Growth, Urbanization, and Poverty Reduction in India

Transcription

1 Policy Research Working Paper 7568 WPS7568 Growh, Urbanizaion, and Povery Reducion in India Gaurav Da Marin Ravallion Rinku Murgai Public Disclosure Auhorized Public Disclosure Auhorized Public Disclosure Auhorized Public Disclosure Auhorized Povery and Equiy Global Pracice Group February 2016

2 Policy Research Working Paper 7568 Absrac Longsanding developmen issues are revisied in he ligh of a newly-consruced daa se of povery measures for India spanning 60 years, including 20 years since reforms began in earnes in The sudy finds a downward rend in povery measures since 1970, wih an acceleraion pos-1991, despie rising inequaliy. Faser povery decline came wih higher growh and a more pro-poor paern of growh. Pos-1991 daa sugges sronger inersecoral linkages: urban consumpion growh brough gains o he rural as well as he urban poor, and he primarysecondary-eriary composiion of growh has ceased o maer, as all hree secors conribued o povery reducion. This paper is a produc of he Povery and Equiy Global Pracice Group. I is par of a larger effor by he World Bank o provide open access o is research and make a conribuion o developmen policy discussions around he world. Policy Research Working Papers are also posed on he Web a hp://econ.worldbank.org. The auhors may be conaced a rmurgai@worldbank.org. The Policy Research Working Paper Series disseminaes he findings of work in progress o encourage he exchange of ideas abou developmen issues. An objecive of he series is o ge he findings ou quickly, even if he presenaions are less han fully polished. The papers carry he names of he auhors and should be cied accordingly. The findings, inerpreaions, and conclusions expressed in his paper are enirely hose of he auhors. They do no necessarily represen he views of he Inernaional Bank for Reconsrucion and Developmen/World Bank and is affiliaed organizaions, or hose of he Execuive Direcors of he World Bank or he governmens hey represen. Produced by he Research Suppor Team

3 Growh, Urbanizaion, and Povery Reducion in India Gaurav Da Marin Ravallion Rinku Murgai 1 Monash Universiy, Melbourne, Ausralia Georgeown Universiy, Washingon DC., USA World Bank, New Delhi, India Key words: Povery, inequaliy, Kuznes, economic growh, urbanizaion JEL: I32, O15, O40 1 For commens he auhors hank Frederico Gil Sander and seminar paricipans a he Universiy of Waikao, New Zealand, and he World Resources Insiue, Washingon DC. These are he views of he auhors and do no necessarily represen hose of heir employers, including he World Bank or any of is member counries. 1

4 1. Inroducion Pas hinking abou he impacs of economic growh on povery in developing counries has emphasized he role played by populaion urbanizaion. 2 Building on classic papers by Lewis (1954) and Kuznes (1955), a sandard heoreical formulaion of he migraion process assumes ha disribuions are preserved wihin boh he rural and urban secors. 3 In essence, a represenaive slice of he rural disribuion is ransformed ino a represenaive slice of he urban disribuion in he process of people moving from rural o urban areas. The Kuznes hypohesis implied by his model is ofen invoked in developmen policy discussions. A common view is ha he hypohesis jusifies he expecaion ha growh will ineviably be inequaliy increasing in poor counries, bu ha inequaliy will evenually sar o decline. 4 In heory, povery measures will, however, fall seadily under he Kuznes process as long as rural povery measures exceed urban measures (Anand and Kanbur, 1985). 5 And he economy as a whole will grow as rural residens ake up he more lucraive urban jobs. I is clear ha wihin-secor disribuional neuraliy is a srong assumpion. The urbanizaion process in pracice may well be quie selecive, enailing significan disribuional shifs wihin one or boh of he urban and rural secors. For example, relaively less poor rural workers may migrae, wih gains, bu be relaively poor in he desinaion urban secor; here is evidence consisen wih his paern for he developing world (Ravallion e al., 2007). The implicaions for inequaliy wihin each secor canno be prediced easily. 6 Even wihou populaion urbanizaion, wihin-secor growh processes are also relevan o he overall oucomes for povery. Various srands of he developmen lieraure have examined hese facors. One srand of he lieraure has quesioned wheher he agriculural growh processes have helped he rural poor, many of whom are landless, while ohers have argued ha he benefis of rising farm produciviy are passed on in due course hrough higher wage raes. 7 2 Overviews of he lieraure can be found in Fields (1980) and Ravallion (2016). 3 As in Robinson (1976), Fields (1980) and Anand and Kanbur (1985, 1993). 4 The exisence of such a urning poin requires cerain condiions o hold, which are specific o he measure of inequaliy used; Anand and Kanbur (1993) derive hose condiions for various measures. 5 This holds for all populaion-weighed measures, such as all hose characerized by Akinson (1987). 6 This is known from research on he effecs of selecive compliance in household surveys on measures of inequaliy; see he analysis of his closely relaed issue in Korinek e al. (2006). 7 Conribuions o his debae are cied in Ravallion and Da (1996) and Da and Ravallion (1998, 2011). 2

5 No less conenious is he role played by urban economic growh wheher i helps absorb surplus rural labor and unemployed urban workers or merely benefis urban elies. 8 Pas research on hese issues has relied mainly on cross-counry comparisons, ofen in single cross-secions (such as in he many ess of he Kuznes hypohesis) bu someimes using panel daa, hough he ypically shor ime-series has mean ha he cross-counry variabiliy is dominan. (While one can rack economic growh annually for almos all counries, he household surveys needed o monior living sandards are far less frequen.) In addressing hese issues, i is clearly desirable o have a reasonably long ime series of surveys; a shor series can be decepive for inferring a rend. Among developing counries, India has he longes series of naional household surveys suiable for racking living condiions. The surveys are reasonably comparable over ime since he basic survey insrumens and mehods have changed raher lile (hough we noe, and address, some comparabiliy problems). India hus provides rich ime series evidence uniquely so among developing counries for esing and quanifying he relaionship beween living sandards of he poor and macroeconomic aggregaes. All he subsanive issues abou growh and povery in he general developmen lieraure have been prominen in he lieraure and policy debaes on India. Famously, India's posindependence planners hoped ha he counry's urban-based indusrializaion process would bring longer-erm gains o poor people, including hrough rural labor absorpion. 9 However, ha hope was largely shaered by he evidence of he slow pace of povery reducion in he period from Independence unil he 1980s. 10 In explaining his, a number of observers poined o he slow pace of labor absorpion from agriculure associaed wih he more inward-looking and capial-inensive developmen pah of his period. 11 The urban populaion share has been rising seadily over ime in India, from 17% in 1950 o 31% oday. However, India s pace of populaion urbanizaion (proporionae increase in he urban populaion share) has been less han eiher Souh Asia as a whole or lower middle-income counries as a whole, and markedly slower han for (say) China. 12 The rend rae of growh in 8 See, for example, he discussion in Eswaran and Kowal (1994). 9 For a review of hese debaes see Ravallion (2016, Ch. 2). 10 See Da and Ravallion (2002, 2011). 11 See, for example, Bhagwai (1993) and Eswaran and Kowal (1994). 12 Urban populaion shares can be found in World Bank (2015 and pas issues). The urban populaion shares of China and India were abou he same around 1990, bu he share now exceeds 50% in China. 3

6 India s Ne Domesic Produc (NDP) per capia in he period was under 2% per annum, bu i was more han double his rae in he period since The picure ha emerges from he accumulaing evidence from India s Naional Sample Surveys (ha sared in he 1950s) indicaes ha economic growh in India had in fac been povery reducing. Ravallion and Da (1996) showed ha he elasiciy of he incidence of povery wih respec o mean household consumpion was -1.3 over Given he modes rae of growh over his period, success a avoiding rising inequaliy prior o he 1990s was key o his finding. 15 Many observers came o he view ha oo lile growh was he reason for India s slow pace of povery reducion. However, a deeper exploraion of he daa suggess ha he secoral paern of growh also played a role. Using daa up o he early 1990s, Ravallion and Da (1996) found ha rural economic growh was more povery reducing, as was growh in he eriary (mainly services) and primary (mainly agriculure) secors relaive o he secondary (mainly manufacuring and consrucion) secor. They also found ha spillover effecs across secors reinforced he imporance of rural economic growh o naional povery reducion. Urban growh and secondary secor growh had adverse disribuional effecs ha miigaed he gains o he urban poor, while urban growh brough lile or no benefi o he rural poor. The slow progress agains povery refleced boh a lack of overall growh and a secoral paern of growh ha did no favor poor people. There was much hope in India ha he higher growh raes aained in he wake of he economic reforms ha sared in earnes in he early 1990s would bring a faser pace of povery reducion. 16 However, here have also been signs of rising inequaliy in he pos-reform period, raising doubs abou how much he poor have shared in he gains from higher growh raes. 17 The changes in India s labor markes since around 2000 have poenially imporan implicaions. There has been a ighening of rural casual labor markes, wih rising real wage 13 NDP is gross domesic produc less depreciaion of capial. In order o beer approximae incomes a he household level, we use ne raher han gross produc series in our analysis, hough he wo are highly correlaed. Noe ha per capia incomes in he naional accouns are also based on ne produc series. 14 They also found higher absolue elasiciies for measures of he deph and severiy of povery, indicaing ha hose well below he povery line have benefied from economic growh, as well as hose near he povery line. 15 For evidence on his poin for developing counries more generally see Bruno e al. (1998). 16 For an overview of India s reform agenda since he early 1990s see Ahluwalia (2002) and Kowal, Ramaswami and Wadhwa (2011). 17 Evidence of rising inequaliy in India since 1991 is repored in Ravallion (2000), Deaon and Drèze (2002), Sen and Himanshu (2004a,b) and Da and Ravallion (2011). 4

7 raes, and also a narrowing of he urban-rural wage gap (Hnakovska and Lahiri, 2013). 18 Three facors appear o be in play here. Firs, schooling has expanded, hus reducing he supply of unskilled labor, especially in rural areas. Second, here has also been a decline in female laborforce paricipaion raes (Klasen and Pieers, 2015). Third, here has been a consrucion boom across India, especially in (rural and urban) infrasrucure, which had been negleced for a long period. In , he consrucion secor accouned for only 3.2% of employmen for rural males, bu by his had risen o 13%. 19 The shif of labor ou of agriculure o he nonfarm secors has been more rapid since he 1990s. 20 The shif has been o consrucion and services, and also o manufacuring, o a smaller degree. Jacoby and Dasgupa (2015) sugges ha rising labor demand from consrucion has conribued o higher wages of unskilled labor relaive o skilled labor wihin rural areas, as well as rising rural relaive o urban wages (for male workers). The combinaion of a lower supply of un-skilled labor and rising demand for ha labor in consrucion, ranspor and oher services is likely o have been a driving force in higher casual wages, in boh farm and non-farm secors and compressing he urban-rural wage gap. I is unclear how permanen his change will prove o be. I may be conjecured ha (like China) India has reached is Lewis Turning Poin. However, ha is a conjecure, since here may well be oher facors leading o higher wages even while here is sill rural underemploymen. And emporary reversals migh be expeced, noably if he curren consrucion boom does no coninue. 21 Wih he backdrop of his hisory of recen economic change in India, his paper revisis he implicaions for povery of boh he higher rae of growh and he paern of growh. The secoral imbalance in India s pos-reform growh would be a concern for povery reducion if he model linking povery o growh had remained he same, noably wih he rural and agriculural secor conribuing mos o povery reducion. However, previous research by Da and Ravallion 18 Hnakovska and Lahiri (2013) also show ha he narrowing of he wage gap persiss when one conrols for educaion and occupaion. 19 These are our esimaes based on he NSS 50 h and 68 h employmen-unemploymen survey rounds. 20 The share of agriculure, foresry and fishing in oal (usual saus) employmen declined from 76% in o 49% in (Jacoby and Dasgupa, 2015). 21 A he ime of wriing (lae 2015) lifed by public infrasrucure invesmen, he consrucion secor has coninued o expand overall, despie a slow-down in he residenial building consrucion secor (Wilkes and Kumar, 2015). However, wage growh for consrucion workers has been lower han in oher occupaions. 5

8 (2011) found signs ha he process of economic growh is changing in India, making urban economic growh more pro-poor in he pos-reform period up o I is imporan o know wheher his paern has coninued in more recen daa o assess wheher sronger linkages from urban economic growh o rural povery reducion have coninued, alongside a more economically diversified rural economy. For he purpose of his paper, we have compiled a new daa series on povery and relaed daa spanning 60 years, exending he period of analysis in pas research. 22 Wih he benefi of nearly wo decades of pos-1991 daa, we believe here is now sufficien daa for he pos-1991 period o es he povery implicaions of he new rae and paern of growh in pos-reform India. Aribuion o reforms per se is problemaic, bu furher scruiny of he emergen properies of he changing growh process wih respec o povery reducion is clearly imporan. The secoral srucure of NDP growh in he pos-1991 period is also of ineres, as is he role played by populaion urbanizaion, including he Kuznes process ha has been so influenial in pas hinking abou he disribuional implicaions of economic growh in poor counries. 23 We provide a decomposiion of povery reducion by secor of NDP and a decomposiion mehod ha allows us o idenify he difference beween populaion urbanizaion effecs wih consan wihin-secor disribuion (as in he Kuznes process) versus changing wihin-secor disribuions. This enquiry delivers he mos robus evidence o dae ha economic growh has no only come wih a lower incidence of absolue povery in India bu ha here has been an acceleraion in he pace of progress agains povery in he pos-1991 period. The new paern of growh has brough greaer benefis o India s poor. While here has been rising inequaliy wihin he rural and (especially) urban secors, growh wihin secors has delivered sufficien gains o poor people o miigae he higher inequaliy. Populaion urbanizaion played a role, bu no in he way assumed by he Kuznes process. Insead we find ha urbanizaion came wih disribuional changes wihin secors; hese were pro-poor in he pre-1991 period, bu ha have no been so since Anoher difference is ha he secoral paern of growh in NDP maered less o progress agains povery pos-1991 han was he case in he pre-1991 period. 22 The period of analysis in Ravallion and Da (1996) ended a abou he ime (1991) when India s process of economic reform sared in earnes. Da and Ravallion (2011) updaed Ravallion and Da (1996) by incorporaing an exra 14 rounds of he Naional Sample Surveys (NSS) aking he series up o This paper exends he series o Da and Ravallion (2011) did no sudy he secoral srucure of NDP or idenify he role played by he Kuznes process. 6

9 The following secion describes he daa se we have creaed for his ask. Secion 3 provides some key summary saisics, and secion 4 invesigaes he relaionship beween povery and overall economic growh. Secion 5 sudies he povery impac of urban-rural composiion of growh in mean consumpion, while Secion 6 urns o he secoral composiion of growh in ne domesic produc. A key focus in secions 3-6 is on changing paerns across he pre-reform and pos-reform periods. Secion 7 concludes. 2. Daa For he purpose of his sudy, we have derived a new and consisen ime series of povery measures for rural and urban India over he period 1951 o This is based on consumpion disribuions from 51 household surveys conduced by he Naional Sample Survey Organizaion (NSSO); beginning wih he 3 rd round for Augus-November 1951 up o he 68 h round for July 2011 o June We use he full period for descripive purposes. Some of he earlies surveys had smaller sample sizes and covered shorer periods. The shorer periods also make for a more imprecise mapping beween NSS rounds and he annual naional accouns daa. Hence, in our main analysis we dropped some of he early NSS rounds ha had survey periods considerably shorer han a year, and our firs observaion for he povery regressions in his paper is for he 13 h round for For he economeric analysis we resric ourselves o he period (from NSS round 11 o round 68), giving 41 observaions including 18 for he pos-1991 period. 25 This series significanly improves upon he mos widely-used ime series on povery measures in India o dae. Following now well-esablished pracice for India and elsewhere, a household's sandard of living is measured by real consumpion expendiure per person. The underlying NSS daa do no include incomes, hough i can be argued ha curren consumpion is a beer indicaor of living sandards han curren income. 26 Noneheless, here are various non-income dimensions 24 Daa from he earlier rounds are included in he graphs, hough povery measures for rounds 4 and 5, rounds 6 and 7, rounds 9 and 10 and rounds 11 and 12 are aggregaed as survey-period-weighed averages. Thus, for insance, he headcoun measure for combined rounds 11 (for Augus 1956-February 1957) and 12 (for March-Augus 1957) is 7/13-h of he headcoun index for round 11 plus 6/13-h of he headcoun index for round Mos of our regressions for changes in povery are based on 40 observaions; hey exclude he 48 h round for 1992, he year of he macroeconomic crisis ha provided an impeus for economic reforms. Thus, effecively, he change in povery beween he 47 h round (for July-December 1991) and 48 h round is no included in eiher he pre-1991 or he pos-1991 period. 26 For an overview of hese argumens see Ravallion (2016, Chaper 3). 7

10 of well-being ha his measure canno hope o capure, and we say nohing here abou how responsive hese oher dimensions may be o growh. While he NSS surveys are highly comparable over ime by inernaional sandards, here is a paricular comparabiliy problem in he rounds since he early 1990s. While mos of he surveys have used a uniform recall period of 30 days for all consumpion iems, seven of he survey rounds in he pos-1991 period have insead used a mixed-recall period (MRP), wih longer (one year) recall for some (mainly non-food) iems. 27 On a preliminary invesigaion of he daa we found ha he use of a mixed recall period increased he mean and reduced inequaliy, implying lower povery measures. All our regressions below include a conrol for MRP survey rounds. Povery lines and price indices: We repor resuls for wo povery lines. Following Da and Ravallion (2011), one line is ha originally defined by he Planning Commission (1979), and endorsed by Planning Commission (1993). This povery line is anchored on a nuriional norm of 2,400 calories per person per day in rural areas and 2,100 calories for urban areas, and corresponds o a per capia monhly expendiure of Rs. 617 and Rs. 922 (rounded o he neares rupee) in rural and urban areas respecively a prices. 28 The second povery line corresponds o he rupee value of he inernaional povery line of $1.25 per person per day a 2005 PPP dollars, and are equivalen o rural and urban per capia monhly expendiures of Rs. 732 and Rs. 1,115 a prices. 29 The second se of lines are hus abou 20% higher han he firs se of lines. The nominal values of he povery lines for differen NSS rounds are evaluaed using separae urban and rural price indices. Our price indices are mainly based on he all-india Consumer Price Index for Indusrial Workers (CPIIW) as he deflaor for he urban secor, and he all-india Consumer Price Index for Agriculural Laborers (CPIAL) as he deflaor for he 27 In paricular, one-year reference is used for clohing, bedding, foowear, educaion, medical (insiuional) and durable goods. Mixed reference periods have been used for seven NSS rounds in our daa, viz., rounds 55, 56, 57, 58, 59, 60 and The original Planning Commission lines correspond o rural and urban per capia monhly expendiures of Rs. 49 and Rs. 57 a prices. A 2005 purchasing power pariy (PPP), hese lines have a value of $1.03 per day in See Ravallion (2008) for furher discussion, including comparisons wih a higher inernaional povery line. 29 Neiher se of lines is direcly comparable o India s curren official Tendulkar povery lines. A 2005 PPP, he Tendulkar lines have a value of $1.17 per day in 2005, incorporaing a lower cos of living differenial rural and urban areas han he original Planning Commission lines on which our povery line series is based. The Tendulkar povery lines are only available afer

11 rural secor. However, our final price indices also incorporae some adjusmens aimed a consrucing a consisen ime series over he long period of analysis; hese adjusmens relae o he use of he Consumer Price Index for he Working Class for he period before Augus 1968 for which he CPIIW did no exis, a correcion for he consan price of firewood for a par of he Labour Bureau s CPIAL series, and he use of a reweighed chain price index in boh rural and urban areas o beer approximae he weigh of food in he consumpion baske of he poor. 30 Our final rural and urban price indices are averages of monhly indices corresponding o he exac survey period of each NSS round. Povery measures: We use hree povery measures: he headcoun index (H), given by he percenage of he populaion living in households wih a consumpion per capia less han he povery line; he povery gap index (PG), defined by he mean disance below he povery line expressed as a proporion of ha line, where he mean is formed over he enire populaion, couning he non-poor as having zero povery gap; and he squared povery gap index (SPG), defined similarly o PG excep ha i is he mean of he squared proporionae povery gaps. Unlike PG, SPG is sensiive o disribuion amongs he poor, in ha i saisfies he ransfer axiom for povery measuremen. 31 In paricular, o economize space we repor resuls on H, PG and SPG for he higher line, and only H for he lower line. The overall level of povery a dae can be addiively decomposed using populaion weighs. We will be ineresed in he urban-rural decomposiion of he aggregae measure for dae : P = n P n P (=1,..,T) (1) u u r r where n i and P i are he populaion shares and povery measures for secors i = u, r for urban and rural areas respecively. Time () represens he ordering of he T survey rounds in ime, which can differ from real ime given he uneven spacing. 32 Demographic daa: The populaion esimaes are based on he Census populaion oals and assume consan growh raes for urban and rural populaions beween censuses. We use he NSSO s urban-rural classificaion. 33 Over such a long period, some rural areas would have 30 See Da and Ravallion (2011) for furher deails on hese adjusmens. 31 All hree measures are members of he class of measures proposed by Foser, Greer and Thorbecke (1984). 32 Conrolling for unequal ime inerval beween survey rounds made lile difference o he resuls. 33 The NSS follows he Census definiion of urban areas which includes all places wih a municipaliy, corporaion, canonmen board or noified own area commiee, and places ha mee a number of crieria including a populaion 9

12 become urban areas. To he exen ha rural (non-farm) economic growh may help creae such re-classificaions, as successful villages evolve ino owns, his process may produce a downward bias in our esimaes of he (absolue) elasiciies of rural povery o rural economic growh. The impac on he urban elasiciies could go eiher way, depending on he circumsances of new urban areas relaive o he old ones. We have no choice bu o use he NSSO/Census classificaion. The rural and urban populaion esimaes are also cenered a he mid-poins of he NSSO s survey periods. Naional accouns: We use privae final consumpion expendiure and ne domesic produc and is secoral componens from he Naional Accouns Saisics (NAS). To mesh he NAS daa wih he povery daa from he NSSO, we have linearly inerpolaed he annual naional accouns daa o he mid-poin of he survey period for differen rounds. There has been a rising gap over ime beween NAS and NSS consumpion aggregaes. 34 From he poin of view of he presen discussion, i is noable ha he NSS series does no fully reflec he large gains in mean consumpion indicaed by he NAS from he early 1990s onwards. The raio of NSS-o-NAS consumpion declined from abou 70% in 1957 o 60% in 1991, and hen seeply o 39% in We do no know how much of he gap is due o errors in NAS consumpion versus NSS survey mehods. Unil recenly, he NSSO s mehods appear o have changed raher lile over many decades. Tha is probably good news for comparabiliy reasons, alhough i does raise quesions abou wheher heir mehods are in accord wih inernaional bes pracice. However, i is noable ha he MRP rounds of he NSS have helped close he gap beween he NAS and NSS consumpion aggregaes. 35 Regressing he log difference of he NSS mean ( ln ) on he log difference of NAS consumpion per capia ( lnc ) and he change in he dummy variable for MRP rounds, we ge: ln = ln C MRP (0.141) (0.021) greaer han 5000, a densiy no less han 400 persons per sq. km. and hree-fourhs of he male workers engaged in non-agriculural pursuis. In he 2011 Census, 31.2% of he oal populaion was classified as urban. 34 The gap is no only found in India, bu i is larger here han mos oher counries (Ravallion, 2003). 35 The MMRP (modified-mixed reference period) aggregae inroduced in he and rounds has furher closed he gap. The MMRP mehod which reduces he recall period for some food iems o a 7-day recall (compared o a 30-day recall in he MRP) brings NSSO s pracices closer o he more common pracice of a wo week or less recall period for food iems in oher counries. 10

13 The posiive and significan coefficien for MRP suggess ha NSS design may accoun for a leas some of he discrepancy beween he wo daa sources. However, i is also imporan o noe ha he gap beween he consumpion aggregaes from hese wo sources does no necessarily imply ha he NSS overesimaes povery. Some of he gap is due o errors in NAS consumpion, which is deermined residually in India, afer subracing oher componens of domesic absorpion from oupu a he commodiy level. There are also differences in he definiion of consumpion, and here are hings included in NAS consumpion ha one would no use in measuring household living sandards. 36 Some degree of under-reporing of consumpion by respondens, or selecive compliance wih he NSS s randomized assignmens, is ineviable. However, i is expeced ha his is more of a problem for esimaing he levels of living of he rich han of he poor. 37 We will look ino he implicaions of he growing drif beween NAS and NSS consumpion in regressions ha use (secoral) growh variables from he NAS. 3. Summary saisics India s urban populaion share has risen seadily over he 60 years, a abou 1% per annum (0.25 percenage poins per annum) over he 60-year period; Figure 1 plos he urban populaion share. (The exen of he lineariy is possibly decepive given ha inerpolaions are used beween census years, as noed in Secion 2.) As can also be seen from Figure 1, povery incidence showed no significan rend up o abou 1970, bu fell afer ha. (The series for he wo povery lines rack each oher closely.) Boh higher growh raes and a higher pace of povery reducion are eviden in he pos-1991 period; Table 1 provides he rend raes of growh. Much of he faser growh pos-1991 has occurred in he eriary secor of India s economy, which is primarily services and rade. The growh rae of eriary secor NDP per capia doubled in he pos-1991 period (afer 1992), from 3.1% per annum up o 1991 o 6.4% For furher discussion of he differences beween he wo daa sources see Sundaram and Tendulkar (2001), Ravallion (2000, 2003), Sen (2005) and Deaon (2005). 37 There is evidence from oher sources consisen wih ha expecaion; see Banerjee and Pikey (2003) on income under-reporing by India s rich. 38 These are OLS regression coefficiens on ime; he sandard errors are 0.04% and 0.2% respecively. 11

14 The secondary secor also picked up, from 2.9% per annum o 4.5%. 39 So oo did he primary secor, bu a a much lower level; he pre-1991 growh rae in primary NDP per capia was only 0.2% per annum, while i rose o 0.8% in he pos-1991 period. 40 As one would expec, he share of he primary secor in NDP has fallen appreciably from 55% in he early 1950s o 15% in The acceleraion in survey-based mean real consumpion growh from 0.6% per annum in he pre-1991 period o 2.0% in he pos-1991 period is significan. The urban and rural rends reveal a paern ha is similar o he naional level, hough here are some differences beween he wo segmens of he economy (Table 2). The NSS mean consumpion growh raes are appreciably higher (nearly wice as high) pos-1991 in boh rural and urban areas. Faser growh pos-1991 has also come wih rising inequaliy wihin urban areas, bu less so in rural areas. Figure 2 plos he indices over ime. Noe ha hese are he raw values, wihou adjusmen for he effec of MRP rounds. When we add conrols for MRP rounds, we also see rising inequaliy in rural areas pos Table 2 gives he exponenial rends for he Gini index. In conras o a declining rend in rural Gini and no rend in urban Gini in he pre period, a significan posiive rend in inequaliy emerged pos-1991 in boh secors. The rise in inequaliy has been greaer in urban areas. A he same ime, iner-secoral inequaliy has been generally rising. We see from Figure 3 ha he raio of urban mean o he rural mean has been rising since around 1970 (he early observaions were volaile, and should probably be discouned), hough wih signs of levelling off and even decline since Conrolling for MRP rounds, ime rends in he raio of real urban-o-rural mean consumpion are similar pre- and pos-1991, wih he raio increasing a abou 0.14% per annum in boh periods. So he higher growh in he pos-1991 period has come wih generally rising consumpion inequaliy, especially wihin secors, bu also o some exen beween hem. Da and Ravallion (2011) also found higher rend raes of povery reducion in he pos period, bu he differences (compared o he pre-1991 period) were only saisically significan for he headcoun index (naionally and for urban areas). Our new series provides a more saisically robus indicaion of acceleraion in progress agains povery pos-1991 for boh ses of povery lines (Table 1). Over he 55-year period as a whole, he exponenial rend decline (for he higher line) was 1.3% per annum for he headcoun index, rising o 2.3% and 3.0% for 39 The sandard errors are 0.1% and 0.3% respecively. 40 The sandard errors are 0.05% and 0.2% respecively. 12

15 he povery gap index and squared povery gap index respecively. 41 For he period prior o 1991, he rends were 0.6%, 1.4% and 2.0% for H, PG and SPG, while he corresponding pos-1991 rends were 3.6%, 5.2% and 6.3%. The differences beween he pre- and pos-1991 rends are saisically significan (Table 1). We also find a faser pace of povery decline pos-1991 in boh rural and urban areas, and his is significan for all hree measures (Table 2). Figure 4 plos he headcoun indices for he lower line; he paern over ime is similar for he higher line and oher measures. Alernaively one can define he rend in he level of he povery measure raher han is log. This again confirms he finding of an acceleraion in he pos-1991 period of boh growh and povery reducion as measured by H and PG (hough no SPG). In oher words, he pos-1991 period has winessed larger annual percenage poin reducions in he incidence and deph of povery while he annual percenage poin reducion in he severiy of povery has remained abou he same. As noed above, all povery measures for boh ses of povery lines exhibi larger proporionae reducions in he pos-1991 period. Hisorically, povery measures have been higher for rural India. However, as can be seen from Figure 4 ha here has been a marked convergence of povery measures beween urban and rural areas. Figure 5 plos he difference beween he rural and urban headcoun indices for boh povery lines. Inuiively, since growh raes in mean consumpion were slighly higher in urban areas, he povery convergence beween urban and rural areas is a disribuional effec, semming in par from he fac ha inequaliy has risen more wihin urban areas and par from he fac ha inequaliy was iniially lower in rural areas, making growh more povery reducing (Ravallion, 2007). Thus rural growh has had greaer impac on rural povery han for urban areas. The convergence process sared around 1980, bu has been noiceably more rapid since This is consisen wih relaed evidence on he narrowing urban-rural wage gap (Hnakovska and Lahiri, 2013). Going forward, one implicaion of his secoral povery convergence is ha he Kuznes process will conribue lile o overall povery reducion, and may even be povery increasing. The nex secion will look more deeply ino he urban-rural paern of growh and povery reducion, including he role played by he Kuznes process. 41 Similarly o he NDP growh raes repored in he inroducion, he growh raes were esimaed as parameers of a single regression, consrained o assure ha he prediced values were equal in

16 A furher implicaion of hese findings is ha here has been a marked urbanizaion of povery in India. Figure 6 gives he proporion of he poor living in urban areas over ime for boh povery lines. In he early 1950s, 14% of he poor lived in urban areas; by 2012 his had risen o 35% for he lower line and 32% for he upper line. This is broadly consisen wih he paern found in oher developing counries (Ravallion e al., 2007). There is a sign of acceleraion in he pace of he urbanizaion of povery since

17 4. Povery and overall economic growh Any povery measure found in pracice can be wrien as a funcion of he survey mean relaive o he povery line and he relaive disribuion of income, as represened by he Lorenz curve. 42 When he povery line is fixed in real erms, all such povery measures are sricly decreasing funcions of he mean ( ) for any given relaive disribuion (hough he elasiciy can vary grealy, depending on he iniial mean and Lorenz curve). A higher growh rae may also enail a shif in disribuion for or agains he poor. In characerizing he overall povery impac of growh, we are ineresed in he oal effec of growh on povery, allowing disribuion o change, raher han he parial effec, holding disribuion consan. 43 We call his he growh elasiciy of povery reducion, or growh elasiciy for shor. We esimae he growh elasiciies a he naional level by he regression coefficien of log povery measure ( ln P ) on log mean per capia consumpion ( ln ) across he available ime series, allowing he error erm o be auocorrelaed and heeroskedasic. Whenever boh he dependen and independen variable of such a regression are esimaed from he same survey daa he possibiliy arises of bias due o he fac ha measuremen errors in he survey can be passed ono boh variables; when overesimaing he mean, for insance, one will end o underesimae povery. (The sign of he bias is heoreically ambiguous since measuremen error in he independen variable will also induce an aenuaion bias in he leas squares esimae of he elasiciy.) In all our regressions we have also ried an Insrumenal Variables (IV) esimaor, in which he insrumens excluded any variables derived from he same survey as he dependen variable. Our esimaes also conrol for he use of mixed reference periods for some of he NSS rounds. Table 3 gives our esimaes of he elasiciies of all hree povery measures wih respec o hree measures of economic growh based on: (i) consumpion per person from he NSS; (ii) consumpion per person as esimaed by he NAS and populaion census; and (iii) NDP ("income" for shor) per person, also from he NAS and census. In all cases, he elasiciies are esimaed by regressing he log povery measure on he log mean consumpion or income. We 42 This follows from he fac ha he mean and he Lorenz curve fully specify he cumulaive disribuion funcion. 43 Analyic formulae for he parial elasiciies are found in Kakwani (1993). On he concepual disincion beween he parial and oal elasiciies in his conex, see Ravallion (2007). 15

18 also give an "adjused" esimae in which a conrol variable was added for he firs difference of he log of he raio of he consumer price index o he naional income deflaor (i.e., he difference in he rae of inflaion implied by he wo deflaors). 44 This was included o allow for possible bias in esimaing he growh elasiciy due o he difference in he deflaor used for he naional accouns daa and ha used for he povery lines. For he period as a whole, he naional povery measures responded significanly o growh in all hree measures. The IV esimaes o address survey measuremen errors (also likely o be negaively correlaed beween he dependen variable and he explanaory variable) are slighly lower han he corresponding OLS esimaes. The (absolue) elasiciies are higher if one uses he NSS esimae of mean consumpion, raher han he naional accouns esimae. The elasiciies are lowes for per capia income. There are a few possible reasons. Iner-emporal consumpion smoohing may make povery (in erms of consumpion) less responsive in he shor-erm o income growh han o consumpion growh. Imperfec maching of he ime periods beween he NSS and he NAS could also be playing a role in aenuaing he elasiciies using NAS growh raes. A furher reason for lower (absolue) elasiciies wih respec o NAS consumpion or income has o do wih he increasing divergence beween NSS and NAS growh raes of mean consumpion; significanly faser growh in NAS means relaive o NSS means is refleced in he lower elasiciies wih respec o he former. When we spli he period ino wo a 1991, we find appreciably higher (absolue) elasiciies of povery indices wih respec o he survey mean in he pos-1991 period; he difference in he esimaed elasiciies over he wo periods is saisically significan. 45 The paern of higher pos-1991 elasiciies is similar for all povery measures, for higher and lower povery lines and for he OLS as well as he IV esimaes (Table 3). By comparison, we find ha NAS-based growh of boh income and consumpion per capia indicae significanly higher (absolue) elasiciies in he pos-1991 period for he headcoun index, bu he difference beween he wo periods is no saisically significan for SPG, and for PG i is significan only for he per capia income growh elasiciy. I is 44 The consumer price index is a consumpion share-weighed average of he rural and urban price indices. 45 See Table 3. These resuls are based on regressions of log povery measures on log survey mean ineraced wih dummy variables for pre- and pos-1991 periods, and a dummy variable for MRP surveys. The regressions also incorporae a kink a NSS round 47 (July-December 1991) such ha here is no disconinuiy in he prediced values of log povery measures beween he pre- and pos-1991 periods. 16

19 neverheless noable how much difference here is in he elasiciy based on he NSS consumpion growh raes versus he NAS growh raes for he pos-1991 period; he surveybased elasiciies are abou wice as high (in absolue erms) as he naional accouns based elasiciies. The much lower NAS elasiciies reflec he NAS-NSS drif (much faser NASbased growh relaive o ha based on he NSS) pos Our resuls are qualiaively robus o he choice of povery measure. However, i is noable ha he growh elasiciies end o be highes (in absolue value) for SPG and higher for PG han H. The higher growh elasiciy of PG han H implies ha he deph of povery (as measured by he mean povery gap relaive o he povery line) is also reduced by growh. Similarly, he even higher elasiciy of SPG implies ha inequaliy amongs he poor (as measured by he coefficien of variaion) is reduced by growh. Thus he impacs of growh wihin and beween secors are no confined o households in a neighborhood of he povery line. To summarize: The responsiveness of povery o growh when measured from he surveys is generally greaer in he pos-1991 period. This is also rue of he responsiveness of he headcoun index o growh measured hrough he naional accouns, bu no for he wo povery gap indices (PG and SPG), which are similarly responsive o growh in he wo periods. 5. Povery and he urban-rural paern of growh Our proposed es for wheher he secoral composiion of growh maers enails esimaing he following regression equaion on he discree ime-series daa on povery and growh: ln P = usu1 ln u + r sr 1 ln r + (2) n ( sr 1 - su 1nr1 / nu 1) ln nr + ( = 2,..,T ) Here is he discree-ime difference operaor (such ha x x x 1 ), si = nii / is secor i s share of mean consumpion a survey round and i is he mean consumpion for secor i. The 's are parameers o be esimaed. To moivae his es regression, noice ha, under he null hypohesis ha =, equaion (2) collapses o: u r n ln P = ln + (3) 17

20 Thus, under his null, i is he overall rae of growh ha maers, no is composiion. By esing ha null we deermine wheher he composiion of growh maers. If his null is rejeced hen he u r paern of growh maers and he, parameers can be inerpreed as he impac of (shareweighed) growh in he urban and rural secors respecively, while n gives he effec of he populaion shif from rural o urban areas. We also es wheher economic growh in one secor has cross-effecs on disribuion in he oher secors. Here we can decompose (2) for he rae of growh in average povery ino hree componens: s s P u 1 ln Pu = uusu1 ln u + ursr1 ln r + un ( sr 1 su 1nr1 / nu 1) ln nr + u (4.1) P r 1 ln Pr = rusu1 ln u + rrsr1 ln r + rn ( sr 1 su 1nr1 / nu 1) ln nr + r (4.2) ( s P r1 ( s nn s r1 P u1 n s r1 u1 n / n r1 u1 / n ) ln n u1 r ) ln n = r s nu u1 + n ln s u nr r1 ln + r (4.3) where P s i = nipi /P for i = u, r, and j uj rj nj for j = u,r, n. So summing (4.1), (4.2) and (4.3) yields (2). By inerpreaion, (4.1) shows how he composiion of growh and populaion shifs impac on urban povery; (4.2) shows how hey impac on rural povery; and (4.3) gives he impac on he populaion shif componen of log P. We esimae (4.1) and (4.2); (4.3) need no be esimaed separaely since is parameers can be inferred from he esimaes of (4.1) and (4.2) using he adding-up resricion. As before, since our main ineres is in a comparison of he pre- and pos-reform periods, we allow he parameers o differ across he wo periods. Table 4 presens our esimaes of equaions (2), (4.1) and (4.2), summarizing he povery impac of he urban-rural composiion of consumpion growh. Table 5 gives he es saisics on wheher he urban-rural composiion of growh maers and wheher he populaion shif effec is significan. Table 6 repors elasiciies of povery wih respec o rural and urban growh. These resuls are presened for naional povery measures as well as separaely for urban and rural areas, and for he wo povery lines. The firs poin o noe from Table 4 is ha here is a significan srucural break a The pre-1991 and pos-1991 model parameers are significanly differen from each oher; he null of parameer equaliy is rejeced in almos all cases in Table 4. Beginning wih resuls a he naional level, for he pre-1991 period we confirm he earlier finding of Ravallion and Da 18

21 (1996) ha he growh effecs on povery for he pre-1991 period are largely aribuable o rural consumpion growh, wih virually no conribuion from urban growh, while he populaion urbanizaion process also conribues o povery reducion. We are also able o confirm he earlier finding of Da and Ravallion (2011) ha wih he pos-reform srucural break his paern has changed subsanially. In he pos-1991 period, while rural growh remains significan for povery reducion, unlike he pre-1991 period, i is no longer he prime driver of naional povery reducion. The mos noable change is ha urban growh now has a significan impac on povery. Thus, wih addiional recen daa and also for a higher povery line, we are able o confirm he emergence of a significan effec of urban consumpion growh on naional povery as a sriking feaure of he pos-1991 paern of economic growh in India. Also noable is he change in he sign of he populaion shif effec from being poveryreducing in he pre-1991 period o becoming povery-increasing pos As his effec is esimaed condiional on urban and rural mean consumpion growh, i can be inerpreed as picking up inra-secoral disribuional effecs associaed wih he shif of populaion from rural o urban areas. The changing sign of his effec pos-1991 is indicaive of he adverse disribuional changes ha have accompanied faser pos-reform growh. The las four columns of Table 4 help unpack hese shifing paerns observed for naional povery measures by urban and rural areas. In qualiaive erms, here is no much change beween he pre- and pos-1991 periods in how urban and rural growh appear o have affeced urban povery, which was highly responsive o urban consumpion growh in boh periods, and generally unresponsive o rural growh excep for he PG and SPG measures in he pre-1991 period. The main change across he wo periods wih regard o urban povery is quaniaive; he marginal effecs of urban growh on urban povery are much larger pos By comparison, here are imporan changes for rural povery in boh qualiaive and quaniaive erms. The mos noable change is ha while in he pre-1991 period urban growh had no discernible impac on rural povery, a significan and large impac emerged pos Rural growh has coninued o be imporan for rural povery reducion. Taken ogeher, hese resuls sugges ha he pos-reform imporance of urban growh for naional povery reducion is driven by urban povery becoming more responsive o urban 19

22 growh and even more imporanly by he emergen and quaniaively subsanial response of rural povery o urban growh. In ligh of he differenial hough changing effecs of rural-urban growh and populaion urbanizaion, i is no surprising ha he hypohesis ha he rural-urban composiion of growh does no maer for povery reducion is rejeced in mos cases (Table 5). For urban povery, i is rejeced srongly in virually every case. Noe ha he esimaes in Table 4 relae o he povery effecs of share-weighed urban and rural growh. In he esimaion framework of equaions (2), (4.1) and (4.2), he elasiciies of povery wih respec o urban and rural growh are in fac no consan. They depend on he shares of urban and rural secors in naional consumpion and naional povery. Table 6 repors hese elasiciies a mean shares for he pre-1991 and pos-1991 periods. The conras for he wo periods for naional povery measures is noable. There is a reversal in he relaive magniudes of urban and rural growh elasiciies. From being lower in absolue erms han elasiciies for rural growh in he pre-1991 period, he urban growh elasiciies are higher pos-1991, despie he sill smaller share of he urban secor in naional consumpion and naional povery. Indeed, wih he excepion of he headcoun index a he higher povery line, he elasiciies of rural povery measures wih respec o urban growh are even higher han hose wih respec o rural growh. A unified decomposiion: The marginal effecs of share-weighed growh or he growh elasiciies do no by hemselves ell us abou he relaive conribuions of differen componens of growh and populaion urbanizaion o observed povery reducion over he pre- and pos-reform periods. To assess his, we now combine analyic and regression-based decomposiion mehods o provide a furher insigh ino he changing sources of povery reducion. A saring poin is o noe ha he populaion urbanizaion effec in equaions (2) and (4) perains o a fixed mean wihin each secor. In he developmen lieraure he Kuznes effec refers o he impac on overall inequaliy of populaion urbanizaion holding he levels disribuion (and hence povery levels) consan wihin boh he urban and rural secors. 46 Thus he populaion urbanizaion effec in (2) and (4.1) combines he Kuznes effec of urbanizaion processes wih wihin-secor disribuional changes associaed wih urbanizaion. We now separae he wo o see how much he pure Kuznes effec has conribued o povery reducion in India, and is 46 This is in keeping wih he argumen of Kuznes (1955) and subsequen formalizaions by Robinson (1976), Fields (1980) and (for a more general class of inequaliy measures) Anand and Kanbur (1993). 20

23 imporance relaive o inra-secoral disribuional changes as well as inra-secoral growh. This requires a unified decomposiion, combining he analyic and regression-based decomposiions as developed below. Reurning o equaion (1) and aking he differenial, he analyic (exac) decomposiion of he change in he povery measure can be wrien as: ln P s s P r1 P r1 ln P ln n r ln P r r s s P u1 P u1 ln P u u s 21 P r1 ln P ln n u ln n r s P u1 ln n where he firs wo erms refer o he conribuion of wihin-secor povery change, he hird and he fourh o he conribuion of populaion shif (urbanizaion), and he las wo o he conribuion of he ineracion beween secoral povery change and populaion shif. Noe ha he firs wo erms are already esimaed in regressions (4.1) and (4.2), which can be embedded in (5). Nex, consisenly wih he idea of he Kuznes effec, imagine holding he povery measures consan in boh urban and rural areas while allowing for urbanizaion. This gives he Kuznes effec: K P P P P ( ln P ) P P sr ln nr su ln nu ( sr su nr / nu ) ln n u r r (6) Thus, he Kuznes effec is he same as he hird and fourh erms in equaion (5). Of course, populaion urbanizaion can also enail disribuional changes wihin each secor, bu hese effecs are already refleced in he populaion shif erms in equaions (4.1) and (4.2). Collecing hese erms, we can also define he following populaion effec conrolling for he means wihin each secor and hus represening inra-secoral disribuional change: N ln n (7) [ un ( sr 1 su 1nr1 / nu 1) rn ( sr 1 su 1nr1 / nu 1)] Equaions (4.1) and (4.2) allow us o specify he effecs of growh in mean consumpion in he wo secors as: G G r u ( ursr + rrs ) 1 r1 ln (8.1) r ( uusu 1 rusu1 ) ln (8.2) u Subsiuing ino (5), he expeced change in he (log) povery measure (forming he expecaion over he disribuion of he error erms in (4.1) and (4.2)) is hen given by: E( ln P ) G G N K I (9) r u u r (5)