three Goals of Agricultural Development


1.Achieve 4% growth in agriculture and raise incomes. Increasing productivity (land, labor), diversification to high value agri. and rural non-farm by maintaining food security. 2.Second goal is sharing growth (equity): focus on small and marginal farmers, lagging regions, women etc. On lagging regions, focus on Eastern India and other rainfed areas. 3. Third is to maintain sustainability of agri. by focusing on environmental concerns.

Deficits in Agriculture Growth


Six deficits in agriculture :(a) land and water management deficit (b) investment, credit and Infrastructure deficit, (c) research and extension (technology) deficit, (d)market deficit, (e) institutions deficit, (f) education/skill deficit

Poverty can not be removed with 55% of workers in agri. Need to promote rural non-farm sector. India currently produces about 50 million tonnes of fruits and 90 million tonnes of vegetables. Only 2% of these are processed as against 23% in China, 78% in Phillippines, 83% in Malaysia. Half of those engaged in agriculture are still illiterate and just 5% have completed higher secondary educ. Even in 2004-05, around 60% of rural male workers and 85% of rural female workers are either illiterate or educated upto primary level. In other words, education and skills are constraints

Rural non-farm sector

Lessons from China


India leap frogged from agriculture to services with less focus on manufacturing. The share of employment in manufacturing in Malaysia is 50%, in Korea 62%, in China 31%. On the other hand, the share of employment in manufacturing in India is only 12% Diversification towards rural non-form sector in China is one of the important factors responsible for rural poverty reduction (poverty 3%). This was partly due to high agricultural productivity and investment in physical and human capital.

Social Development
In social sector, significant achievements in education and health However, Human development index rank is 127 out of 170 countries. Social indicators are much lower for Scheduled castes and Scheduled tribes Malnutrition among children is one major problem (46% of children suffer from malnutrition

Six problems in Social Sector: education and health


There have been significant achievements but there are problems Low levels of social indicators Slow progress Significant regional, social and gender disparities Low level and slow growth in public expenditures particularly on health Poor quality delivery systems Privatization of Health and Education

Regional Disparities
Significant Regional Disparities in India. Per capita income : Highest per capita income Rs.16,679 in Punjab; lowest per capita income state Rs.3557 in Bihar Female infant mortality varies from 12 in Kerala to 88 in Madhya Pradesh Female literacy varies from 33.6% in Bihar to 88% in Kerala

Regional Disparities
Inter-state disparities in the growth of Gross State Domestic Product (GSDP) increased in the post-reform period compared to the eighties. In general, richer states grew faster than the poorer states. Causes for disparities; Investment in physical and human capital Technology Institutions including governance

Environment
Degradation of land, water. Increase in pollution levels Challenges of climate change Consumption patterns of rich Higher economic growth should not lead to decline in our environment

What Should be done to improve inclusive growth?


Equity is important for economic development Agricultural Development Economic reforms are important. But macropoor policies (fiscal, trade, financial, monetary etc.) should have pro-poor focus Structural change should have followed agriculture-industry-services sequence Development of manufacturing sector is important for creation of productive employment Equality of opportunities (education) South East Asian and East Asian experience

What should be done? (contd.)


Role of Technology Shift focus of reforms to delivery systems Importance of womens economic and social empowerment Decentralization Economic reforms in relation to sociopolitical environment Rights approach (civil, political and economic)

Conclusion
There is a need to have a broad based and inclusive growth to benefit all sections of society and improve economic growth. We have examined issues and challenges in five elements of inclusive growth (poverty and employment, agriculture, social sector, regional disparities and environment) It is more challenging for the country to achieve inclusive growth than getting 8 to 10 per cent growth in GDP

Conclusion
There are strong social, economic and political reasons for achieving broader and inclusive growth. Socially, lack of inclusive growth leads to unrest among many people. There is also an economic argument. The measures which raise equity also promote economic growth. Lastly, the political argument is that no government in a democracy can afford to ignore large sections of workers and non-working population. If it is not inclusive it can generate very severe social tensions. Thus, politically, for having a stable and democratic society one needs to have inclusive growth.

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