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Rapid GDP growth dents poverty but reduction is feasible-Raghav Gaiha and Vani S Kulkarni

If proof is needed of a policy paralysis, a recent official admission that poverty cannot be eradicated by 2020 cannot be dismissed out of hand. That this follows the Planning Commission's estimate of a rapid decline in poverty over the period 2004-05 and 2009-10 is not just intriguing but arguably schizophrenic. The former is utterly pessimistic while the latter is optimistic notwithstanding dubious price adjustments designed to deliver a favourable picture of UPA's track record in poverty alleviation. 

Eruption of indignation over the Tendulkar Committee's ad hoc recalibration of poverty lines and estimates of the poor had barely died down when another set of estimates, based on these poverty lines updated using more recent prices, were released by the Planning Commission. A spate of critiques followed - some more cynical than others - ranging from abandoning the calculation of poverty lines to rethinking of how more meaningful poverty estimates could be obtained. The government response was typical: appoint another expert group to review the methodology and its implementation with new survey data. 

It is not hard to imagine why UPA is apprehensive about more meaningful poverty estimates. As the fiscal burden of subsidies is unsustainably high and policy space is subject to coalition politics, higher poverty estimates could result in loud clamours for enhancing food and other subsidies that may prove disastrous for UPA's fragile survival prospects. 

As a survival strategy and in order to protect its self-proclaimed pro-poor image, the first response of the UPA to the Tendulkar Committee's poverty estimates was defensive to the point of being absurd: delink poverty and public assistance. The comedy of errors became more hilarious when eminent scholars rationalised it on ethically specious grounds. As we see it, the Planning Commission saw the folly of defending a position that was indefensible and set about updating poverty estimates. In doing so, it went overboard and produced poverty estimates that no one outside the Commission took seriously. 

Pronouncements on the tepid and uncertain recovery of the world economy with the eurozone crisis not showing signs of abating were orchestrated to prepare the electorate for difficult and grim years ahead. There is ostensibly some merit in these pronouncements except that policy failures and aberrations are barely hinted at or peddled as manifestations of coalition politics. 

Not unexpected but somewhat stunning was the admission that poverty is not likely to be eradicated by 2020. On the face of it, and to put it mildly, this admission is intriguing when there is no consensus on what the current level of poverty is. If we go by the Planning Commission's estimate of a rapid reduction in poverty, and the business as usual scenario, a substantial dent in poverty is likely, subject, of course, to the caveat of measurement issues. Nobody in his or her right mind expects poverty to disappear in the next eight years, but a more rapid and durable reduction in poverty is feasible. 

Available evidence shows aggregate GDP growth matters in poverty alleviation but agricultural growth matters more despite a sharp reduction in its contribution to GDP. There are specifically four components: its direct growth component, its indirect growth component, the participation of the poor in the growth of this sector, and its size in the overall economy. 

An analysis by one of us shows that, as a result, the elasticity of the headcount ratio, measured at the cut-off point of $1.25 (2005 PPP), with respect to agricultural value added is nearly twice as high as that of GDP (both on a per capita basis). Another important finding is that inequality of income distribution has a large, worsening effect on poverty and, worse, this effect has become larger in recent years. Finally, despite its pro-business stance, India's ranking in the World Bank ease-of-doing business index is unimpressive. Downgrading of the Indian economy by rating agencies further corroborates how shackled and uncertain the investment environment has become. 

While there are no easy solutions - a case in point is institutional reform - the areas of policy initiative and reform are identifiable. Does the policy discourse reflect these priorities? Unfortunately, it doesn't. Is policy incoherence compounded by policy inaction? The budget for 2012-13 leaves little doubt that both are deliberate political choices. An interesting puzzle then is why the chief economic advisor eloquently described the policy paralysis which the finance minister was quick to deny. Whatever the truth, there is no denying that the poor are the worst victims. 

(Raghav Gaiha is a former Professor of Public Policy, Faculty of Management Studies, University of Delhi; and Vani S Kulkarni is a Research Associate, Department of Sociology, Yale University)