Impact of Pro-Market Reforms on Poverty and Inequality in IndiaAn Assessment and Lessons for Policy Makers Dr.

Tarun Das1, Economic Adviser, Ministry of Finance Room 34-A North Block, New Delhi-110001, India. August 2003 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 during 1980-2000. Indias reforms program emphasized on gradualism and step-by-step approach 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, contribute to 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 and more productive. 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 also a wide scope for strengthening the public-private partnership and involvement of NGOs for implementation of government schemes in social sectors.

The paper expresses the personal views of the author, which may not necessarily imply the views of the organizations he is associated with. The author is presently working as Economic Adviser in the Ministry of Finance. Earlier he worked as Adviser (Modeling and Policy Planning) in the Planning Commission, Government of India. He also worked as a Consultant for the Asian Development Bank (ADB), World Bank, IMF, Commonwealth Secretariat, UN Economic Commission for Africa (UN-ECA), UNCTAD, UNDP and UN-ESCAP. For any clarifications and comments, contact das.tarun@hotmail.com/ tarundas@nic.finance.in
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Impact of Pro-Market Reforms on Poverty and Inequality in IndiaAn Assessment and Lessons for Policy Makers Dr. Tarun Das, Economic Adviser, Ministry of Finance, 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 countrys potentials for higher growth. As the initial reforms take root and secondgeneration reforms unfold, India is emerging as one of the fastest growing and dynamic economies of Asia. Indias 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 Fully satisfies the Agency Constraint (i.e. the ideology of the government) 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 calibrated on the basis 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 may be 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 any companies. India came out of a severe balance of payments crisis without any debt write-off or rescheduling of external debt. On the contrary, India was able to prepay a part of external debt to the multilateral funding agencies and bilateral countries.

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, Indias position improved from the third rank after Brazil and Mexico in 1990 to the ninth rank after Brazil, Russian Federation, Mexico, China, Argentina, 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 in Latin America 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 objective of this paper is to analyze the unique features of Indias 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 for 19772000, 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.

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. 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. 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. 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.

(b)

(c)

(d)

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;

Table-2.1 Paradigms of Pro-Market Reforms in India since 1991 Pre-Reforms Period 1. Quantitative licensing on external trade, industrial size and investment 2. State regulated monopolies of utilities and external trade 3. Strict Government control on finance and capital markets 4. Restrictions on foreign investment and technology transfer 5. Import substitution and export of primary goods 6. High duties and taxes with multiple rates and large dispersion 7. Sector-specific monetary, fiscal and tariff policies 8. End-use and sector-specific, multiple and controlled interest rates 9. Strict foreign exchange control, no convertibility of rupee 10. Multiple and fixed exchange rates determined by the Reserve Bank 11. Administered prices for minerals, utilities, and essential goods 12. Tax concessions on exports and savings 13. Central planning, discretionary process, high degree of bureaucracy 14. General lack of consumers protection and other rights 15. Outdated Companies Act 16. No exit policy for land and labour, high stamp duties and registration fees 17. Outdated legal system 18. Explicit subsidies on food, fertilizers, and some essential items 19. Hidden subsidies on power, urban transport, public goods, POL Post Reforms Period 1. Abolition of industrial, investment and trade licensing 2. Removal of state monopolies, and privatization of public enterprises 3. Significant liberalisation of financial and capital markets 4. Liberal regime for FDI, portfolio investment, foreign technology 5. Export promotion and diversification, no import bias 6. Reduction and rationalization of taxes and duties 7. Sector-neutral monetary, fiscal and tariff policies 8. Flexible interest rates without any enduse or sector specifications 9. Abolition of exchange control, full convertibility on current account 10. Unified and market determined exchange rates 11. Abolition of all administered prices except for few drugs 12. Rationalized and being phased out 13. Decentralization, sound institutional framework, reforming civil services 14. Acts governing consumer rights, IPR, independent regulatory authority 15. Competition Law enacted 16. No change in labor policy, slow progress of reforms in land markets 17. No change 18. No change, budget subsidies on LPG and kerosene introduced 19. No change, but user charges are being rationalized, and subsidies targeted

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 Indias 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 nonresidents. As regards exchange rate, India is regarded by the IMF as one of the countries having independent floating exchange rate system.

Table- 2.2 Major Pro-Market Reforms in Fiscal and Financial Sectors since 1991
Status in June 1991 Budgetary support to central public enterprises amounted to 1.5% of GDP besides various subsidies, preferential financing, price and purchase preferences. No hard budget constraints for PSEs. No disinvestment of government equity. Control on interest rates on government securities. Irrational duty structure and high rates of taxes. Maximum Rates Excise duties 110% Import duties 400% Income tax 54% Corporate taxes: Domestic cos. 49% and 54% Foreign cos. 65% Double dividend tax on both individuals and companies. Existence of gift tax. Limited cases of tax holidays. Highly regulated and controlled banking system with strict entry of new banks and branching rules. Bank deposit rates fixed according to account types and maturities. Minimum maturity of fixed deposit is 30 days. Issuing and pricing of securities, shares and bonds determined by the Controller of Capital Issues in the Ministry of Finance. Bank lending rates are fixed according to loan size and end uses. Floor rate on loans exceeding Rupees two lakh fixed by the RBI at 21%. At least 40 percent of bank credits canalized to the priority sectors at concessional rates. Government pre-empted large portion of bank reserves through CRR of 25% and SLR of 38.5% RBI Bank rate at 12%. PLR was high at above 21%. Inadequate norms concerning capital adequacy, income recognition, and provisioning for non-performing assets Portfolio investment by foreign investors in Indian companies is not allowed. Foreigners not allowed to buy government securities or disinvested shares in PSEs. Indian firms not allowed to raise funds from foreign stock exchanges. Status in August 2003 Budgetary support curtailed to 0.6% of GDP, preferential access to bank credits / price preference eliminated. MOUs with CPSEs strengthened. Disinvestment up to 49% of govt. equity is allowed. Government securities are sold at market prices. Direct and indirect taxes are reduced and rationalized. Maximum Rates Excise duties 24% Import duties 25% Income tax 30% + surcharge of 10% Corporate tax: Domestic cos. 35% + surcharge of 2.5% Foreign cos. 40% + surcharge of 2.5% Dividend tax only on distributed profits. Gift tax abolished. Tax holidays extended to many infrastructure. New private banks set up. Govt share of equity in public banks is being brought down to 49%. Foreign equity in new private banks is allowed to the extent of 40%. Bank deposit rates except for savings a/c liberalized. The min. maturity of term deposit reduced to 7 days. The office of CCI is abolished. Independent regulatory authority i.e. SEBI is established for orderly growth of capital markets. The banks determine lending rate. PLR ranges between 10.5% to 12%. Banks are also allowed to lend at below PLR rates. Priority sectors rationalized. No concessional rates except for small loans up to Rs.25000. Higher bank funds for private sector as CRR reduced to 4.75%. SLR reduced to 25%. Bank rate reduced to 6.25%. PLR is free and ranges between 10.75%-11.5%. Regulations, monitoring, norms on asset classification, provisioning, capital adequacy tightened as per international best practices. FIIs, NRIs and OCBs allowed to operate in Indias stock markets subject to individual and cumulative ceilings. NRIs/ FIIs allowed to buy govt securities & debt issues. Indian firms allowed to raise funds abroad through Global Depository Receipts, Foreign Currency Convertible Bonds and offshore fund.

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 1. Industry and infrastructure: (a) Licensing required for most industries, which accounted for 80% of manufacturing output. (b) Restrictions on expansion under MRTP (c) Reservation of 836 items for SSI units (d) 18 core and infrastructure industries, mostly with high capital intensity, long gestation period, lumpiness of huge capital, low return and high risk, reserved for the public sector. (e) Restricted foreign investment policy. Status in August 2003 (a) Licensing abolished except for 6 industries, which account for 7% of manufacturing output. (b) MRTP Act amended. (c) Many items dereserved. (d) Only four industries viz. Defense products, rail transport, atomic energy, minerals required by atomic energy reserved for public sector. (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) Competition Commission established. (a) (b) (c) (d) Exchange rate is market determined Most QRs removed Most items decanals Abolished except for some minerals and agricultural items, but compatible with WTO. (e) Export taxes abolished (f) Fully convertible on current account. (g) Significant convertibility on capital account.

(f) No Competition Act. 2. External Sector reforms: Fixed exchange rate determined by RBI QRs on 91% of imports Imports of 55 goods canalized 439 items of exports are subject to export licenses. (e) Export taxes on agro products and minerals (f) Rupee not convertible on current account. (g) No capital account convertibility. (a) (b) (c) (d)

Table-2.4 Private Sector Development and Investment Climate in selected Asian economies in 1990 and 2000
Country Private fixed Domestic credit to investment as % of private sector domestic fixed As % of GDP investment 1990 2000 1990 2000 .. 87 .. .. 34 .. 90 70 .. 65 .. 82 85 .. 58 .. 61 .. .. 52 .. 84 65 63 .. 74 .. 56 .. 82 78 Foreign Direct Investment As % of GDP 1990 2000 F RF F F SS .. .. R .. RF .. SS RF .. F .. AI .. R R RF F Entry and Exit Regulation in 2000 Entry Repatriation of: Income F F F F F .. .. R .. F R F F R F .. F .. R F R F Capital F F F F F .. .. R .. D R F F R F .. F .. R F F F

Hong Kong Korea,Rep Singapore Taiwan,China China Mongolia Cambodia Indonesia Lao, PDR Malaysia Myanmar Philippines Thailand Vietnam Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka Japan Low & middle income East Asia & Pacific Europe & Central Asia Latin America & Carib. Mid. East & N.Africa South Asia Sub-Saharan Africa High Income World

Newly Industrializing Economies (NIEs) .. 165 159 .. 89.0 79 .. .. 47 .. 61 61 .. 51 .. 69 68 .. 70 .. 70 .. .. 62 .. 79 67 50 .. 80 .. 72 .. .. .. 66 97 .. 88 19 n.a. 47 1 69 5 22 83 3 17 .. 25 .. 13 28 20 195 42 71 .. 28 42 25 43 108 97 102 110 .. 125 8 South-East Asia 7 21 9 136 9 45 109 35 South Asia 25 .. 29 .. 31 29 29 East Asia 188 World 55 106 21 28 47 29 66 136 120 1.7 0.9 15 0 0.9 0.9 0.1 1.0 3.0 2.7 0.9 3.5 3.9 3.8 4.5 1.0 0.6 1.8 10.1 8.8 0 .. 0 .. 0 0.6 0.5 0.6 .. 0.6 .. 0 0.5 1.1 1.7 1.0 0.7 5.3 .. 1.2 3.0 0.6 3.9 4.2 5.4 2.0 .. 2.8 2.8 4.1 0.7 20.7 .. 1.2 .. 3.2 11.6 .. 4.3 3.4

China and Mongolia

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.

Table-2.5 Foreign Investment regime in selected Asian countries

Country 1. India Sectors allowed for Foreign Direct Investment All except defense, agriculture, Plantation, atomic energy, rail trans. All except arms, drugs, forestry, nuclear power, rail Selected areas All sectors All except defense, alcoholic beverage All areas except broking, retail and personal services All sectors except banned/ restricted All sectors All sectors except retail trade and advertising All sectors All except media, retail trade and Accountancy All sectors except negative list All sectors except minerals, telecom, aviation, shipping All except public utilities, leasing, real estate, trust, transport All sectors except broadcasting All sectors except prohibited list All except arms, environment, related industries Selected sectors Areas of 100% foreign equity 100% Eons, FTZ, EPZ, power, technology parks, hospitals, shipping, priority areas All allowed sectors All allowed sectors, minimum of 35% Projects with FDI above Rs.20 million In any business All allowed sectors All allowed sectors All areas except public utilities, media, telecom and transport FDI of at least $50 mln, EOUs, designated sectors and locations Designated sectors 100% EOUs and designated sectors Over 80% exports, designated sectors and locations All allowed sectors, Minimum of 30% All allowed sectors, Minimum of 25% All sectors except banking All sectors except restricted list All sectors except prohibited list All allowed sectors Duration of FDR Unlimited Local content obligation Abolished since 1991 Value addition for EOUs No No No No No No 51% in 20 years No No 51% in 5 yrs in allied and agriculture No No Export obligations None except for 100% EOUs None except for EOUs No No No No No No No No No No No No

2. Bangladesh 3.Myanmer 4.Nepal 5.Pakistan 6. Sri Lanka 7.South Korea 8.Singapore 9.Indonesia 10.Malaysia 11.Philippines 12.Thailand 13.Vietnam 14. China

Unlimited Unlimited Unlimited Unlimited Unlimited Unlimited Unlimited 30 years Unlimited Unlimited Unlimited 20 years 10-30 years Unlimited Unlimited Unlimited 15 years

15.Hong Kong 16.Taiwan 17.Japan 18.Lao, PDR

No No No No

No No No No

Source: Tarun Das (2003)

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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 As percent of GDP Expenditure on social sectors as percent of total expenditure 7.8 10.5 10.0 11.1 11.1 11.3 11.5 Expenditure on social sectors as percent of GDP 1.4 1.7 1.7 1.7 1.8 1.9 2.0

1992-93 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04

17.4 16.0 15.4 15.5 16.0 16.7 17.0

Table-2.7 Expenditure on Social Services by the General Government (Combined Centre and States)
______________________________________________________________________________
I T E MS 1985 Actual As percentage of GDP: Total Expend. Social services Education Health Others Social services Education Health Others Education Health Others 29.4 5.8 2.9 1.3 1.6 19.6 9.8 4.4 5.4 50 23 27 26.8 5.4 3.1 1.2 1.2 20.3 11.4 4.3 4.6 56 21 23 24.2 4.9 2.7 1 1.2 20.4 11.3 4.3 4.8 55 21 24 23.4 5 2.7 1 1.3 21.5 11.6 4.5 5.4 54 21 25 24.2 5.2 2.8 1.1 1.3 21.4 11.5 4.6 5.3 54 21 25 25.4 5.5 3 1.2 1.3 21.6 11.9 4.6 5 55 22 23 26.6 5.7 3.3 1.2 1.2 21.3 12.3 4.4 4.6 58 21 21 28.1 6.3 3.1 1.3 1.8 22.4 11.2 4.8 6.4 50 21 29 29.5 6.5 3.1 1.4 2 22 10.5 4.8 6.7 48 22 31 29.6 6.2 3.1 1.4 1.8 20.9 10.3 4.6 6 49 22 29 1990 Actual 1995 Acual 1996 Actual 1997 Actual 1998 Actual 1999 Actual 2000 Actual 2001 RE 2002 BE

Finance of Centre & States

As % of total expenditure:

As % of expenditure on social services

______________________________________________________________________________

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) (b) (c) (d) (e) (f) (g) (h) (i) Privatisation of public enterprises at a faster speed, Further liberalisation of the reservation policy for the small-scale industries, Liberalisation in land and labour markets, Formulation of an effective exit policy for bankrupt firms, Coordinating state level reforms Reforms in municipalities and corporations Strengthening regulation in infrastructure Reforms in insurance, provident and pension funds, and 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 labourintensive 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.

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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 (19851990) 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 19972002 (Table-3.1). Table-3.1: Average GDP Growth rates in 1980s and 1990s (In percent) Average 1991-92 Average Average 1980s 1990s 7th plan 8th Plan 9th Plan 1986-90 1992-97 1997-2002 3.4 -2.3 4.7 1.8 3.4 3.0 7.6 7.4 6.0 -1.3 4.9 0.8 7.6 7.5 6.7 4.5 8.1 5.5 7.0 6.9 5.6 5.8 7.6 5.8

Sectors Agriculture & Allied Industry Services Total GDP

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.

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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 Agriculture & allied sectors 97 97 97 Mining and Quarrying 25 14 15 Manufac turing Electricity, gas, water supply 13 -10 -7 Construction Trade, hotels & restaurant 95 96 98 Transprt storage, commu nication 47 47 57 Finance, insurance, real estate 71 68 66 Commn social, personal services 37 31 33 Total GDP

1980-81 1990-91 1999-00

87 81 87

84 84 84

80 75 74

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

1980-81 1990-91 1999-00 52 70 72 7 3 3 83 81 88 10 6 14 58 84 71 102 82 60 56 47 44 90 86 87 38 18 26 59 64 71

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

1980-81 1990-91 1999-00 1.6 1.7 1.2 0.1 0.0 0.0 4.4 6.1 7.2 0.3 0.2 0.3 0.3 0.4 0.2 1.4 1.3 0.6 1.8 1.4 1.0 2.0 2.8 2.5 1.3 0.4 0.7 13.2 18.9 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 Indias 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).

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Table-3.3: Basic Indicators of Human Development Year Life expectancy at birth (years) Literacy rate (percent) Birth rate Per 1000 Death rate Per 1000 27.4 22.8 19.0 12.5 9.8 8.5 Infant mortality rate Per 1000 146 146 129 110 80 68

1951 32.1 18.3 39.9 1961 41.3 28.3 41.7 1971 45.6 34.5 41.2 1981 50.4 43.6 33.9 1991 59.4 52.2 29.5 2001 63.5 65.4 25.8 Source: Economic Survey 2002-03, Ministry of Finance.

Table-3.4: Selected Indicators of Human Development for Major States State Andhra Pradesh Assam Bihar Gujarat Haryana Karnataka Kerala Madhya Pradesh Maharashtra Orissa Punjab Rajasthan Tamil Nadu Uttar Pradesh West Bengal All India Life expectancy at birth (years) 60.6 54.9 58.5 60.1 62.9 61.9 72.0 54.0 64.2 55.5 66.4 58.0 62.4 55.9 61.5 59.4 Literacy rate (percent) 44.1 52.9 38.5 61.3 55.9 56.0 89.8 44.2 64.9 49.1 58.5 38.5 62.7 41.6 57.7 52.2 Infant mortality rate per 1000 66 75 72 62 68 53 13 97 48 95 52 86 54 85 55 72 Adult literacy rate (percent) 82 84 52 90 84 95 38 98 91 90 94

Table-3.5: Indicators of Human Development in Selected Asian Countries Country Life expectancy at birth Infant mortality rate per (years) 1000 China Indonesia India Kerala state (India) Malaysia Philippines Pakistan Korea, Republic Singapore Sri Lanka Thailand 69.2 64.0 61.6 72.0 71.4 67.4 62.8 71.7 77.1 72.5 69.5 38 47 73 13 11 32 95 6 4 17 31

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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 1991-92 1992-93 Percentage change -6.19 +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.
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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) Poverty Poverty Annual Average Average ratios Ratios Reduction GDP growth GDP growth 1975 1995 In 1975-95 1970-1980 1980-1995 % Point

Country

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.

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Indias progress in fighting poverty is modest when compared with some of Asian countries (like China and Indonesia) which experienced faster economic growth (Table3.8). 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.

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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 population labour force (% per annum) (% per annum) 1972-1978 2.27 2.94 1977-1983 2.19 2.04 1983-1988 2.14 1.74 1987-1994 2.10 2.29 1993-2000 1.93 1.03 Source: Planning Commission, Government of India. Rate of growth of employment (% per annum) 2.73 2.17 1.54 2.43 0.98

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

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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) Sector 1983 19871988 60.1 0.9 11.9 0.3 4.4 8.3 3.0 1.0 10.1 100 19931994 60.4 0.8 11.1 0.5 3.5 8.5 3.1 1.1 11.1 100 19992000 56.7 0.7 12.1 0.3 4.4 11.1 4.1 1.4 9.2 100 1983 to 19871988 1.8 7.4 3.6 2.9 12.1 4.9 3.2 4.7 3.6 2.9 Annual growth rate (%) 19871988 to 19931994 2.6 1.0 1.2 7.2 -1.4 3.0 3.5 4.5 4.1 2.5 1983 to 19931994 2.2 3.7 2.3 5.3 4.2 3.8 3.4 4.6 3.6 2.7 19931994 to 19992000 0.0 -1.9 2.6 -3.6 5.2 5.7 5.5 5.4 -2.1 1.1

Agriculture Mining & quarrying Manufacturing Electricity, gas and water supply Construction Trade, hotels and restaurant Transport, storage and communication Financial, real estate & business services Community, social & personal services All Sector

63.2 0.7 11.6 0.3 3.0 7.6 2.9 0.9 9.8 100

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

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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 interstate 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 19992000. 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

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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 19771989 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.

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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 incomeearning 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.

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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 tradeoff 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.

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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 4.1B 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

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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) (b) (c) An increase in per capita income is essential for reduction of poverty, as it generates extra income that can benefit the poor. Educational achievement facilitated by public investment in health allows the poor to participate in the economic growth process through employment. 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. 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. 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. A reduction of fiscal deficit also helps in poverty reduction, as it does not lead to crowing out of private investment.

(d)

(e)

(f)

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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 Constant Per capita national income Growth rate of real GDP at factor cost Growth rate of population Inflation rate based on WPI Gross fiscal deficit as percentage of GDP Share of social sectors in central govt. expend. Literacy rate Expectation of life Growth rate of agricultural GDP Share of service sectors in overall GDP Share of private sector in overall GDP Share of private sector in gross domestic invest. Gini ratio for consumer expenditure Time (1977-78=1) R squared No. of observations Equation-1 Coefficient t-statistic 425.9 -0.002 2.58 0.027 0.84 2.740 4.49 0.008 0.38 0.123 1.60 -1.358 4.78 -1.407 6.02 -7.281 5.51 -0.018 1.28 -0.466 2.34 0.217 1.25 -0.067 3.42 43.801 4.16 -6.929 6.31 0.999 23 Equation-2 Coefficient t-statistic 456.1 -0.002 5.11 3.049 0.085 -1.39 -1.26 -7.68 -0.54 -0.07 44.06 -6.96 0.999 23 5.38 1.11 5.11 7.38 5.86 4.21 4.18 4.11 6.34

Table-4.1-B: 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 Constant Per capita national income Gini ratio for consumer expenditure Time (1977-78=1) R squared No. of observations Equation-3 Coefficient t-statistic 47.861 -0.002 3.25 29.813 1.96 -0.540 4.51 0.985 23 Equation-4 Coefficient t-statistic 41.594 -0.004 24.81 82.290 3.27 0.969 23

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Table-4.2-A : Determinants of Poverty at the Macro Level: Log-Linear/ Semi-log Multiple Regression Equations (All India time series data for the period 1977-78 to 1999-2000)
Independent variables (Log of) Equation-1 Log-Linear Equation-2 Semi-log

Log of Poverty ratio as the Dependent variable

Constant Per capita national income Growth rate of real GDP at factor cost Growth rate of population Inflation rate based on WPI Gross fiscal deficit as percentage of GDP Share of social sectors in central govt. expend. Literacy rate Expectation of life Growth rate of agricultural GDP Share of service sectors in overall GDP Share of private sector in overall GDP Share of private sector in gross domestic invest. Gini ratio for consumer expenditure Time (1977-78=1) R squared No. of observations Coefficient t-statistic 41.43 -0.651 5.59 0.003 0.73 0.021 1.96 0.014 3.08 0.025 1.87 -0.043 1.98 -3.979 9.00 -3.622 3.17 -0.003 0.83 -1.078 5.79 0.190 0.61 -0.052 2.04 0.161 1.95 -0.139 6.50 0.999 23

Poverty ratio as the Dependent variable

Coefficient 1290 -7.07 1.88 1.09 -0.90 -114 -156 -31.6 -3.56 8.68 4.32 0.999 23 t-statistic 2.69 1.96 0.44 8.06 3.44 1.95 5.77 3.23 1.96 4.92

Table-4.2-B : Determinants of Poverty at the Macro Level: Semi-Log Multiple Regression Equations Poverty ratio as the Dependent variable (All India time series data for the period 1977-78 to 1999-2000)
Independent variables (Log of) Constant Per capita national income Gini ratio for consumer expenditure Time (1977-78=1) R squared No. of observations Equation-3 Semi-log Coefficient t-statistic 144.99 -10.82 1.98 3.386 1.95 -0.592 3.53 0.980 23 Equation-4 Semi-log Coefficient t-statistic 317.96 -29.79 24.41 14.20 1.96 0.968 23

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5 Factors Affecting Poverty Across States A World Bank study (World Bank 2000) on India on the basis of inter-state and intertemporal 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 4.5B) 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.

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

Table-4.3-B : 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) Constant Time (catch-all variable, 1983=1) Inequality adjusted pc consum. Exp Rate of unemployment Literacy rate Expectation of life Old-age dependency ratio Degree of urbanisation R squared No. of observations Rural sector Coeffitcient statistic 25.183 0.027 0.49 -0.030 8.42 0.242 2.62 0.574 1.91 -5.674 3.59 0.901 2.26 -0.272 2.01 0.864 68 Urban sector Coeffitcient statistic 20.233 -0.022 0.54 -0.029 9.51 0.046 1.53 0.861 1.41 -4.616 3.42 0.237 1.95 0.311 3.65 0.780 68 Combined Coeffi- t-statistic cient 19.574 -0.016 0.45 -0.022 8.56 0.211 2.77 0.244 1.01 -3.334 3.06 0.775 2.47 0.043 2.17 0.820 68

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Table-4.4-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) Constant Time (catch-all variable, 1983=1) Per capita Net state domestic prod. Rate of unemployment Literacy rate Expectation of life Old-age dependency ratio Gini ratio for consumer expenditure Degree of urbanisation R squared No. of observations Rural sector Coeffitcient statistic 42.610 0.297 3.11 -0.749 4.23 0.125 2.28 1.135 2.92 -9.623 5.42 1.797 3.50 1.018 1.96 -0.351 2.01 0.803 68 Urban sector Coeffitcient statistic 34.831 0.220 2.65 -0.684 4.26 0.006 2.00 0.509 0.57 -7.117 3.89 0.839 2.71 0.701 2.00 0.296 2.32 0.760 68 Combined Coeffi- t-statistic cient 33.397 0.199 3.56 -0.595 5.60 0.138 2.12 0.692 2.29 -6.217 5.83 -0.182 0.53 1.144 2.84 0.101 1.96 0.789 68

Table-4.4-B : 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) Constant Time (catch-all variable, 1983=1) Inequality adjusted pc NSDP Rate of unemployment Literacy rate Expectation of life Old-age dependency ratio Degree of urbanisation R squared No. of observations Rural sector Coeffitcient statistic 36.207 0.128 1.83 -0.0006 6.26 0.161 1.96 0.991 2.80 -9.860 5.96 2.035 5.08 -0.226 1.96 0.820 68 Urban sector Coeffitcient statistic 32.590 0.099 1.55 -0.0005 4.28 0.145 2.07 -0.285 0.34 -7.371 4.07 0.891 2.83 0.341 2.89 0.680 68 Combined Coeffi- t-statistic cient 29.750 0.065 1.40 -0.0005 6.11 0.195 2.16 0.481 1.65 -7.101 6.34 0.472 2.01 0.072 2.00 0.754 68

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Table-4.5-A: Determinants of Poverty across States Log-Linear Multiple Regression Equations Log of Poverty ratio as the Dependent variable (Panel and Pooled Data for 16 major States and All India, stratified by rural, urban and combined for four years 1983, 1987-88, 1992-93,and 1999-2000)
Independent variables (log of) Constant Dummy (0 for Urban, 1 for National, 2 for Rural) Time (catch-all variable, 1983=1) Per capita consumption expenditure Inequality adjusted per capita consump. Exp. Rate of unemployment Literacy rate Expectation of life Old-age dependency ratio Gini ratio for consumer expenditure Degree of urbanization R squared No. of observations Equation-1 Coefficient t-statistic 26.290 -0.298 4.66 0.125 0.12 -0.017 9.91 0.241 0.295 -5.465 0.448 0.649 0.119 0.710 204 4.07 1.40 5.74 2.21 2.50 2.12 Equation-2 Coefficient t-statistic 24.833 -0.271 5.42 0.093 0.93 -0.025 0.227 0.328 -5.280 0.367 0.108 0.727 204 12.19 3.96 1.61 5.94 1.96 1.98

Table-4.5-B: Determinants of Poverty across States Log-Linear Multiple Regression Equations Log of Poverty ratio as the Dependent variable (Panel and Pooled Data for 16 major States and All India, stratified by rural, urban and combined for four years 1983, 1987-88, 1992-93,and 1999-2000)
Independent variables (log of) Constant Dummy (0 for Urban, 1 for National, 2 for Rural) Time (catch-all variable, 1983=1) Per capita net state domestic product (NSDP) Inequality adjusted per capita NSDP Rate of unemployment Literacy rate Expectation of life Old-age dependency ratio Gini ratio for consumer expenditure Degree of urbanisation R squared No. of observations Equation-1 Coefficient t-statistic 38.18 -0.241 3.50 0.226 4.37 -0.658 7.18 0.117 0.823 -8.161 1.019 0.861 0.005 0.685 204 2.09 3.39 8.51 4.76 3.07 2.00 Equation-2 Coefficient t-statistic 33.307 -0.337 6.06 0.094 2.40 -0.0006 0.160 0.575 -8.393 .243 0.076 0.690 204 8.76 2.46 2.47 8.92 6.53 2.01

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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 (i.e. positive growth rate of per capita income) is essential for poverty reduction as it provides extra income for distribution among the poor without affecting adversely 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 sociocultural-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

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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

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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 Indias 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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Das, Tarun (1993a) Structural Reforms and Stabilisation Policies in India Rationale and Medium Term Outlook, pp.20-56, in Economic Liberalisation and its Impact, ed. SP Gupta,, Macmillan India Limited, Delhi. _______ (1993b) Macro-economic Framework, Special Economic Zones and Foreign Investment in India, Ad-Hoc Working Group on Investment and Financial Flows, pp.1-75, TD/B/WG.1/Misc.3/ Add.3, UNCTAD, United Nations, Geneva. _______ (1996) Policies and Strategies for Promoting Private Sectors Role in Industrial and Technological Development Including Privatisation in the Asian Economies, pp.1-171, ST/ESCAP/1696, United Nations, New York. _______ (1998a) Role of Private Sector and Privatization for Industrialization and Technology Development in Asia and Lessons for African Economies, pp.1-90, Economic Commission for Africa, United Nations, Addis Ababa, Ethiopia. _______ (1998b) Poverty and inequality in India trends and policy issues, prepared for the Economic and Social Survey for Asia and the Pacific 1998, pp.1-30, ESCAP, UN, Bangkok.
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Datt, G. (1997) Poverty in India and Indian States: An Update, International Food Policy Research Institute, Washington, D.C. ______ (1999) Has Poverty in India Declined During the Post-Reform Period? Economic and Political Weekly, pp.3516-18, December. Datt, G. and Ravallion (1997) Macroeconomic Crises and Poverty Monitoring: A Case Study for India, Review of Development Economics, Vol.1., No.2, pp.135-52. Ghura, Dhaneshwar; Carlos Leite, and Charalambos Tsangarides (2003) Is Growth Enough? Macroeconomic Policy and Poverty Reduction, IMF, Washington D.C.
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Jalan, Bimal (2002a) India's Economy in the Next Millennium: selected Essays, UBS Publishers' Distributors Pvt. Ltd., New Delhi. ______ (2002b) Mid-Term Review of Monetary and Credit Policy for the Year 2002-2003, Reserve Bank of India, 29 October. Kumar, Nagesh (2000) Indian Economy under Reforms: An Assessment of Economic and Social Impact, Bookwell, New Delhi. Ministry of Finance (2003) Economic Survey 2002-03, Ministry of Finance and Company Affairs, February. Ravallion, M. and G. Dutt (1996a) India's Checkered History in the Fight Against Poverty: Are there Lessons for the Future? Economic and Political Weekly, Vol.31. ______ (1996b) How Important to India's Poor is the Sectoral Composition of Growth? World Bank Economic Review, Vol.10, No.1, pp.1-26. Reserve Bank of India (2002) The Process of Globalisation in India: Its Impact, Lessons and Policy Changes, RBI, Mumbai, October. Tendulkar, S.D. and Jain, L.R. (1995) Economic growth and equity: India, 1970-71 to 1988-89, The Economic Review, XXX (1), pp.19-49. The United Nations Development Programme (UNDP) (2003) Human Development Report 2003, United Nations. Virmani, Arvind (2001) India's 1990-91 Crisis: Reforms, Myths and Paradoxes, Planning Commission, Government of India, December. World Bank (1995) Economic Development in India: Achievements and Challenges, Washington D.C., October. _______ (1997) Poverty in India: 50 Years after Independence, Country Operations, South Asia Region. _______ (1998) India: Reforming for Growth and Poverty Reduction, Washington D.C. _______ (2000) India: Reducing Poverty, Accelerating Development, Oxford Univ. Press. ______ (2002) World Development Report 2002, Washington D.C. _______ (2003) India: Sustaining Reform, Reducing Poverty, Washington D.C., July.

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