Friday, April 13, 2012

India is less poor but more unequal

Poverty as measured by head count ratio may have dropped in India by 7.3 percentage points from 37.2% in 2004-05 to 29.8% in 2009-10 but the decline could have been much more had the country been more equal. To the dismay of pro market economists, a new ADB report entitled Asian Development Outlook 2012: Confronting Rising Inequality in Asia tells that had inequality remained unchanged from the 1990s to the 2000s, the poverty headcount rate in India could have been brought down to 29.5% in 2008, instead of the actual 32.7%. It is a widely held belief that growth ultimately trickles down to the poor living at the bottom, thus reducing poverty. However, the new report finds that rising inequality due to growth has affected poverty reduction.

The new ADB report has given ample attention to the extreme level of inequality existing in the Asian economies. People’s Republic of China (PRC) and India—the world’s two most populous countries—with annual GDP growth rates of 9.9% and 6.4%, respectively have witnessed rise in inequality from the early 1990s to the late 2000s. During the period of economic reforms, Gini coefficient*—a common measure of inequality—deteriorated from 32.4 in 1990 to 43.4 in 2008 in the PRC and from 32.5 in 1993 to 37 in 2010 in India.

The yawning gap between the rich and the poor in India could be observed from the ratio of the per capita expenditure of the top 20% to that of the bottom 20%. The quintile ratio has increased from 4.8 in 1993 to 5.7 in 2010. In India, the annual mean per capita expenditure growth was only 1.1% for the bottom quintile but 1.9% for the top quintile during 1993-2010. Rising inequality in India has been driven by income redistribution to the top 20%, at a cost to the bottom 80%, the report mentions. 

A central message of the ADB report is that income inequality is caused by inequality of opportunity in developing Asia. Inequality of opportunity arises out of unequal access to public services, especially education and health. In some Asian countries including India where the average proportion of out-of-school primary school-age children was about 20% in 1999–2003, children from the poorest quintile were three times as likely as those from the richest quintile to be out of school. Infant mortality rates among the poorest households in some Asian countries were double or treble the rates among the richest households. The chance of a poor infant dying at birth was more than 10 times higher than for an infant born to a rich family in Asia.

Unlike the popular belief, the ADB report cautions that high and rising inequality can bring down medium-term growth by reducing social cohesion, undermining the quality of governance, and increasing pressure for inefficient populist policies.

Key findings of the ADB report:

·         In  India,  the urban Gini  grew  from  34.4  in  1993  to  39.3  in 2010, much faster than the contemporaneous growth of the rural Gini, from 28.6 to 30.5. India’s rural inequality is lower and urban inequality is higher than in the PRC and, unlike the PRC but like most developing countries, India’s urban inequality is higher than its rural inequality.

·         The average annual growth rate of labor productivity was 7.4% during 1990–2007, while average annual real wage growth rate was only 2%. Gains in productivity were not passed on to wages and, consequently, the labor share of India’s organized manufacturing sector declined from 37% in 1990 to 22% in mid 2007 in India.

·         Wage employment elasticity of growth fell from 0.44 in 1991–2001 to 0.28 in 2001–2011 in PRC and from 0.53 to 0.41 in the case of India thus showing jobless growth.

·         During 1990−2010, the region’s average per capita GDP in 2005 PPP terms increased from $ 1633 to $ 5133. The proportion of the population living on or below the $ 1.25 a day poverty line fell from 51.8% in 1990 to 20.8% around 2008, as 714 million people were lifted out of poverty.

·         If inequality had remained stable in the Asian economies where it increased, the same growth in 1990–2010 would have taken about 240 million more people out of poverty—equivalent to 6.5% of developing Asia’s population in 2010 and 8.0% of those countries with rising inequality.

·         Inequality widened in 11 of the 25 economies with comparable data, including the three most populous countries and drivers of the region’s rapid growth—the PRC, India, and Indonesia.

·         The gaps between urban and rural incomes in developing Asia have increased, as have those between prosperous and lagging areas.

·         Although average Gini coefficient across developing Asian economies (38) was lower than that in Latin American economies (52), most Latin American countries have seen narrowing inequality in the last 2 decades.

·         Disparities in the means to raise one’s living standards—such as physical assets (e.g., capital and land), human capital (e.g., education and health), and market access (e.g., labor)—are common.

·         High gender disparities could be noticed for tertiary education in South Asia and the Paciic.

·         Differences in educational attainment can explain 25%–35% of inequality between households in many regional economies, and the earnings premium for skills and tertiary education has increased in recent years.

·         From 1990 to 2010, the average annual growth rate of gross domestic product (GDP) for developing Asia reached 7.0% in 2005 purchasing power parity (PPP) terms, more than double the 3.4% for Latin America and the Caribbean.

* Note: A Gini of zero denotes absolute equality, while a value of 1 (or 100 on the percentile scale) means absolute inequality.

Asian Development Outlook, April 2012, Asian Development Bank (ADB),

Press Note on Poverty Estimates, 2009-10, Planning Commission, March 2012,  

Give us growth and we’ll handle the inequality by Manas Chakravarty, Live Mint, 11 April, 2012,

'Rapid growth leaving millions behind in Asia', The Business Standard, 12 April, 2012,

‘Inequality has gone up, notwithstanding dip in poverty'-K Balchand, The Hindu, 21 March, 2012,

Reign of the one per cent?-N Chandra Mohan, The Business Standard, 26 March, 2012

The great Indian poverty game-Sonalde Desai, The Business Standard, 29 March, 2012

New methods needed to answer old controversy in poverty measurement-Sreelatha Menon & Indivjal Dhasmana, The Business Standard, 9 April, 2012,

Pronab Sen, principal advisor to Planning Commission interviewed by Indivjal Dhasmana, The Business Standard, 6 April, 2012,

Planning Commission’s Poverty Charade, Economic and Political Weekly, Vol XLVII, No. 14, 7 April, 2012,

India undercounts its poor-Himanshu, Live Mint, 26 March, 2012,

Poverty line: Usefulness of poverty data-S Mahendra Dev, The Economic Times, 28 March, 2012,

States' data cast doubt on growth-poverty equation; welfare schemes have a strong role to play by Devika Banerji, The Economic Times, 26 March, 2012,

Poverty line: Myths, perceptions and reality by Sriram Balasubramanian, CNN-IBN, 23 March, 2012,

Is India Fudging Its Poverty Numbers?-Tripti Lahiri, The Wall Street Journal, 20 March, 2012,

Abhijit Sen, Member, Planning Commission interviewed by Pallavi Polanki, First Post, 20 March, 2012,

Bihar's growth story has a poor side-Rukmini Shrinivasan, The Economic Times, 20 March, 2012,

5 crore people moved out of poverty: Government, The Economic Times, 20 March, 2012,

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