Poverty and Reforms - A Case Study For India by Tarun Das

Submission of Research paper for the
Global Development Awards: 2003 Competition
Category: Medals for Research on Development

Topic: Pro-Market Reform and the Poor
Title of the Paper

Impact of Pro-Market Reforms Poverty and Inequality in India-
An Assessment and Lessons for Policy Makers
Dr. Tarun Das, Economic Adviser, Ministry of Finance, India
Abstract
This is a case study on India on the progress of pro-market reforms and their impact on
growth, private investment, poverty, inequality, employment and other development
indicators in 1980-2000. India’s reforms program emphasized on gradualism with a
human face. Reforms helped India to move on a higher growth profile with more
employment, less inflation and less poverty. The study makes an econometric analysis of
the factors affecting poverty reduction at the macro and states levels with time series and
pooled data for urban and rural sectors. The study confirms observations made by
economists that while growth in income is essential for poverty reduction, it is by no
means sufficient. It is important to focus on creating an enabling environment for the
poor to participate in, and benefit from, the growth process. The pro-poor public policies
include creation of employment opportunities and enhancing the level of health,
education and skill of the poor.
A stable macroeconomic environment, characterized by low inflation and sustainable

level of fiscal deficit makes it possible for the poor to safeguard their purchasing power.
The reduction of government deficit allows banks to provide more funds for private
investment, which is more efficient. It also allows the government to devote more scarce
resources to investment in social sectors. Effective safety nets that insure poor against
income fluctuations, such as public works programs, are very effective in overcoming
market failures, and need to be widened. There is a wide scope for strengthening the
public-private partnership and involvement of NGOs for implementation of government
schemes in social sectors.
Author: Dr. Tarun Das, Economic Adviser, Ministry of Finance, India.

Official Address: Room 34-A North Block, New Delhi-110001, India.
Residential address: 10/14 East Patel Nagar, New Delhi-110008, India.
Citizenship: Indian, Permanent Resident of India.
TeleFax: (00-91-11) 2309-3552. Mobile: Delhi 9818111841/ 9810047340
Email: tarundas@finance.nic.in
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Impact of Pro-Market Reforms Poverty and Inequality in India-
An Assessment and Lessons for Policy Makers
Dr. Tarun Das, Economic Adviser, Ministry of Finance

Room 34-A North Block, New Delhi-110001, India.
1. Introduction, Scope and Objectives of the Paper
It is well known that since 1991 India intensified pro-market reforms to encourage
private participation in economic development and to impart dynamism to the overall
growth process. Credible reforms were taken in industry, trade, infrastructure, fiscal and
financial sectors to improve competitiveness of Indian industries and to exploit fully
country’s potentials for higher growth. As the initial reforms take root and second-
generation reforms unfold, India is emerging as one of the fastest growing and dynamic
economies of Asia.
India’s reforms program is characterized by the following unique features:
 Gradual and Step by Step Approach not a Big Bang or Shock Therapy Approach
 General political consensus
 Strong emphasis on “human face”
 Least sacrifice made by people
 No write-off / rescheduling of external debt
India has a multi-party democracy and adopted “growth with social justice” as one of the
basic objectives of planning since 1951. Indian government believes that no reforms can
succeed unless they are able to take the people along with them. Therefore, all reforms
are based on general political consensus and have a bias for employment generation and
poverty reduction.
More than 12 years passed since the reforms started. Twelve years is a long period in the
life of an individual, but for a country as complex and large as India, 12 years are not
enough to expect completion of all reforms. There is unfinished agenda of reforms in
land and labour markets, local governments, external openness and capital account
convertibility. However, it is a matter of satisfaction that the impact of reforms on growth
and poverty reduction had been encouraging. India moved up on a higher growth path
with higher employment, higher real wages, less inflation and lower level of poverty.
Inflation declined from 16 percent in June 1991 to around three percent today. Poverty
ratio declined from 36 percent in 1993-94 to 26 percent in 1999-2000. There was no
wage freeze, no retrenchment of employees or shutting down of companies.
India came out of a severe balance of payments crisis without any debt write-off. On
contrary, India was able to prepay a part of external debt to the multilateral funding
agencies and bilateral countries.
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Total foreign exchange reserves increased from US$1 billion, equivalent to two weeks’
imports in June 1991, to US$85 billion equivalent to 15 months of imports. The current
account balance, which recorded a deficit of 3.1 percent of GDP in 1990-91, had a
surplus amounting to 0.3 percent of GDP in 2001-02 and 0.9 percent of GDP in 2002-03.
Foreign investment inflows improved from total of US$1 billion in 1980s to $40 billion
in 1990s due to stability of the exchange rate, continual reforms in infrastructure and
liberalisation of foreign investment policies.
External debt indicators also showed steady improvement. In terms of stock of external
debt, India’s position improved from the third rank after Brazil and Mexico in 1990 to the
ninth rank after Brazil, Russian Federation, Mexico, China, Argentine, Indonesia, Korean
republic and Turkey in 2000. The external debt-to-GDP ratio declined from 38.7 percent
at end-March 1992 to 19 percent at end-March 2003. The debt-service ratio declined
from 35.3 percent in 1990-91 to 13 percent in 2002-03. Due to these improvements, India
is now categorized as “a low indebted country”.
India is one of the few countries, which reaped these benefits without serious economic
disruptions or much sacrifice made by the people. Many countries with significant
reforms experienced high rates of inflation, unemployment and poverty at the initial stage.
There was no such adverse situation in India, as Indian reform program emphasized
development of appropriate safety nets for the vulnerable and weaker sections that might
be adversely affected by structural reforms.
The basic objectives of this paper is to analyze the unique features of India’s economic
reforms and to answer a number of questions, particularly the following:
(a) What has been the impact of reforms on poverty and social development
indicators in India?
(b) What kinds of poverty alleviation and employment generation programs and
social safety nets were used to protect the interests of the poor?
(c) How can we encourage further the private participation and public-private
partnership for the development of social sectors?
(d) What lessons can we learn from the Indian experience for policy planning?
The paper is divided into six sections including this section on objectives and scope.
Section-2 discusses briefly the pro-market reforms taken since 1991. Section-3 analyses
the impact of reforms on growth, private investment, poverty and inequality, employment
and other human development indicators. Section-4 makes an econometric analysis of the
factors affecting poverty reduction at the macro-level with time series data in 1977-2000,
while section-5 carries out similar econometric analysis at the state levels with panel and
pooled data for 1983-2000. Section-6 summaries main conclusions of the study and
lessons for policy makers. The paper ends with selected bibliography on the subject.
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2. Pro Market Reforms in India since 1991
2.1 Paradigms of reforms
Table-1 summarizes paradigms of pro-market reforms in India since 1991. Reforms were
based on the following rationale (Das 1993, 2003):
(a) It was recognised that as there are imperfections in the markets, there are also
imperfections in the government. It was, therefore, necessary to redefine the role
of the government from a controller to an enabler, from a supplier to a facilitator,
from an operator to a policy maker, and from a regulator to a trustee of social
equity and environmental sustainability.
(b) Over the years, government widened its scope and participated in activities where
private initiatives are more productive. It was, therefore, necessary to reduce the
scope of the government, and to encourage private participation including foreign
investment in the development process.
(c) In many cases, twin objectives of the public sector (viz. growth and equity) were
inter-mixed and one objective was taken as an alibi for failure of another. In the
process, both the prospects of higher growth and social justice were impaired. It
was, therefore, necessary to focus on growth and to target subsidies and fiscal
incentives for the welfare of the poor and vulnerable sections of the society.
(d) Till 1991 India adopted a restrictive policy on capacity expansion and foreign
equity. Indian economy was characterized by high level of control, licenses,
regulation, monopolistic practices in public utilities, complex tax regime with
high rates, high tariff walls and Quantitative Restrictions (QRs), rigid factor
markets for land, labour and capital, and high levels of fiscal deficits. All these
led to low efficiency, high transactions cost, rent seeking, non-optimal allocation
of resources, sub-optimal choice of industrial size, technology and location, low
quality but high prices of products and services, and bureaucratic inefficiency and
corruption. It was, therefore, necessary to liberalize the economy and to open it to
internal and external competitions.
In the post reforms period, there is re-orientation of public policies. The basic job of the
government is now to create enabling environment for public-private partnership; to link
fiscal, monetary and other incentives to productivity; to streamline public investment and
social welfare programs; to repair market failures; to strengthen institutional structures
and legal system; and to put emphasis on consultations, flexibility, decentralization,
selectivity, monitoring and co-ordination of policies and operations;
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Table-2.1 Paradigms of Pro-Market Reforms in India since 1991
Pre-Reforms Period Post Reforms Period
1. Quantitative licensing on external trade, 1. Abolition of industrial, investment and

industrial size and investment trade licensing
2. State regulated monopolies of utilities 2. Removal of state monopolies, and
and external trade privatization of public enterprises
3. Strict Government control on finance 3. Significant liberalisation of financial
and capital markets and capital markets
4. Restrictions on foreign investment and 4. Liberal regime for FDI, portfolio
technology transfer investment, foreign technology
5. Import substitution and export of 5. Export promotion and diversification,

primary goods no import bias
6. High duties and taxes with multiple 6. Reduction and rationalization of taxes
rates and large dispersion and duties
7. Sector-specific monetary, fiscal and 7. Sector-neutral monetary, fiscal and
tariff policies tariff policies
8. End-use and sector-specific, multiple 8. Flexible interest rates without any end-
and controlled interest rates use or sector specifications
9. Strict foreign exchange control, no 9. Abolition of exchange control, full

convertibility of rupee convertibility on current account
10. Multiple and fixed exchange rates 10. Unified and market determined
determined by the Reserve Bank exchange rates
11. Administered prices for minerals, 11. Abolition of all administered prices
utilities, and essential goods except for few drugs
12. Tax concessions on exports and savings 12. Rationalized and being phased out
13. Central planning, discretionary process, 13. Decentralization, sound institutional

high degree of bureaucracy framework, reforming civil services
14. General lack of consumers protection 14. Acts governing consumer rights, IPR,
and other rights independent regulatory authority
15. Outdated Companies Act 15. Competition Law enacted

16. No exit policy for land and labour, high 16. No change in labor policy, slow
stamp duties and registration fees progress of reforms in land markets
17. Outdated legal system 17. No change
18. Explicit subsidies on food, fertilizers, 18. No change, budget subsidies on LPG
and some essential items and kerosene introduced
19. Hidden subsidies on power, urban 19. No change, but user charges are being
transport, public goods, POL rationalized, and subsidies targeted
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2.2 Pro-market reforms in fiscal and financial sectors
The basic objective of fiscal reforms since 1991 (Table 2.2) was to reduce fiscal deficits
so that public borrowings donot crowd out private investment. The associated tax
reforms aimed at creating a simple, equitable and stable tax system, which interferes
least with the efficient allocation of resources. Government desires to gradually increase
the scope of direct taxes and to move towards a system of value added tax.
Several measures were taken since 1991 to strengthen the banking system and to improve
the functioning of money and capital markets. Policy package included decontrol of
lending and deposit rates, reduction of CRR from 25 percent in 1991 to 4.75 percent in
2003, reduction of SLR from 38.5 to 25 percent, reduction of interest rates from over 21
percent to 10.5 - 11.5 percent in 2003, tightening of prudential norms for capital
adequacy and provisioning for non-performing assets, an active open market operations
and abolition of selective credit controls. An array of capital market reforms was
introduced for primary and secondary markets, equity and debt, and foreign investment.
Indian firms were allowed to raise funds abroad through Global Depository Receipts,
Foreign Currency Convertible Bonds and offshore fund. Foreign Institutional Investors
(FIIs), Non-resident Indians (NRIs) and Overseas Corporate Bodies (OCBs) were
allowed to operate in India’s capital markets subject to limits of individual holdings and
collective holding up to 49 percent of paid up capital.
Foreign investors are permitted to pick up disinvested shares of public enterprises, dated
government securities and treasury bills and shares of unlisted companies. The Foreign
Exchange Regulation Act (FERA) removing various restrictions on foreign companies,
who can now own real estate, use their trademarks and brand names for domestic sale.
India has become a member of the Multilateral Investment Guarantee Agency and signed
treaties for avoidance of double taxation with many countries.
2.3 External sector reforms
Significant reforms took place in external sectors (Table 2.3) with abolition of
quantitative restrictions on foreign trade and significant reduction of customs duties from
400 percent in 1990 to maximum of 25 percent in 2003. The rupee is now fully
convertible on current account and almost fully convertible on capital account for the non-
residents. As regards exchange rate, India is regarded by the IMF as one of the countries
having independent floating exchange rate system.
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Table- 2.2 Major Pro-Market Reforms in Fiscal and Financial Sectors since 1991
Status in June 1991 Status in August 2003
Budgetary support to central public enterprises amounted Budgetary support curtailed to 0.6% of GDP,
to 1.5% of GDP besides various subsidies, preferential preferential access to bank credits / price preference
financing, price and purchase preferences. eliminated.
No hard budget constraints for PSEs. MOUs with CPSEs strengthened.
No disinvestment of government equity. Disinvestment up to 49% of govt. equity is allowed.
Control on interest rates on government securities. Government securities are sold at market prices.
Irrational duty structure and high rates of taxes. Direct and indirect taxes are reduced and rationalized.
Maximum Rates Maximum Rates
Excise duties 110% Excise duties 24%
Import duties 400% Import duties 25%
Income tax 54% Income tax 30% + surcharge of 10%
Corporate taxes: Corporate tax:
Domestic cos. 49% and 54% Domestic cos. 35% + surcharge of 2.5%
Foreign cos. 65% Foreign cos. 40% + surcharge of 2.5%
Double dividend tax on both individuals and companies. Dividend tax only on distributed profits.
Existence of gift tax. Gift tax abolished.
Limited cases of tax holidays. Tax holidays extended to many infrastructure.
Highly regulated and controlled banking system with strict New private banks set up. Govt share of equity in public
entry of new banks and branching rules. banks is being brought down to 49%. Foreign equity in
new private banks is allowed to the extent of 40%.
Bank deposit rates fixed according to account types and Bank deposit rates except for savings a/c liberalized. The
maturities. Minimum maturity of fixed deposit is 30 days. min. maturity of term deposit reduced to 7 days.
Issuing and pricing of securities, shares and bonds The office of CCI is abolished. Independent regulatory
determined by the Controller of Capital Issues in the authority i.e. SEBI is established for orderly growth of
Ministry of Finance. capital markets.
Bank lending rates are fixed according to loan size and end The banks determine lending rate.
uses. Floor rate on loans exceeding Rupees two lakh fixed PLR ranges between 10.5% to 12%.
by the RBI at 21%. Banks are also allowed to lend at below PLR rates.
At least 40 percent of bank credits canalized to the priority Priority sectors rationalized. No concessional rates
sectors at concessional rates. except for small loans up to Rs.25000.
Government pre-empted large portion of bank reserves Higher bank funds for private sector as
through CRR of 25% and SLR of 38.5% CRR reduced to 4.75%. SLR reduced to 25%.
RBI Bank rate at 12%. Bank rate reduced to 6.25%.
PLR was high at above 21%. PLR is free and ranges between 10.75%-11.5%.
Inadequate norms concerning capital adequacy, income Regulations, monitoring, norms on asset
recognition, and provisioning for non-performing assets classification, provisioning, capital
adequacy tightened as per international
best practices.
Portfolio investment by foreign investors in Indian FIIs, NRIs and OCBs allowed to operate in India’s
companies is not allowed. stock markets subject to individual and
Foreigners not allowed to buy government securities or cumulative ceilings.
disinvested shares in PSEs. NRIs/ FIIs allowed to buy govt securities & debt issues.
Indian firms not allowed to raise funds from foreign stock Indian firms allowed to raise funds abroad through
exchanges. Global Depository Receipts, Foreign Currency
Convertible Bonds and offshore fund.
7
2.4 Pro-Market Reforms in industry and Infrastructure
Government abolished licensing for industrial production and exports except for a few
strategic sectors (Table 2.3). Licensing is now required for only 6 industries which
account for 7 percent of manufacturing output. Only 4 industries are now reserved for the
public sector.
Foreign investment policy is liberalized significantly. Most of the sectors (except

agriculture, retail trade, print media etc.) are now open for foreign investment subject to
sectoral caps on equity. Majority participation and equity up to 100 percent are allowed
in most of the infrastructure sectors. Comparative statements on private sector
development policies and foreign investment regime in selected Asian economies given
in Tables 2.4 and 2.5 respectively indicate that Indian investment environment is
comparable to best practices in Asian region.
Table-2.3 Major Pro-Market Reforms in Industry and Infrastructure since 1991
Status in June 1991 Status in August 2003
1. Industry and infrastructure:

(a) Licensing required for most industries, which (a) Licensing abolished except for 6 industries,
accounted for 80% of manufacturing output. which account for 7% of manufacturing output.
(b) Restrictions on expansion under MRTP (b) MRTP Act amended.
(c) Reservation of 836 items for SSI units (c) Many items dereserved.
(d) 18 core and infrastructure industries, mostly (d) Only four industries viz. Defense products, rail
with high capital intensity, long gestation transport, atomic energy, minerals required by
period, lumpiness of huge capital, low return atomic energy reserved for public sector.
and high risk, reserved for the public sector.
(e) Restricted foreign investment policy. (e) Almost all the sectors are open for foreign
investment except a few which are strategic on
considerations of national security, public
health, and environment.
(f) No Competition Act. (f) Competition Commission established.
2. External Sector reforms:

(a) Fixed exchange rate determined by RBI (a) Exchange rate is market determined
(b) QRs on 91% of imports (b) Most QRs removed
(c) Imports of 55 goods canalized (c) Most items decanals
(d) 439 items of exports are subject to export (d) Abolished except for some minerals and
licenses. agricultural items, but compatible with WTO.
(e) Export taxes on agro products and minerals (e) Export taxes abolished
(f) Rupee not convertible on current account. (f) Fully convertible on current account.
(g) No capital account convertibility. (g) Significant convertibility on capital account.
8
Table-2.4 Private Sector Development and Investment Climate
in selected Asian economies in 1990 and 2000
Country Private fixed Domestic credit to Foreign Direct Entry and Exit Regulation in 2000
investment as % of private sector Investment
domestic fixed As % of GDP As % of GDP Entry Repatriation of:
investment
1990 2000 1990 2000 1990 2000 Income Capital
Newly Industrializing Economies (NIEs)
Hong Kong .. .. 165 159 .. 89.0 F F F
Korea,Rep 87 79 66 102 0.7 3.2 RF F F
Singapore .. .. 97 110 20.7 11.6 F F F
Taiwan,China .. .. .. .. .. .. F F F
China and Mongolia
China 34 47 88 125 1.2 4.3 SS F F
Mongolia .. .. 19 8 .. 3.4 .. .. ..
South-East Asia
Cambodia 90 61 n.a. 7 1.7 3.9 .. .. ..
Indonesia 70 61 47 21 1.0 4.2 R R R
Lao, PDR .. .. 1 9 0.7 5.4 .. .. ..
Malaysia 65 51 69 136 5.3 2.0 RF F D
Myanmar .. .. 5 9 .. .. .. R R
Philippines 82 69 22 45 1.2 2.8 SS F F
Thailand 85 68 83 109 3.0 2.8 RF F F
Vietnam .. .. 3 35 0.6 4.1 .. R R
South Asia
Bangladesh 58 70 17 25 0 0.6 F F F
Bhutan .. .. .. .. .. .. .. .. ..
India 61 70 25 29 0 0.6 AI F F
Maldives .. .. .. .. .. .. .. .. ..
Nepal .. .. 13 31 0 0 R R R
Pakistan 52 62 28 29 0.6 0.5 R F F
Sri Lanka .. .. 20 29 0.5 1.1 RF R F
East Asia
Japan 84 79 195 188 1.7 0.9 F F F
World
Low & middle income 65 67 42 55 0.9 3.5
East Asia & Pacific 63 50 71 106 15 3.9
Europe & Central Asia .. .. .. 21 0 3.8
Latin America & Carib. 74 80 28 28 0.9 4.5
Mid. East & N.Africa .. .. 42 47 0.9 1.0
South Asia 56 72 25 29 0.1 0.6
Sub-Saharan Africa .. .. 43 66 1.0 1.8
High Income 82 .. 108 136 3.0 10.1
World 78 .. 97 120 2.7 8.8
Notes:
(a) Two dots (..) stand for "Data not available"
(b) Entry and exit regulations are classified as Free (F), Relatively Free (RF), Delayed (D), Selected Sectors (SS), Authorized
Investors only (AI), and Restricted (R).
Sources : (1) World Development Indicators 2002, World Bank. (2) World Development Report 2002, World Bank.
9
Table-2.5 Foreign Investment regime in selected Asian countries
Country Sectors allowed Areas of 100% foreign Duration Local Export

for Foreign equity of FDR content obligations
Direct Investment obligation
1. India All except defense, 100% Eons, FTZ, EPZ, Unlimited Abolished None
agriculture, power, technology since 1991 except for
Plantation, atomic parks, hospitals, 100%
energy, rail trans. shipping, priority areas EOUs
2. Bangladesh All except arms, All allowed sectors Unlimited Value None
drugs, forestry, addition for except for
nuclear power, rail EOUs EOUs
3.Myanmer Selected areas All allowed sectors, Unlimited No No
minimum of 35%
4.Nepal All sectors Projects with FDI above Unlimited No No
Rs.20 million
5.Pakistan All except defense, In any business Unlimited No No
alcoholic beverage
6. Sri Lanka All areas except All allowed sectors Unlimited No No
broking, retail and
personal services
7.South All sectors except All allowed sectors Unlimited No No
Korea banned/ restricted
8.Singapore All sectors All areas except public Unlimited No No
utilities, media, telecom
and transport
9.Indonesia All sectors except FDI of at least $50 mln, 30 years 51% in 20 No
retail trade and EOUs, designated years
advertising sectors and locations
10.Malaysia All sectors Designated sectors Unlimited No No
11.Philippines All except media, 100% EOUs and Unlimited No No
retail trade and designated sectors
Accountancy
12.Thailand All sectors except Over 80% exports, Unlimited 51% in 5 yrs No
negative list designated sectors and in allied and
locations agriculture
13.Vietnam All sectors except All allowed sectors, 20 years No No
minerals, telecom, Minimum of 30%
aviation, shipping
14. China All except public All allowed sectors, 10-30 No No
utilities, leasing, Minimum of 25% years
real estate, trust,
transport
15.Hong All sectors except All sectors except Unlimited No No
Kong broadcasting banking
16.Taiwan All sectors except All sectors except Unlimited No No
prohibited list restricted list
17.Japan All except arms, All sectors except Unlimited No No
environment, prohibited list
related industries
18.Lao, PDR Selected sectors All allowed sectors 15 years No No
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2.5 Social sector policies and reforms
Growth with social justice had been primary objective of Indian planning since its
inception in 1951, and several anti-poverty measures are in operation for decades
focusing the poor as the target groups. These include welfare programs for the weaker
sections, women, children, and a number of special employment programs for self- and
wage employment. Ongoing economic reforms since 1991 strengthened these programs
to generate more employment, create productive assets, impart technical skills and raise
the income levels of the poor.
Government relied mainly on two approaches for poverty alleviation: the first based on
the anticipation that economic growth will have a “trickle down effect” on the levels of
living of all groups; and the second that direct anti-poverty programs are also required.
Government shifted public expenditure away infrastructure and industry towards social
sectors, and improved targeting of subsidies through changes in the public distribution
system. Central government expenditure on social sectors (comprising education, health,
water supply, sanitation, housing, slum development, social welfare, nutrition, rural
employment and minimum basic services) as a ratio to total expenditure increased from
7.7 percent in 1990-91 to 11.3 percent in 2003-04, and as a ratio to the GDP increased
from 1.3 percent to 2 percent over the same period (Table-2.6)).
Trends of total expenditure on social services by the general government (Centre and
States combined) given in Table-2.7 indicate that:
(a) Despite fluctuations, total expenditure as a percentage of GDP virtually remained

invariant around 29.5 percent in 1985-2002.
(b) There was marginal increase in social services expenditure from 5.8 percent of
GDP in 1985 to 6.2 percent in 2002 and the increase was uniformly distributed
among education, health and other services.
(c) The share of social services in total expenditure increased from 19.6 percent in
1985 to 20.9 percent in 2002, that of education from 9.8 percent to 10.3 percent,
and that of health from 4.4 percent to 4.6 percent in the same period.
(d) Composition of social services expenditure indicates that the share of education in
it declined from 50 to 49 percent that of health from 23 to 22 percent, while share
of other expenditure increased from 27 to 29 percent in 1985-2002.
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Table-2.6 Expenditure on Social Sectors by the Central Government
Year Total Expenditure Expenditure on Expenditure on

As percent of GDP social sectors social sectors
as percent of as percent of GDP
total expenditure
1992-93 17.4 7.8 1.4

1998-99 16.0 10.5 1.7
1999-00 15.4 10.0 1.7
2000-01 15.5 11.1 1.7
2001-02 16.0 11.1 1.8
2002-03 16.7 11.3 1.9
2003-04 17.0 11.5 2.0
Table-2.7 Expenditure on Social Services by the General Government

(Combined Centre and States)
______________________________________________________________________________
I T E MS 1985 1990 1995 1996 1997 1998 1999 2000 2001 2002
Actual Actual Acual Actual Actual Actual Actual Actual RE BE
Finance of Centre & States
As percentage of GDP:
Total Expend. 29.4 26.8 24.2 23.4 24.2 25.4 26.6 28.1 29.5 29.6
Social services 5.8 5.4 4.9 5 5.2 5.5 5.7 6.3 6.5 6.2
Education 2.9 3.1 2.7 2.7 2.8 3 3.3 3.1 3.1 3.1
Health 1.3 1.2 1 1 1.1 1.2 1.2 1.3 1.4 1.4
Others 1.6 1.2 1.2 1.3 1.3 1.3 1.2 1.8 2 1.8
As % of total expenditure:
Social services 19.6 20.3 20.4 21.5 21.4 21.6 21.3 22.4 22 20.9
Education 9.8 11.4 11.3 11.6 11.5 11.9 12.3 11.2 10.5 10.3
Health 4.4 4.3 4.3 4.5 4.6 4.6 4.4 4.8 4.8 4.6
Others 5.4 4.6 4.8 5.4 5.3 5 4.6 6.4 6.7 6
As % of expenditure on social services
Education 50 56 55 54 54 55 58 50 48 49
Health 23 21 21 21 21 22 21 21 22 22
Others 27 23 24 25 25 23 21 29 31 29
______________________________________________________________________________
India is committed to achieve the UN MDG targets by 2015. According to the Human
Development Report (UNDP 2001) India is one of the 11 countries in the world that is
on track to meet the UN MDG while 70 other countries are lagging or slipping. The
report acknowledges the significant reduction of poverty ratio from 36 percent in 1993-
1994 to 26 percent in 1999-2000, and also significant improvement in literacy rate.
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2.6 Agricultural policies and reforms
Indian agriculture suffers from a mis-match between food crops and cash crops, lower
yields per hectare than the world average, except for wheat, volatility in production and
wide disparities of productivity over regions and crops. Domestic production of pulses
and oilseeds are still below the domestic requirements and India depends on imports of
pulses and edible oils to satisfy domestic demand.
Although the country holds sufficient buffer stock of food grains, food management is
inefficient with unsustainable level of food subsidies. The rural economy and the private
sector lack the basic infrastructure to build up sufficient buffer stocks, and agriculture
remains vulnerable to weather shocks. Private sector gets various fiscal incentives for
improving rural storage facilities. The central government provides financial assistance to
the States for procurement and distribution of food grains at subsidized rates particularly
to the families below the poverty line.
The enhanced availability of bank credits through priority lending to agriculture and agro
based industries, favourable terms of trade, liberalized domestic and external trade for
agricultural products have attracted greater private investment in agriculture in recent
years. The successive Central Government Budgets stepped up public investment
significantly for rural electrification, rural roads, rural employment, irrigation, agriculture
research and public distribution system for food grains.
2.7 Unfinished Agenda on Reforms
Momentum of reform needs to be maintained for sustaining higher growth and rapid
progress toward poverty alleviation. In particular, ambitious fiscal consolidation and broad
based structural reforms are needed to allow resources to be redirected from servicing
public debt towards economic development and social programs and to create enabling
environment for private investment.
Areas where further reforms would promote greater efficiency include the following:
(a) Privatisation of public enterprises at a faster speed,

(b) Further liberalisation of the reservation policy for the small-scale industries,
(c) Liberalisation in land and labour markets,
(d) Formulation of an effective exit policy for bankrupt firms,
(e) Coordinating state level reforms
(f) Reforms in municipalities and corporations
(g) Strengthening regulation in infrastructure
(h) Reforms in insurance, provident and pension funds, and
(i) Thrust on state provision of basic needs.
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The following structural reforms need to be given priority:
 Although major reforms were taken at the macro level and in production sectors,
credible reforms need to be taken at local bodies particularly with regard to sale,
acquisition and transfer of land and property.
 Indian labour is highly protected. Reforms are necessary in labour markets for
enhancing employment.
 Regaining the momentum of the disinvestment program is critical for fiscal

sustainability and improving efficiency in the public sector.
 Further liberalisation of the non-debt creating financial flows including FDI is

required for petroleum, real estate, telecommunications, civil aviation, banking and
insurance. There are synergies between disinvestment and the FDI strategy, and
serious consideration may be given to use disinvestment as a magnet for foreign
investment.
 There is significant scope for increasing Indian exports by encouraging both labour-
intensive and high technology products.
 India will have to face and surmount the challenges posed by new technologies and
market places, such as Internet and e-commerce.
 It is important to lock in recent gains on the inflation front. Management of inflation

and protecting the interest of the vulnerable and weaker sections of the society should
remain a priority agenda for the government.
 Another priority of the government is to reduce inter-state disparities and

interregional inequality.
There is need for greater co-ordination, co-operation and partnership between

private and public sectors. Both well-governed state and well functioning markets
are essential for high growth and sustainability. Government and free markets
should supplement and complement each other. Government should withdraw from
sectors where private participation is more productive and more efficient. But the
scope of government is to remain large in social sectors and physical infrastructure.
14
3. Impact of economic reforms on Poverty and Growth
3.1 Sustained Economic Growth
Macro-economy responded well to wide ranging reforms initiated since June 1991. The
average GDP growth rate increased from 6 percent per annum in the Seventh Plan (1985-
1990) to 6.7 percent in the Eighth Plan (1992-1997). The GDP growth rate decelerated to
5.5 percent in the Ninth Plan mainly due to sluggish industrial growth and deceleration in
agricultural growth caused by unfavourable monsoon. The service sectors having a
weight of 50 percent in GDP, however, posted a robust growth of 8.1 percent in 1997-
2002 (Table-3.1).
Table-3.1: Average GDP Growth rates in 1980s and 1990s

(In percent)
Sectors Average 1991-92 Average Average 1980s 1990s
7th plan 8th Plan 9th Plan
1986-90 1992-97 1997-2002
Agriculture 3.4 -2.3 4.7 1.8 3.4 3.0
& Allied
Industry 7.6 -1.3 7.6 4.5 7.0 5.8
Services 7.4 4.9 7.5 8.1 6.9 7.6
Total GDP 6.0 0.8 6.7 5.5 5.6 5.8
3.2 Impact on Private Sector Participation
Since the First Plan in 1951, India adopted a mixed economy with significant private
investment in many sectors. There were mixed trends of private sector shares in sectoral
GDP and GDI during last two decades. Trends given in Table-3.2. indicate the following:
(a) While private sector share in overall investment (GDI) increased from 59 percent
in 1980 to 71 percent in 1999, that in overall GDP declined from 80 to 74 percent
over the same period.
(b) Private sector continues to have pre-dominant shares in sectoral GDP and sectoral
investment in agriculture and allied sectors, manufacturing, construction, trade
and hotels, finance and real estate in 1980-2000.
(c) Private sector had negative value added in electricity, gas and water supply. Its
share in value added remained invariant in agriculture, increased in trade and
hotels, transport and communications, and decreased in mining and financial
sectors despite significant reforms over the period.
(d) Private sector share in investment increased in agriculture, manufacturing, public
utilities, construction, community and social services, but decreased in mining
and quarrying, trade and hotels, transport and communications.
15
Table-3.2 Share of Private Sector in Sectoral GDP and GDI
Share of private sector in sectoral GDP (in percentage to sectoral GDP)
Year Agri- Mining Manufac Electri- Construc- Trade, Transprt Finance, Commn Total
culture and turing city, gas, tion hotels & storage, insurance, social, GDP
& allied Quarry- water restau- commu real personal
sectors ing supply rant nication estate services
1980-81 97 25 87 13 84 95 47 71 37 80
1990-91 97 14 81 -10 84 96 47 68 31 75
1999-00 97 15 87 -7 84 98 57 66 33 74
Share of private sector in sectoral investment (in percentage to sectoral GDI)
1980-81 52 7 83 10 58 102 56 90 38 59
1990-91 70 3 81 6 84 82 47 86 18 64
1999-00 72 3 88 14 71 60 44 87 26 71
Sectoral investment ratios in the private sector (share in overall GDP)
1980-81 1.6 0.1 4.4 0.3 0.3 1.4 1.8 2.0 1.3 13.2
1990-91 1.7 0.0 6.1 0.2 0.4 1.3 1.4 2.8 0.4 18.9
1999-00 1.2 0.0 7.2 0.3 0.2 0.6 1.0 2.5 0.7 18.9
3.3 Improvement in human development indicators
Increased availability of health care services resulted in continuous reduction of death

rate, birth rate and infant mortality rate over the years (Table-3.3). The trends are
consistent with the view that rapid economic growth brought about an
improvement in living standards of people in general. Despite significant
progress, indicators of human development such as life expectancy, literacy and
medical care in India lag far behind those in East Asian countries.
Wide gender disparities exist with regard to economic, health and educational attainment.
More than 40 percent of India’s illiterates are women. Incidence of infant
mortality and child malnutrition is more pervasive for females. However, female
life expectancy at birth improved in 1990s and now exceeds male life expectancy.
Poorer health of women is caused by dual work burdens in production and
reproduction and skewed pattern of intra-household food allocation in favour of
males.
There are wide inter-State variations in indicators of human development. For instance, in
Kerala the life expectancy at birth at 72 years and overall literacy at 90 are
significantly higher than those in the States like Bihar, Madhya Pradesh, Orissa,
Rajasthan and Uttar Pradesh (Table-3.4), but comparable with those in China,
Malaysia, Indonesia, Thailand and Sri Lanka which made significant progress in
human development (Table-3.5).
16
Table-3.3: Basic Indicators of Human Development
Year Life expectancy Literacy rate Birth rate Death rate Infant mortality rate Per
at birth (years) (percent) Per 1000 Per 1000 1000
1951 32.1 18.3 39.9 27.4 146

1961 41.3 28.3 41.7 22.8 146
1971 45.6 34.5 41.2 19.0 129
1981 50.4 43.6 33.9 12.5 110
1991 59.4 52.2 29.5 9.8 80
2001 63.5 65.4 25.8 8.5 68
Source: Economic Survey 2002-03, Ministry of Finance.
Table-3.4: Selected Indicators of Human Development for Major States
State Life expectancy at birth Literacy rate Infant mortality rate per
(years) (percent) 1000
Andhra Pradesh 60.6 44.1 66

Assam 54.9 52.9 75
Bihar 58.5 38.5 72
Gujarat 60.1 61.3 62
Haryana 62.9 55.9 68
Karnataka 61.9 56.0 53
Kerala 72.0 89.8 13
Madhya Pradesh 54.0 44.2 97
Maharashtra 64.2 64.9 48
Orissa 55.5 49.1 95
Punjab 66.4 58.5 52
Rajasthan 58.0 38.5 86
Tamil Nadu 62.4 62.7 54
Uttar Pradesh 55.9 41.6 85
West Bengal 61.5 57.7 55
All India 59.4 52.2 72
Table-3.5: Indicators of Human Development in Selected Asian Countries

Country Life expectancy at birth Infant mortality rate per Adult literacy rate
(years) 1000 (percent)
China 69.2 38 82
Indonesia 64.0 47 84
India 61.6 73 52
Kerala state (India) 72.0 13 90
Malaysia 71.4 11 84
Philippines 67.4 32 95
Pakistan 62.8 95 38
Korea, Republic 71.7 6 98
Singapore 77.1 4 91
Sri Lanka 72.5 17 90
Thailand 69.5 31 94
17
3.4 Increase in Real Wages for agricultural labour.
Average real wages for unskilled agricultural labour, which reflect economic conditions
of agricultural labourers, declined by 6.2 percent in the crisis year 1991-92, but increased
in subsequent years except in 1994-95 (Table-3.6). Increase in real wages along with
agricultural growth contributed to a reduction of poverty and income inequality.
However, there were no uniform trends across the States implying that local conditions
exert significant influence on agriculture wages.
Table-3.6 Change in real wages for unskilled agricultural labour

For all India (percentage change in agricultural year July to June)
Year Percentage change
1991-92 -6.19
1992-93 +5.21
1993-94 +5.61
1994-95 -0.39
1995-96 +0.72
1996-97 +1.64
1997-98 +2.50
1998-99 +3.45
1999-2000 +3.50
Source: Various Issues of Economic Survey, Ministry of Finance.
3.5 Poverty Reduction
Poverty ratios are estimated by the Planning Commission on the basis of the consumer
expenditure surveys conducted by the National Sample Survey Organisation (NSSO).
The latest survey data are available for the 55th round covering the period July 1999 to
June 2000. Despite high population growth, the headcount ratio declined from 55 percent
in 1973 to 26 percent in 1999 for all India i.e. at a rate of 1.1 percentage point per annum.
The decline was fairly uniform across rural and urban areas. Rural poverty, which
accounts for 75 percent of the overall poor, declined from 56 to 27 percent in 1973-1999,
while urban poverty dropped from 49 to 24 percent during the same period. Interstate
differentials of poverty also narrowed, although these still remain high. While only 6
percent of population in Punjab lives below the poverty line, the incidence of poverty is
as high as 43 percent in Bihar.
The absolute number of the poor declined by only 61 million from 321 million in 1973
to 260 million in 1999 due to population growth from 600 million in the early 1970s to
991 million in 1999. In fact, the number of poor remained stable around 320 million in
1973-1994 and declined to 260 million in 1999 due to reduction of poverty ratio by 10
percent in 1993-1999. This shows favourable impact of economic reforms and high
economic growth on the incidence of poverty and employment in 1990s.
18
Table-3.7 Estimates of Incidence of Poverty in India 1973-1999
___________________________________________________________
Year Poverty Ratios (%) Number of Poor (Million)
______________________ _________________________
Rural Urban Combined Rural Urban Combined
__________________________________________________________
1973-74 56.4 49.0 54.9 261 60 321
1977-78 53.1 45.2 51.3 264 65 329
1983-84 45.7 40.8 44.5 252 71 323
1987-88 39.1 38.2 38.9 232 75 307
1993-94 37.3 32.4 36.0 244 76 320
1999 27.1 23.6 26.1 193 67 260
__________________________________________________________
It may be noted that the official poverty ratios are basically “deprivation indices” as the
poverty line takes into account mainly “bare biological needs” (calorie intake of 2400 per
capita per day for rural areas and 2100 per capita per day for urban areas). It does not
consider adequately needs on health, education, housing, transport, water, power,
sanitation etc. not to talk of minimum entertainment and social, cultural and religious
needs. Poverty line assumes fixed consumption basket over time and regions, although it
takes into account price differentials among the states.
The determination of poverty line also assumes continuous relationship between calorie
intake and money income levels, which is not supported by facts. Since there are
differences in consumption habits among the states and there does not exist an optimal
consumption basket, neither the uniform calorie norm nor the substitution of calorie
norms by monetary norms is justified.
Table-3.8: Poverty incidence and growth rates in India

and selected Asian countries (in percent)
Country Poverty Poverty Annual Average Average
ratios Ratios Reduction GDP growth GDP growth
1975 1995 In 1975-95 1970-1980 1980-1995
% Point
India 54.9 26.1 1.1 3.2 5.6

China 59.5 22.2 1.9 5.0 11.1
Indonesia 64.3 11.4 2.6 7.8 6.6
Korea 23.0 5.0 0.9 9.0 8.7
Malaysia 17.4 4.3 0.7 7.8 6.4
Philippines 35.7 25.5 0.5 6.2 1.4
Thailand 8.1 0.9 0.4 7.2 7.9
Source of data: For India, Planning Commission; for others World Bank Report on
Social Consequences of the East Asian Financial Crisis, September 1998.
Note: For India, poverty ratios refer to the years 1973 and 1999 respectively.
19
India’s progress in fighting poverty is modest when compared with some of Asian
countries (like China and Indonesia) which experienced faster economic growth (Table-
3.8). It is, therefore, often argued that a sustained and long lasting solution to the problem
of poverty depends on creation of opportunities for broad based economic development.
More than three-fourths of the poor live in rural areas. Economic groups most prone to
poverty are rural households (mainly landless agriculture labour and marginal farmers),
urban casual labour and the self-employed engaged in petty services.
Poverty is generated by many factors such as unemployment, ill health, and lack of
access to productive assets. Demographic factors also interact with socio-economic and
environmental factors. Gender, literacy, land-ownership, employment status, religion and
caste are closely related to poverty. Some social and religious groups do not believe in
family planning and have large family size.
The spatial distribution of poverty in India is highly uneven; linkages between

urbanisation, state domestic product and poverty ratios are weak testifying the complexity
of the phenomenon of poverty; and urban poverty is both an outflow of poverty from the
rural areas as also an autonomous phenomenon.
The poor are caught by unfavourable forces at the local, national, and global levels that
combine to form a three-tiered poverty trap. At the local level, factors include skewed
distribution of land and other assets, physical weakness, higher fertility rate, and
relatively lower power to fight against corrupt institutions. These are reinforced at the
national level by various policies ranging from tax laws to interest policies that are
generally pro-rich. At the global level, the poor are held down by a mix of oppressive
factors such as tied grants, falling export prices and rising capital flight.
The culture of poverty theorists argue that poverty breeds poverty and a poor family has a
high probability of staying poor as these families are associated with high risks of ill
health, high fertility rates, inadequate education, low skill, irregular sources of livelihood,
low productive jobs, insecure shelter, limited accessibility to basic services and lack of
dynamism. With the progress of urbanisation, traditional joint families progressively
broke down into micro families, which are economically less viable. A general
improvement in health services led to an increase in the expectation of life and a larger
proportion of aged persons. A decline in the infant mortality and maternal mortality rates
increased the proportion of labour force in total population and that of females in the
reproductive age group. But the growth of employment generally lagged behind the
growth of labour force.
20
Various studies by the World Bank (1997, 2000, 2003) made the following observations :
(a) There are sharp disparities in poverty ratios between states, between men and
women, and between city and countryside.
(b) Although the Central government adopted a policy of growth with social justice,
no state government effectively combined both policies to encourage growth and
develop human resources and physical infrastructure.
(c) Agricultural investment, not agricultural subsidy, reduces poverty. Differentials
in agricultural growth and rural wages were major factors, which led to different
levels of poverty across Indian states (Ravallion and Dutt). Green revolution,
better irrigation and infrastructure were associated with rising rural wages and
increased rural non-farm employment, such as in Punjab and Haryana which had
the highest per capita GDP and lower poverty.
(d) Investment on human capital reduces the extent of poverty. The human resource
approach to poverty reduction across Indian states is exemplified by Kerala,
which exported relatively skilled labour internationally and benefited from
remittances, even though its GDP growth was not rapid.
(e) Degree of urbanisation was found to be less significant to affect poverty across
states, reflecting the capital-intensive, import-substituting nature of India's
industrial development, its requirements for skilled rather than unskilled labour,
and labour market regulations that limited the growth of organised employment.
(f) Inflation is a "harsh tax" on the poor because their incomes are not generally
indexed to prices.
3.6 Impact on Employment
There was a mixed trend in employment growth, which decelerated from 2.73 percent in
1972-1978 to 0.98 percent in 1993-2000 (Table 3.9). The deceleration in employment
was associated with a sharp decline in the growth rate of labour force from 2.29 percent
in 1987-1994 to 1.03 percent in 1993-2000.
Table-3.9: Employment growth rates during 1972-2000 (percent)
Period Rate of growth of Rate of growth of Rate of growth of

population labour force employment
(% per annum) (% per annum) (% per annum)
1972-1978 2.27 2.94 2.73
1977-1983 2.19 2.04 2.17
1983-1988 2.14 1.74 1.54
1987-1994 2.10 2.29 2.43
1993-2000 1.93 1.03 0.98
Source: Planning Commission, Government of India.
A major shift in the work force structure in 1977-2000 was an increase in the proportion
of casual labour from 27.2% to 33.2%, and a decrease in self-employment from 58.9% to
52.9%, while the proportion of regular salaried employment in total employment
21
remained stationary around 13.9 percent. The decline of self-employment in rural areas
reflect the decline in proportion of farmers cultivating their own land owing to
fragmentation of holdings. The increase in casual employment reflects the displacement
of marginal cultivators and their conversion into agricultural labour.
Table 3.10 Sectoral Employment during 1983 to 2000
Employment (per cent to total) Annual growth rate (%)
Sector 1983 1987- 1993- 1999- 1983 to 1987- 1983 to 1993-

1988 1994 2000 1987- 1988 to 1993- 1994 to
1988 1993- 1994 1999-
1994 2000
Agriculture 63.2 60.1 60.4 56.7 1.8 2.6 2.2 0.0
Mining & quarrying 0.7 0.9 0.8 0.7 7.4 1.0 3.7 -1.9
Manufacturing 11.6 11.9 11.1 12.1 3.6 1.2 2.3 2.6
Electricity, gas and 0.3 0.3 0.5 0.3 2.9 7.2 5.3 -3.6
water supply
Construction 3.0 4.4 3.5 4.4 12.1 -1.4 4.2 5.2
Trade, hotels and 7.6 8.3 8.5 11.1 4.9 3.0 3.8 5.7
restaurant
Transport, storage 2.9 3.0 3.1 4.1 3.2 3.5 3.4 5.5
and communication
Financial, real estate 0.9 1.0 1.1 1.4 4.7 4.5 4.6 5.4
& business services
Community, social 9.8 10.1 11.1 9.2 3.6 4.1 3.6 -2.1
& personal services
All Sector 100 100 100 100 2.9 2.5 2.7 1.1
During 1983-2000 the share of agriculture in total employment declined from 63 percent
to 57 percent and that of manufacturing increased from 11.6 to 12.1 percent. In 2000, the
share of construction in total employment increased to 4.4%, that of trade and transport to
15.2% and that of community services to 9.2%. During 1994-2000, trade has the highest
growth rate (5.7%), followed by transport and communications (5.5%), financial services
(5.4%), and construction (5.2%), whereas agriculture, mining and quarrying, and public
utilities registered negative growth rates in employment.
Organised sector accounted for only 9 percent of the total employment in 1978-1994,
and its share declined to 7 percent in 1999-2000. This was entirely due to slowing down
of employment in the public sector from 1.52 percent per annum in 1983-1994 to a
negative growth rate of (-) 0.03 percent in 1994-2000. The decline of employment in the
public sector could be attributed to restructuring programs of the public sector and
imposition of ban on new recruitment in government departments as a part of the
“economy drive” to reduce expenditure. Employment in the public sector is unlikely to
expand rapidly as government is reducing its scope and many public undertakings have
surplus labour.
Growth rate of organized private sector employment accelerated from 0.45 percent per
annum in 1983-1994 to 1.87 percent in 1994-2000. However, this was not enough to offset
22
the employment slowdown in the public sector, as private sector accounted for only one
third of total organized employment.
The employment elasticity with respect to GDP declined continuously in 1980s and
1990s. Rapid growth of employment in the organized sector depends on employment
growth in the private sector. Since the potential growth of organized employment is
limited, bulk of the employment growth has to come from unorganized sector.
3.7 Impact on Unemployment
There are various concepts of unemployment viz. Usual Principal Status (UPS), Usual
Principal and Subsidiary Status (UPSS), Current Weekly Status (CWS) and Current Daily
Status (CDS). All these concepts of unemployment indicate that unemployment rates
differ widely for rural and urban areas and for males and females. Generally, urban areas
have higher unemployment rates for both males and females than rural areas.
The rate of unemployment on the basis of CDS increased from 6.03 percent in 1993-94 to
7.32 percent in 1999-2000. Unemployment rates varied sharply across the states and inter-
state variations were consistent over time. States where wages are kept higher than
neighboring regions by strengthening bargaining power of labour or by provision of social
security have generally high incidence of unemployment.
The differentials of rural and urban unemployment rates narrowed in 1999-2000, due to
sharp increase in unemployment rates for both rural males and females. One factor for this
development was a shift from self-employment to casual labour.
Female unemployment rates are generally higher than male unemployment rates though
differences narrowed down over time and were nearly eliminated in rural areas in 1999-
2000. Female unemployment rate in urban areas at 9.8 percent was more than the male
unemployment rate at 7.2 percent underlying the need to create employment opportunities
for females in urban areas.
3.8 Inequality in India
In the absence of comprehensive income surveys in India, household expenditure surveys

conducted by the National Sample Survey Organisation since 1950 are used to have some
idea of income distribution depending on the assumptions regarding savings in different
expenditure brackets. There is some bias with regard to rich households, which are under
represented in both rural and urban areas. The concept of consumption expenditure used
in the surveys has undergone significant changes over time and there is substantial
discrepancy between total consumption expenditure estimated from the surveys and that
obtained from the national accounts of the Central Statistical Organisation.
There are various studies on the extent of income inequality in India, but these studies
vary widely regarding the concept of income receiving unit, time period, assumption
regarding savings profiles, and estimation procedures for various inequality measures. So
23
it is very difficult to draw any meaningful conclusion regarding the extent and trend of
income inequality over time in India. However, it can be observed that the degree of
inequality in India is almost the same as in the case of developed countries and there is
some evidence that the degree of income inequalities had a declining trend during 1977-
1989 followed by an increasing trend since then (Das 1997). It is observed that
distribution of consumption expenditure in the urban sector is more uneven than that in
the rural sector, and the Gini coefficient for all India lies in between the Gini coefficients
for the rural and urban sectors.
Inequalities of income and consumer expenditure are mainly due to the inequalities in
assets or wealth distribution among the individuals. There are very few studies on the
distribution of wealth and assets in different states of India, and the studies are outdated.
A study by Basu (1976) indicated that the degree of inequality in asset distribution
remained almost stable during the years 1961-1971 although there were variations in
different states. For the wealth distribution, a study by Jakhade and Shetty indicted a
decline in the Gini index from 0.72 in 1960-61 to 0.68 in 1966-67. Another study by
Bagchi and Das (1977) indicated a decline in wealth inequality from 0.73 in 1960-61 to
0.64 in 1972-73 in the rural sector, and from 0.59 to 0.58 in the urban sector.
The extent of business concentration (i.e. the concentration in the size distribution of
firms) is another source of inequalities in income and wealth. An extensive study on the
size and concentration of the factory sector in India done by Sandesara (1979) indicated
that the average size of the factory and concentration in all the industries declined in
1951-1970 and concentration in industry varied inversely with employment and directly
with the average size of the factory.
Although recent trends of wealth and asset inequalities and the degree of business
concentration are not available, the fiscal and development policies of the government
had always attempted to reduce such inequalities. The ongoing economic reforms and
structural changes in industry, trade, financial and public sectors must have also reduced
economic concentration through abolition of regulation, licensing and undue protection
and enhancing competition among firms.
As regards regional disparities, there is some evidence that rural incomes are generally
less unequal than the urban incomes and the disparities between rural and urban incomes
have widened over time. Although the rural sector has lower inequality, it has higher
poverty ratios in most of the states. Several studies on the inter-state inequalities indicate
that there has been a reduction of inter-state inequality during 1950-51 to 1960-61
followed by a gradual increase in inter-state disparities during 1960-61 to 1980-81.
However, since 1981 there had been some reduction of inter-state inequalities due to
larger central transfers of both plan and non-plan resources to the poorer states
recommended by the successive Finance Commissions due to their special weightage to
poverty reduction and backward states.
24
3.9 Redistribution Policies
Removal of wealth and income inequalities, socio-economic injustices and assurance of

minimum levels of living have been among the most important Directive Principles laid
down in the Indian Constitution. Right from the inception of planning in 1951, Indian
planners had attached great importance to issues relating to equity and redistribution.
The income of a household is the sum of what it earns from the various income-earning
assets, which it commands, e.g., land, capital and labour. Therefore, the distribution of
income across households is the resultant of two factors: (i) the distribution of income-
earning assets across households; and (ii) the rate of return of these assets.
Government adopted progressive tax systems for redistribution of income, wealth and
property, and various employment generation and anti-poverty programs. Before reforms
in 1991, government introduced strict licensing, controls, regulations and anti-trust laws
restricting size and growth of firms to reduce business concentration. Wage-income
policies were formulated for the organised labour to ensure equity. However, government
had to operate under several social and political constraints.
All direct taxes are progressive, and the maximum tax rates have been reduced
significantly in 1990s. Indirect taxes like excise and customs duties are determined in
such a way that the mass consumption goods are generally exempted from the payment of
indirect taxes, and the luxury products are taxed at higher rates. Commercial banks are
directed to lend at least 40 percent of their lending to the priority sectors, which include
agriculture, small-scale industries, small transport operators. There is also a reservation
policy for the small-scale sector, although many items having export potentials had been
dereserved in post reforms period.
The agricultural development and policies led to some undesirable consequences. First, it
has created interregional disparities in agricultural production, especially food grains
production. Second, it has led to interregional disparities among different social groups
such as landowners, tenants and landless laborers. It is generally observed that some
states such as Punjab and Haryana, which enjoyed assured and better irrigation facilities,
recorded higher growth rates of food grains production, compared with other states.
In agricultural prices, government policy is to provide relatively high support prices for
food grains and to distribute the procured grains with large subsidy. Since the major part
of marketable surplus of grains is controlled by big farmers, the high support prices
mostly help them rather than small farmers. The statutory stipulation of minimum wages
in industry or agriculture is virtually inoperative in the vast unorganized nonunionized
sectors where the overwhelming majority of the poor work. Similarly inoperative is the
rent control legislation in protective tenancy reforms in agriculture.
As regards direct provision of basic services for the poor, there was some progress in the
last two decades, but facilities in proportion to minimum needs remain meager. Apart
from the problem of inadequate delivery system, finance was a major constraint.
25
Whenever financial situation got worse, social welfare programs were the first casualties
to be shelved. There is some evidence that the upper-income groups were able to
appropriate a disproportionate share in social services (particularly education, health,
transport, communication, and low-cost housing).
In sum, problems of poverty and inequality in India remain intractable, not because
redistributive policies were inadequately considered in the planning models. At the micro
level, specific programs were ill conceived and uncoordinated and there were
administrative inefficiencies. The major constraint was rooted in the socio-political
system dominated by a complex constellation of forces representing the rich farmers, big
business, elite, bureaucrats and unionized workers of the organized sector, who wanted to
protect their vested interests.
4 Factors Affecting Poverty at the Macro Level
Various empirical studies concluded that higher economic growth is a key driver of
poverty reduction, with little direct role of pro-poor economic policies (once account is
taken of the growth effects). However, a recent research by Dhaneshwar Ghura, Carlos
Leite, and Charalambos Tsangarides (2003) observed that some public policies are
"super pro poor" i.e. they appear to directly influence the incomes of the poor.
On the basis of cross-country econometric relations, they concluded the following:
(i) Countries with higher income shares of the poor are characterized by higher
macroeconomic stability, lower income inequality, higher literacy, more democratic
institutions, better governance, better internal environment, more open trade
regimes and higher levels of financial development than those in other countries.
(ii) Economic growth is an important factor in raising the incomes of the poor.
(iii) Certain public policies have direct impact on the incomes of the poor, even after
taking into the effect of growth. These include policies that lower inflation, shrink
the size of the government, promote financial development, and raise the
educational level. The policies are considered "super pro- poor" because they raise
the incomes of the poor directly, as well as indirectly through economic growth.
The direct and indirect effects are mutually reinforcing, and there is thus no trade-
off between growth promotion and poverty alleviation.
(iv) The poor are significantly vulnerable to adverse movements in the terms of trade.
(v) A number of variables, such as trade openness, investment rate, the extent of
democracy, life expectancy, and civil wars that are generally shown to affect
economic growth do not directly influence the incomes of the poor.
26
In this paper an econometric exercise is carried out at the macro level for India on the
basis of time series data on poverty ratios and related variables for the period from
1977-78 to 1999-2000. While data on all other variables were available for all the
years, poverty ratios were available only for the years 1977-78, 1983, 1987-88,
1993-94 and 1999-2000 during which NSSO conducted large sample surveys on
household consumption expenditure. For the purpose of fitting multiple regression
lines, poverty ratios for the intervening years, for which no surveys were conducted,
were estimated on the basis of linear interpolated.
The following potential variables were considered to influence the poverty ratio:
• Per capita income;

• Growth rates of overall GDP and its three main components viz. agriculture and allied
sectors, industry and services
• Shares of agriculture, industry and services in GDP
• Growth rates of private sector GDP and its three main components viz. agriculture,
industry and services GDP in the private sector
• Shares of private sector in agriculture, industry and services GDP
• Growth rates of overall GDI and its components in agriculture, industry and services
• Growth rates of private sector GDI in agriculture, industry and services
• Shares of private sector in agriculture, industry and services investment
• Human capital (life expectancy, literacy rate and population growth rate);
• Physical capital (private and public investment);
• Macroeconomic stability (WPI and CPI inflation rates and gross fiscal deficit);
• Government size (share of social sector in central government expenditure);
• Inequality (Gini coefficient of expenditure).
The best fitted linear and log-linear regression equations; given in tables 4.1-A, 4.1-B,
4.2-A and 4.2-B respectively, indicate that poverty ratios are strongly influenced by the
per capita income and expenditure inequalities at the macro level. While the incidence of
poverty varies inversely with the per capita income, it is positively correlated with the
degree of inequality implying that, given the same level of development, a more unequal
distribution of income is associated with a higher level of poverty. The Per capita income
and Gini ratios account for 97 per cent variations in poverty ratios over time (Tables 4.1-
B and 4.2-B).
When other socio-economic and demographic variables are included as additional

determinants of poverty, there is little improvement in the R-square of the regression
equations, and the coefficients of per capita income and Gini index continue to retain
their signs and their significance (Tables 4.1-A and 4.2-A).
The other variables that are significant in the multiple regression equations include the
growth rate of population, inflation rate, share of social sectors in government
expenditure, literacy rate, expectation of life, share of service sectors in GDP, and share
of private sector in gross domestic investment. However, agricultural growth, overall
27
GDP growth and share of private sector in GDP do not have significant influence on
poverty.
Poverty ratio is negatively correlated with the share of social sectors in central
government expenditure, share of service sectors in overall GDP, share of private sector
in gross domestic investment and human development indicators such as literacy rate and
expectation of life. On the other hand, poverty ratio varies directly with the population
growth rate, inflation rate and gross fiscal deficit.
The results confirm the following observations made in many studies by the World Bank
(1997, 1998, 2000 and 2003), Dutt and Ravallion (1997, 1999) and Ravallion and Dutt
(1996a and 1996b):
(a) An increase in per capita income is essential for reduction of poverty, as it

generates extra income that can benefit the poor.
(b) Educational achievement facilitated by public investment in health allows the

poor to participate in the economic growth process through employment.
(c) Inflation had a negative effect on poverty reduction. Higher inflation in India is
generally associated with monsoon failures and a relatively higher rise in the price
of food grains. The poor are doubly hit, as their consumption basket is
predominantly food, and their wages and demand for labour rise less than prices
in years of poor harvests.
(d) Services sectors are the fastest growing sectors in the Indian economy and
account for more than fifty per cent of GDP. These sectors have in general higher
employment elastisities. Their growth, therefore, helps in poverty reduction.
(e) An increasing share of private sector in total investment leads to poverty

reduction, as private investment is more productive and more efficient in many
sectors.
(f) A reduction of fiscal deficit also helps in poverty reduction, as it does not lead to
crowing out of private investment.
28
Table-4.1-A: Determinants of Poverty at the Macro Level:
Linear Multiple Regression Equations
Poverty ratio as the Dependent variable
(All India time series data for the period 1977-78 to 1999-2000)
Independent variables Equation-1 Equation-2

Coefficient t-statistic Coefficient t-statistic
Constant 425.9 456.1
Per capita national income -0.002 2.58 -0.002 5.11
Growth rate of real GDP at factor cost 0.027 0.84
Growth rate of population 2.740 4.49 3.049 5.38
Inflation rate based on WPI 0.008 0.38
Gross fiscal deficit as percentage of GDP 0.123 1.60 0.085 1.11
Share of social sectors in central govt. expend. -1.358 4.78 -1.39 5.11
Literacy rate -1.407 6.02 -1.26 7.38
Expectation of life -7.281 5.51 -7.68 5.86
Growth rate of agricultural GDP -0.018 1.28
Share of service sectors in overall GDP -0.466 2.34 -0.54 4.21
Share of private sector in overall GDP 0.217 1.25
Share of private sector in gross domestic invest. -0.067 3.42 -0.07 4.18
Gini ratio for consumer expenditure 43.801 4.16 44.06 4.11
Time (1977-78=1) -6.929 6.31 -6.96 6.34
R squared 0.999 0.999
No. of observations 23 23
Table-4.1-B: Determinants of Poverty at the Macro Level:

Linear Multiple Regression Equations
Independent variables Equation-3 Equation-4

Constant 47.861 41.594
Time (1977-78=1) -0.540 4.51
R squared 0.985 0.969
29
Table-4.2-A : Determinants of Poverty at the Macro Level:
Log-Linear/ Semi-log Multiple Regression Equations
Independent variables (Log of) Equation-1 Equation-2

Log-Linear Semi-log
Log of Poverty ratio Poverty ratio as the
as the Dependent Dependent variable
variable
Constant 41.43 1290
Growth rate of real GDP at factor cost 0.003 0.73
Growth rate of population 0.021 1.96 1.88 1.96
Inflation rate based on WPI 0.014 3.08
Gross fiscal deficit as percentage of GDP 0.025 1.87 1.09 0.44
Share of social sectors in central govt. expend. -0.043 1.98 -0.90 8.06
Literacy rate -3.979 9.00 -114 3.44
Expectation of life -3.622 3.17 -156 1.95
Growth rate of agricultural GDP -0.003 0.83
Share of service sectors in overall GDP -1.078 5.79 -31.6 5.77
Share of private sector in overall GDP 0.190 0.61
Share of private sector in gross domestic invest. -0.052 2.04 -3.56 3.23
Time (1977-78=1) -0.139 6.50 4.32 4.92
R squared 0.999 0.999
Table-4.2-B : Determinants of Poverty at the Macro Level:

Semi-Log Multiple Regression Equations
Independent variables (Log of) Equation-3 Equation-4

Semi-log Semi-log
Constant 144.99 317.96
Time (1977-78=1) -0.592 3.53
R squared 0.980 0.968
30
5 Factors Affecting Poverty Across States
A World Bank study (World Bank 2000) on India on the basis of inter-state and inter-
temporal data suggests that the major factors in reducing poverty are (a) faster growth,
particularly agricultural growth that raises agricultural wages and tends to depress the
(relative) price of food, (b) lower inflation, (c) infrastructure, and (d) human resource
development, notably female literacy.
In this paper an attempt is made to study the econometric relations between poverty and
other variables at the state level on the basis two sets of data:
(a) The first set of regressions uses panel data for 16 major States and All India for four
years 1983, 1987-88, 1993-94 and 1999-2000 (having 68 observations) for each of
Rural, Urban and Combined sectors.
(b) The second set of regressions uses pooled panel data for all the sectors and all the
years (having 204 observations).
Although such a cross-state and inter temporal regression analysis (Tables 4.3-A to 4.5-
B) faces some daunting challenges such as state and time-specific effects, omission of
relevant variables, endogeneity of explanatory variables, and uncertainty about the
effectiveness of the underlying statistical model, the results need special attention.
(a) Per capita state domestic product and the Gini ratio for consumer expenditure have
significant correlations with the poverty ratio for different states. As in the case of
macro level relations, while poverty ratio varies inversely with per capita income, it
varies directly with the consumption inequality across the states.
(b) The other variables that have significant influence on the poverty ratio across the
states include rate of unemployment, degree of literacy, expectation of life, old-age
dependency ratio, and degree of urbanisation.
(c) As expected, poverty ratio varies directly with the rate of unemployment and old age
dependency ratio in all the sectors.
(d) Poverty ratio is inversely related to expectation of life in all sectors implying that an
improvement in health conditions and reduction of mortality rates have a positive
contribution to poverty reduction.
(e) However, certain results appear to be counter-intuitive. First, there is a positive
correlation between poverty and literacy in all the sectors. This relationship may
simply imply that an improvement in the degree of literacy is associated with greater
poverty after taking into account the improvement in per capita income or reduction
in the unemployment rate. In other words, literacy reduces poverty through
improvement in employment and income earnings, and its major impact is captured
by the income and unemployment variables. Second, rural poverty is inversely
related with the degree of urbanisation. This suggests that urbanisation leads to
growth of agro-based and food processing industries which provide more
employment opportunities for the rural unemployed.
31
Table-4.3-A : Determinants of Poverty across States
Log-Linear Multiple Regression Equations
Log of Poverty ratio as the Dependent variable
(Panel Data for 16 major States and All India
for four years 1983, 1987-88, 1992-93,and 1999-2000)
Independent variables (log of) Rural sector Urban sector Combined

Coeffi- t- Coeffi- t- Coeffi- t-statistic
cient statistic cient statistic cient
Constant 30.454 15.164 19.34
Time (catch-all variable, 1983=1) 0.060 0.93 -0.007 0.16 -0.016 0.46
Per capita consumption expenditure -0.019 6.82 -0.023 9.50 -0.016 7.43
Rate of unemployment 0.247 2.57 0.004 1.97 0.212 2.80
Literacy rate 0.612 1.96 0.926 1.55 0.265 1.09
Expectation of life -6.453 3.93 -3.429 2.45 -3.037 2.74
Old-age dependency ratio 0.773 2.21 0.121 0.51 -0.837 2.60
Gini ratio for consumer expenditure 1.346 2.81 0.150 1.97 0.629 2.00
Degree of urbanisation -0.380 2.12 0.466 4.93 0.032 1.98
R squared 0.856 0.793 0.831
No. of observations 68 68 68
Table-4.3-B : Determinants of Poverty across States


Constant 25.183 20.233 19.574
Time (catch-all variable, 1983=1) 0.027 0.49 -0.022 0.54 -0.016 0.45
Inequality adjusted pc consum. Exp -0.030 8.42 -0.029 9.51 -0.022 8.56
Literacy rate 0.574 1.91 0.861 1.41 0.244 1.01
Old-age dependency ratio 0.901 2.26 0.237 1.95 0.775 2.47
R squared 0.864 0.780 0.820
32
Table-4.4-A : Determinants of Poverty across States

Constant 42.610 34.831 33.397
Time (catch-all variable, 1983=1) 0.297 3.11 0.220 2.65 0.199 3.56
Per capita Net state domestic prod. -0.749 4.23 -0.684 4.26 -0.595 5.60
Literacy rate 1.135 2.92 0.509 0.57 0.692 2.29
Old-age dependency ratio 1.797 3.50 0.839 2.71 -0.182 0.53
Gini ratio for consumer expenditure 1.018 1.96 0.701 2.00 1.144 2.84
R squared 0.803 0.760 0.789
Table-4.4-B : Determinants of Poverty across States


Constant 36.207 32.590 29.750
Time (catch-all variable, 1983=1) 0.128 1.83 0.099 1.55 0.065 1.40
Inequality adjusted pc NSDP -0.0006 6.26 -0.0005 4.28 -0.0005 6.11
Literacy rate 0.991 2.80 -0.285 0.34 0.481 1.65
Old-age dependency ratio 2.035 5.08 0.891 2.83 0.472 2.01
R squared 0.820 0.680 0.754
33
Table-4.5-A: Determinants of Poverty across States
(Panel and Pooled Data for 16 major States and All India,
stratified by rural, urban and combined
Independent variables (log of) Equation-1 Equation-2

Constant 26.290 24.833
Dummy (0 for Urban, 1 for National, 2 for Rural) -0.298 4.66 -0.271 5.42
Time (catch-all variable, 1983=1) 0.125 0.12 0.093 0.93
Per capita consumption expenditure -0.017 9.91
Inequality adjusted per capita consump. Exp. -0.025 12.19
Rate of unemployment 0.241 4.07 0.227 3.96
Literacy rate 0.295 1.40 0.328 1.61
Old-age dependency ratio 0.448 2.21 0.367 1.96
Gini ratio for consumer expenditure 0.649 2.50
Degree of urbanisation 0.119 2.12 0.108 1.98
R squared 0.710 0.727
Table-4.5-B: Determinants of Poverty across States

(Panel and Pooled Data for 16 major States and All India,
stratified by rural, urban and combined
Independent variables (log of) Equation-1 Equation-2

Constant 38.18 33.307
Dummy (0 for Urban, 1 for National, 2 for Rural) -0.241 3.50 -0.337 6.06
Time (catch-all variable, 1983=1) 0.226 4.37 0.094 2.40
Per capita net state domestic product (NSDP) -0.658 7.18
Inequality adjusted per capita NSDP -0.0006 8.76
Rate of unemployment 0.117 2.09 0.160 2.46
Literacy rate 0.823 3.39 0.575 2.47
Old-age dependency ratio 1.019 4.76 .243 6.53
Gini ratio for consumer expenditure 0.861 3.07
Degree of urbanisation 0.005 2.00 0.076 2.01
R squared 0.685 0.690
34
6 Concluding Observations
The relations between poverty and other variables lead to the following policy
prescriptions:
 Higher growth rate of national income than that of population is essential for
poverty reduction as it provides extra income for distribution among the poor
without affecting the well being of the relatively richer households.
 While growth in per capita income is a necessary condition for poverty reduction, it
is by no means sufficient. It is also important to focus on creating an enabling
environment for the poor to participate in, and benefit from, the growth process. The
pro-poor public policies include creation of employment opportunities and
enhancing the level of health, education and skill of the poor.
 A stable macroeconomic environment, characterized by low inflation and
sustainable level of gross fiscal deficit makes it possible for the poor to safeguard
their purchasing power.
 The reduction of government deficit allows banks to provide more funds for private
investment, which is more productive and more efficient. It also allows the
government to devote more scarce resources to investment in social sectors. .
Most evaluations of the poverty alleviation programs, done by the government or others,
conclude that these programs are not very effective in reducing poverty. They suffer from
ill defined and multiple objectives, limited targeting, under-funding, complex
administration, high administrative costs and leakage, lack of proper accountability and
adequate monitoring. A recent study of the Public Distribution System (PDS) suggested
that only 25 percent of food grains actually reach the poorest 40 percent of the
population, and administrative costs account for 85 percent of total expenditure and
therefore far outweigh the income gains to the poor.
One of the better-targeted programs is the Integrated Child Development Services. Food
for works program is also more successful at targeting the poor and improved their living
standards at a relatively low cost.
As unemployment is the root cause of poverty and the population growth in India is very
high, there should be more emphasis on family planning. For an urban family a child is
born by parental planning and family size is limited to the necessary minimum. On
contrary, in rural India a child is regarded as an asset and is expected simply because of
normal life cycle progressions.
Government is trying to change this environment by suitable public policy on education,

health and family welfare, and economic incentives for micro families. But these
measures have marginal impact on the net reproduction rates and the family size as socio-
cultural-religious environment put a constraint on the effectiveness of family planning.
Female education, awareness and better standard of living would create the required
consciousness among the people that smaller families are desirable. If the needs for
35
health and family welfare services are fully met, it will be possible to achieve substantial
decline in the family size and enable the families to improve quality of life.
Low productivity of small landholders leads to poverty, low energy in-take and under
nutrition, which in turn prevents the development and creates a vicious circle. In most of
the States, non-farm employment in rural areas has not grown very much and cannot
absorb the growing in labour force due to high population growth. Those who are getting
educated specially beyond the primary level do not wish to do manual agricultural work.
They would like better opportunities and more remunerative employment in rural areas.
This can be done by developing agro-based and rural resource-based enterprises.
Government provides several fiscal and monetary incentives for the small-scale
industries, many of which are based on agricultural goods and rural resources. But these
small industries suffer from lack of modern technology, adequate bank credits, skill
labour and efficient network of markets. It is imperative that a program of skill
development, vocational training and technical education is adopted on a large scale in
order to generate productive employment in rural areas for those living there. The entire
gamut of existing poverty alleviation and employment generation programs may have to
be restructured to meet the newly emerging demand for employment.
It is observed that investment on rural infrastructure and agricultural extension services

reduces poverty to a greater extent than agricultural subsidies, which are not properly
targeted and enjoyed by the rich farmers. Roads, well-designed irrigation systems, flood
control, rural electrification and telecommunications and the economic use of fertilizers
can make inroads against rural poverty.
While some states were able to take advantage of the stabilization and economic reforms
to speed up growth and poverty reduction, others lagged behind due to poor governance,
insufficient infrastructure, lack of human development and lack of fiscal adjustment.
Agriculture, which may have lost its impetus in reducing poverty, remains the least
reformed and most distorted sector. Lack of reforms of labour and product markets limit
both the rate of growth and its labour intensity.
International experience indicates that the cost recovery for basic social services does not
generate much revenue and adversely affects the utilization rates, especially by the poor.
Therefore, any attempt to raise the services charges to cover full cost for the provision of
basic services will be counter-productive and is to be avoided to the maximum extent
possible. When imposed, cost recovery should improve quality and exempt the poor.
When cost recovery occurs, revenues should go a special fund to be reinvested in the
social sectors.
In the education sector, at the higher level, there is a case for greater cost recovery, but
the political economy constraints may go against the enhancement of user charges. In
countries like Malaysia and Sri Lanka, lower level services have been delivered free of
36
charge for decades on the principle of universality, and even the World Bank was
persuaded against the imposition of user charges.
While the level, efficiency and equity of social expenditure matters, there is need to
ensure effective utilization of existing resources. Expenditure levels cannot be increased
without improved absorptive capacity. In this respect, the involvement of the community
appears to be extremely important in order to improve absorptive capacity, transparency
and the appropriate monitoring of expenditures.
There is a wide scope for strengthening the public-private partnership in the delivery of
health care services. There is also a wider scope for more involvement of India’s several
thousand Non-Government Organisations (NGOs) for implementation of many
government schemes in social sectors.
In sum, India needs to reformulate an anti-poverty strategy that is fiscally sustainable and
more finely targeted to those who cannot benefit from the opportunities offered by
growth. Safety nets should focus on those who either cannot participate in the growth
process (for reasons of extreme deprivation or vulnerability combined with poverty) or
face continuing exposure to risks.
Effective safety nets that insure rural poor against the income fluctuations, such as public
works programs, are very effective in overcoming important market failures, and need to
be strengthened and widened.
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Submission of Research paper for the

Global Development Awards: 2003 Competition

Category: Medals for Research on Development

Title of the Paper

Dr. Tarun Das, Economic Adviser, Ministry of Finance, India

A stable macroeconomic environment, characterized by low inflation and sustainable

Author: Dr. Tarun Das, Economic Adviser, Ministry of Finance, India.

Dr. Tarun Das, Economic Adviser, Ministry of Finance

1. Introduction, Scope and Objectives of the Paper

India’s reforms program is characterized by the following unique features:

Pre-Reforms Period Post Reforms Period

1. Quantitative licensing on external trade, 1. Abolition of industrial, investment and

5. Import substitution and export of 5. Export promotion and diversification,

9. Strict foreign exchange control, no 9. Abolition of exchange control, full

13. Central planning, discretionary process, 13. Decentralization, sound institutional

15. Outdated Companies Act 15. Competition Law enacted

2.3 External sector reforms

Status in June 1991 Status in August 2003

Foreign investment policy is liberalized significantly. Most of the sectors (except

Table-2.3 Major Pro-Market Reforms in Industry and Infrastructure since 1991

Status in June 1991 Status in August 2003

1. Industry and infrastructure:

2. External Sector reforms:

Country Sectors allowed Areas of 100% foreign Duration Local Export

(a) Despite fluctuations, total expenditure as a percentage of GDP virtually remained

Year Total Expenditure Expenditure on Expenditure on

1992-93 17.4 7.8 1.4

Table-2.7 Expenditure on Social Services by the General Government

2.7 Unfinished Agenda on Reforms

(a) Privatisation of public enterprises at a faster speed,

 Regaining the momentum of the disinvestment program is critical for fiscal

 Further liberalisation of the non-debt creating financial flows including FDI is

 It is important to lock in recent gains on the inflation front. Management of inflation

 Another priority of the government is to reduce inter-state disparities and

There is need for greater co-ordination, co-operation and partnership between

3.1 Sustained Economic Growth

Table-3.1: Average GDP Growth rates in 1980s and 1990s

3.2 Impact on Private Sector Participation

Share of private sector in sectoral investment (in percentage to sectoral GDI)

Sectoral investment ratios in the private sector (share in overall GDP)

3.3 Improvement in human development indicators

Increased availability of health care services resulted in continuous reduction of death

1951 32.1 18.3 39.9 27.4 146

Table-3.4: Selected Indicators of Human Development for Major States

Andhra Pradesh 60.6 44.1 66

Table-3.5: Indicators of Human Development in Selected Asian Countries

Table-3.6 Change in real wages for unskilled agricultural labour

Year Percentage change

3.5 Poverty Reduction

Table-3.8: Poverty incidence and growth rates in India

India 54.9 26.1 1.1 3.2 5.6

The spatial distribution of poverty in India is highly uneven; linkages between

3.6 Impact on Employment

Table-3.9: Employment growth rates during 1972-2000 (percent)

Period Rate of growth of Rate of growth of Rate of growth of

Table 3.10 Sectoral Employment during 1983 to 2000

Employment (per cent to total) Annual growth rate (%)

Sector 1983 1987- 1993- 1999- 1983 to 1987- 1983 to 1993-

3.7 Impact on Unemployment

3.8 Inequality in India

In the absence of comprehensive income surveys in India, household expenditure surveys

Removal of wealth and income inequalities, socio-economic injustices and assurance of