Rapid Economic Growth Is the Best Poverty Alleviator

India is no longer a poor country. With a per capita income of $2,600, it is now a lower middle income country. Even so, many readers will be astonished by an IMF working paper suggesting that less than one percent of Indians are now below the World Bank’s poverty line of $1.90 consumption per person per day.

India is a land of a thousand statistical debates, and other researchers put the poverty ratio at 10 percent. But all researchers agree on one thing: poverty has plummeted in the last two decades. The main cause is “miracle” economic growth of almost 7 percent annually. A rising tide has lifted all boats. Expanded welfare benefits have helped too, but GDP growth was the main driver, and also provided the fiscal wherewithal for increased welfare spending.

After Covid struck in 2020, the focus was naturally on welfare rather than growth. The International Labor Organization estimated that 400 million Indians (out of a population of 1,400 million) might fall into extreme poverty. GDP in many countries was projected to fall more than 10%. The World Bank estimated that an additional 78 million people in South Asia would fall into extreme poverty.

India imposed one of the strictest lockdowns in the world when Covid struck in March 2020. Offices, factories, and transport were shuttered. Indian cities are full of migrant labor from villages, and the lockdown rendered more than 100 million of them jobless. At least 10 million people trekked back to their villages, walking for up to a week because there was no transport. The government estimates that Covid killed half a million Indians, but other estimates are ten times higher.

How much did poverty worsen in the two Covid years? Amazingly, some recent research suggests that poverty and inequality actually declined. This is not as far‐​fetched at it may seem at first sight. Governments across the world showered massive benefits on their citizens to counter the impact of Covid. Poverty declined in the USA because of cash transfers and tax breaks. Something similar seems to have happened in India. Certainly the ruling Bharatiya Janata Party did very well in State elections in these two years, especially in India’s biggest and second poorest state, Uttar Pradesh. Many voters told journalists that the state government had done a decent job in emergency relief.

To combat Covid, the government organized feeding centers in shuttered urban zones. It decreed free distribution of 5 kilos of foodgrains monthly per head to the poorest three‐​quarters of villagers and poorest half of town dwellers. This supplemented existing food subsidies for 5 kilos per month. In effect, poor people got 10 kilos of foodgrains virtually free per month, enough to stave off hunger. There were glitches and leakages, of course, but most of the subsidized food did reach the needy.

In addition the government provided Rs 6,000 per year to every farm family, a long‐​term pledge made in the 2019 election campaign. When Covid struck, the government virtually doubled spending on its rural employment program that provide up to 100 days of work at minimum wages in the lean season. This helped relieve distress.

India’s economic growth turned out to be better than expected. GDP in 2020–21 declined by 6.7%, just half of what pessimists had feared, and then rose 8.7% the next year as the economy recovered. Agricultural output increased 3.3% in 2020–21 and 3.5% in 2022–23, well above population growth of 0.8% per year. A ban on exports of wheat and some other agricultural items increased domestic availability and checked prices. So, massive urban distress was more than offset by a buoyant rural economy. Since India is still 70% rural, the net outcome was a decline and not worsening of poverty.

An early study at Premji University suggested a dramatic worsening of poverty in the first seven months of Covid. But other studies with longer perspectives tell a happier tale. Panagariya and More of Columbia University derived estimates from India’s periodic labor surveys. They found that poverty worsened sharply in April‐​June 2020 during the strict lockdown, but subsequently improved. Poverty deepened in urban areas but reduced in rural areas, and the net effect was a decline of 4 percentage points in poverty. They also found that inequality, measured by the Gini coefficient, improved from 0.343 to 0.313.

Another study by Gupta, Malani and Woda, using data from surveys of CMIE (Centre for Monitoring Indian Economy) also found that, after a sharp spike in the first quarter, both poverty and inequality came down. They too found that urban distress was more than offset by rural improvement. When GDP crashes in a recession, profits fall more dramatically than wages, and hence inequality typically decreases in a recession. 2020–21 was no exception.

Instead of focusing on the Covid years, two studies take a longer term look. One by World Bank researchers, drawing on CMIE data, estimated that the poverty ratio declined from 22 percent in 2011 to 10 percent in 2019, the year before Covid. A separate IMF working paper by Bhalla, Bhasin and Virmani, makes projections from state‐​level data and gives different projections based on different assumptions. One projection shows poverty declining from 49.7 percent in 2004 to 5.4 percent in 2019. The paper then makes the novel innovation of adjusting for highly subsidized food for the poor plus different periods of consumer recall for consumption of different items. Their most optimistic projection shows poverty falling from 31.9 percent to just 0.76 percent between 2004 and 2019.

The World Bank researchers question the IMF paper’s assumptions that targeting of the food subsidy to the poor improved from 54 percent to 86 percent; that consumption rose at the same pace as GDP; and that food quality was uniform in rural and urban areas. But they agree that it makes sense to adjust for highly subsidized food.

The Modi government will be very happy with the IMF paper showing that the poverty ratio in India may be less than one percent. The most optimistic of the IMF projections shows poverty falling from 5.1 percent in 2014, when Modi came to power, to 0.76 percent in 2019. However, the Congress Party, which ruled India from 2004 to 2014, will be even happier, because the projection shows poverty declining from 31.9 percent to 5.1 percent in that decade. This suggests that the heavy lifting was done by the Congress Party, and the Modi government simply took that forward.

GDP growth averaged a bit over 7 percent annually in the Congress decade. It averaged almost as much in the subsequent Modi era if we ignore the disastrous Covid years. Rapid economic growth spurred poverty reduction in both periods.

How important has subsidized food been in this process? Not much. For 2019, the IMF paper estimates that the poverty ratio was 1.9 percent without food transfers and 0.76 percent with transfers. In 2020, when the subsidized ration was doubled, the poverty ratio was 2.1 percent without food transfers and 0.86 percent with transfers. Every welfare benefit helps in difficult times, but evidently the main factor driving down poverty in the last two decade has been rapid GDP growth, not cheap food.

When highly subsidized food under the National Food Security Act was first proposed, some economists feared fiscal disaster. One economist calculated that the food subsidy might rise to as much as 3% of GDP. In practice it was less than half as much. Besides, GDP grew much faster than the food subsidy, and made it fiscally very affordable. Even with an expanded ration of 10 kilos per head, the food subsidy came to barely one percent of GDP in 2022. With Covid petering out, the government has now cut the subsidized ration to the original 5 kilos per head, but made this completely free. The fiscal cost will fall to just 0.63 percent of GDP. That demonstrates how rapid GDP growth makes welfare benefits affordable.

Source: https://www.cato.org/

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