Country Partnership Strategy: IND, 2013–2017

POVERTY ANALYSIS (SUMMARY)

1. Poverty incidence. From 1951 to 1978, India's poverty rate—the percentage of the
population living below a given poverty line—fluctuated between about 45% and 62% with no
clear trend.1 Beginning in the late 1970s, and broadly coinciding with an acceleration in the rate
of economic growth, the poverty rate declined, from 43% in 1983 to 27.6% in 2004/05.2 An
improved methodology for determining the poverty line, introduced in 2009, has led to a larger
share of the population being counted as poor. However, poverty rates have declined even
according to the new poverty line, from 45.3% in 1993/94 to 21.9% in 2011/12 (Figure 1).
Further, while in 1983 about 55.5% of Indians lived below the $1.25 per day poverty line—the
internationally comparable poverty line—this dropped to 32.7% in 2009.3 However, 68.9% of the
population still lives under the $2.00 per day poverty line, indicating that a large proportion of
population is vulnerable to economic shocks that may drive them back into extreme poverty.

Figure 1: Poverty in India

420 50
405 45

Percentage of population
Number of people below

390
poverty line (million)

40

below poverty line

375
360 35
345 30
330 25
315 20
300 15
285
270 10
255 5
240 0
1993/1994 2004/2005 2009/2010 2011/2012

Note: Poverty is defined in terms of the poverty lines defined by the Expert Group 2009.
Source: Government of India, Planning Commission. 2013. Press Note on Poverty
Estimates, 2011-12. New Delhi; Government of India, Planning Commission. 2012. Press
Note on Poverty Estimates, 2009-10. New Delhi.

2. Increased pace of poverty reduction. The pace of poverty reduction increased in

recent years, from an average 0.74 percentage points per year between 1993/94 and 2004/05
to an average 2.18 percentage points per year between 2004/05 and 2011/12. This has
coincided with a significant decline in the absolute number of poor people (as seen in Figure 1),
from over 400 million in 2004/05 to about 270 million in 2011/12. In comparison, between
1993/94 and 2004/05, the number of poor remained generally unchanged at about 400 million,
even as poverty rates declined.

3. Interstate disparities in incidence and reduction of poverty. The incidence of

poverty varies widely across Indian states, ranging from about 40% in Chhattisgarh in 2011/12

1
These poverty rates are based on the poverty estimation method developed by the Expert Group 1993, whose
method for reporting official poverty statistics has been in use since March 1997. Several methodological concerns
with this approach led to the formulation of the Expert Group 2009, which developed a new methodology for
updating poverty lines over time.
2
Since 1987, India's poverty estimates have been based on household expenditure surveys conducted over a 12-
month period starting in July. Thus, the period 2004/05 covers July 2004 to June 2005.
3
The World Bank. PovcalNet database. http://iresearch.worldbank.org/PovcalNet/index.htm.
2

to less than 10% in a number of states. A wide variation is also seen in the performance of
states with respect to poverty reduction. The poverty rate declined by about 25 percentage
points between 2004/05 and 2011/12 in Odisha and Tripura, which have outperformed other
states in poverty reduction. In contrast, the poverty rate declined by less than 10 percentage
points in a few states including Assam, Chhattisgarh, Jharkhand, and Meghalaya during the
same period.

4. Rural and urban poverty. In 2011/12, the poverty incidence in rural areas (25.7%) was
higher than in urban areas (13.7%). However, between 2004/05 and 2011/12, poverty declined
more rapidly in rural areas (annual average rate of 2.3 percentage points) compared to urban
areas (annual average rate of 1.7 percentage points), suggesting that India’s urban and rural
poverty rates are converging.

5. Inequality. The Gini Index, a popular measure of inequality, was about 32 in both 1983
and 1993/94 based on household consumption expenditure data. Thereafter, it increased to 36
in 2004/05 and to 37 in 2009/10. The increases in inequality are mainly an urban phenomenon,
driven primarily by increased wages among people with higher levels of education.4 In
comparison with other fast-growing emerging economies, these levels of inequality are not
particularly high. However, non-income inequality in India (e.g., pertaining to health and
education) has tended to be larger relative to other parts of the developing world. 5

6. Progress towards the Millennium Development Goals. India is on track to achieve

the Millennium Development Goal targets relating to enrollment in primary education, youth
literacy, gender parity in education, trend reversal in HIV prevalence, and access to improved
drinking water, and is on track with respect to income poverty reduction as well. However, India
is likely to miss the targets for reduction in malnutrition, reduction in maternal and child mortality,
and improved access to sanitation facilities.6

Causes of Poverty

7. Poverty in India results mainly from a lack of economic opportunities, limited access to
available economic opportunities due to insufficient human capabilities, and lack of safety nets
to minimize vulnerability to economic shocks.

A. Limited Economic Opportunities

8. Low agriculture productivity and limited non-agricultural job opportunities. About

half of India’s workforce is engaged in agriculture, which contributes only 14% to India’s gross
domestic product (GDP); this illustrates the sector’s low productivity, and hence limited income-
earning opportunities. Labor productivity in the agriculture sector has been estimated to be only
29% of labor productivity nationally.7 On the other hand, many non-agriculture sectors with high
productivity levels—such as finance, insurance, and real estate; and transport, communications,

4
J Cain et al. 2010. Accounting for Inequality in India: Evidence from Household Expenditures. World Development.
38(3). pp. 282–297.
5
ADB. 2012. Asian Development Outlook 2012: Confronting Rising Inequality in Asia. Manila.
6
Government of India, Central Statistical Office. 2011. Millennium Development Goals, India Country Report. New
Delhi; World Bank World Development Indicators 2012 (http://data.worldbank.org/data-catalog/world-development-
indicators); ADB. 2012. Key Indicators for Asia and the Pacific 2012. Manila.
7
R. Hasan et al. 2012 Growth, Structural Change, and Poverty Reduction in India. New Delhi: India Resident
Mission.
 3

and business services—have limited potential for direct generation of jobs on a large scale for
unskilled and semi-skilled workers. The manufacturing sector, which has considerable untapped
potential, employs only 11% of the workforce while contributing 16% to India’s GDP. 8 Moreover,
about 80% of the manufacturing workforce is employed in the informal sector, where
productivity and earnings tend to be low and firm size is often too small to benefit from
productivity-enhancing technology. Private investment in the formal sector manufacturing has
been concentrated in capital-intensive and skill-intensive sectors, and has largely bypassed the
labor-intensive subsectors.

Figure 2: Employment Shares and Labor Productivity Differentials across Sectors (2009/10)
800
Labor Productivity (%)

700
FIRE (723)
Share of Average
productivity as a
Sectoral Labor

600
PU (623)
500
REGMFG (395)
400 MIN (339)
300 GOV (266)
TSC (208)
200 WRT (140)
CSP (112)
100 AGR (29) UNREG (58) CONST (81)
0
1 21 41 61 81
Employment (%)

AGR = agriculture and allied activities, CONST = construction, CSP = community, social and personal services, FIRE
= finance, insurance and real estate, GOV = public administration and government services, MIN = mining and
quarrying, PU = public utilities, REGMFG = registered manufacturing, TSC = transport, storage and communications,
UNREG = unregistered manufacturing, and WRT = wholesale and retail trade, restaurants and hotels.
Note: the number in parenthesis reflects sector productivity as a percent of the national productivity.
Source: Government of India, Ministry of Finance. 2013. Economic Survey 2012-13. New Delhi.

9. Two major factors that constrain the creation of economic opportunities are inadequate
infrastructure and stringent regulations.9 Inadequate infrastructure can be a major constraint to
poverty reduction. Various studies suggest that investment in infrastructure facilitates job
creation by increasing agriculture and manufacturing productivity, and distributes the benefits of
economic growth more evenly.10

B. Limited Access to Opportunities

10. Human capital accumulation. Poor nutrition, health and education, especially early in
life, have historically limited efforts to rapidly reduce poverty. Poor sanitation has a detrimental
effect on health early in life, and can lead to a loss of adult cognitive skills, and negatively
impact labor productivity.11 In addition to health concerns, the educational and skills

8
Government of India. Ministry of Finance. 2012. Economic Survey 2011–12. New Delhi
9
Both factors are discussed in the Private Sector Assessment (accessible from the list of linked documents in
Appendix 2).
10
R. Murgai and R. Zagha. 2010. Building Infrastructure for Accelerated Poverty Reduction. New Delhi. BS Books. pp
54-75; S. Fan et al. 2000. Government Spending, Growth and Poverty: An Analysis of Interlinkages in Rural India.
American Journal of Agricultural Economics. 82(4). pp.1038–1051; S. Datta. 2012. The Impact of Improved
Highways on Indian Firms. Journal of Development Economics. 99(1). pp. 46–57, J. Rud. 2011. Infrastructure
Regulation and Reallocations within Industry: Theory and Evidence from Indian firms. Journal of Development
Economics, 99(1), pp. 116–127.
11
D. Spears and S. Lamba. 2012. Effects of Early-Life Exposure to Rural Sanitation on Childhood Cognitive Skills:
Evidence from India’s Total Sanitation Campaign. working paper (http://riceinstitute.org/wordpress/wp-
content/uploads/downloads/2012/07/Spears-Lamba-TSC-cognition-May-2012.pdf)
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development system has serious deficiencies. As a result, India is faced with a serious skills
deficit, which has resulted in the low employability of its labor force.12

C. Vulnerability to Economic Shocks

11. Much of India’s working population is engaged in the informal sector, and thus works
without social security benefits and medical coverage, rendering them vulnerable to economic
and health shocks. Health shocks and associated healthcare expenses are the principal
reasons people fall into poverty.13 Furthermore, many youth, especially in the rural sector,
remain underemployed in the agricultural sector or unemployed due to limited opportunities, and
require safety nets to ensure subsistence until they find productive employment.

Government Responses

12. The government’s continued commitment to poverty reduction is reflected in the goal of
inclusive growth which is a pivotal feature of the Twelfth Five Year Plan. Poverty incidence is
targeted to be reduced by 10 percentage points by 2017.

13. The government’s approach to tackling poverty focuses on (i) enhancing economic
opportunities the poor can access through efforts to improve productivity in agriculture, spur the
manufacturing sector (e.g., through the National Manufacturing Policy of 2011), and strengthen
India's infrastructure development, including through targeted initiatives such as Bharat Nirman
(a time-bound government program focusing on the availability and accessibility of public
services such as water supply, electricity, and roads in rural areas); (ii) developing the
capabilities of the population, especially the disadvantaged, to access economic opportunities
through targeted livelihood improvement programs; health and nutrition programs (e.g., the
National Rural Health Mission, Midday Meal Scheme and Integrated Child Development
Services); programs ensuring access to safe drinking water and better sanitation such as Nirmal
Bharat Abhiyan (Total Sanitation Campaign); and education and skills development programs
such as the Right to Education and the 2009 National Skill Development Policy; and (iii)
protecting the poor and disadvantaged from various types of shocks by providing safety nets
through targeted social security schemes, and the National Social Security Fund for
unorganized sector workers; food and nutritional security through the National Food Security
Act; and livelihood security programs such as the Mahatma Gandhi National Rural Employment
Guarantee Act. The government’s approach under (ii) and (iii) is targeted in nature: beneficiaries
are mainly the poor and disadvantaged.

14. To ensure the government's targeted approach leads to the intended outcomes, the
Twelfth Five Year Plan advocates reforms in implementation structures, including use of
techniques such as total quality management and information technology-related tools, better
coordination among ministries, strengthening of local institutions, capacity building,
professionalization of public service delivery, partnership with civil society, and an emphasis on
social mobilization. The Unique Identification Project will provide a unique identification for each
resident of India; it has the potential to increase the efficiency of welfare service delivery and
could be an effective tool for monitoring government schemes and programs.

12
Team Lease Services. 2008. India Labour Report 2007.
13
Krishna A., 2007. Poverty and Health: Defeating Poverty by Going to the Roots. World Development. 50. pp. 63–
69.