Tackling poverty
civil society in India associates the World Bank with economic growth infrastructure, and fiscal stabilisation. This book to some extent confirms this perception. It argues that economic growth alone will create a demand for labour, which would reduce poverty on a sustained basis. This in turn requires macroeconomic stability, sound legal and incentive regulatory frameworks, decentralisation, quality infrastructure, and above all good governance ensuring access of the poor to human development. Thus, social and economic aspects of development are interlinked and it is futile to look at them as either-or options.
The book begins with a discussion on the record of Indian states in dealing with poverty reduction during the last two decades followed by a chapter on human development, which is both an indicator of and a way to poverty reduction. The third chapter focuses on fiscal and sectoral reforms in the states, which are key actors in human development and infrastructure provision, as well as in regulation and governance. The next chapter deals with governance issues, a major concern of the World Bank because of its links to poverty reduction and development. The following three chapters deal with ways to increase growth and its poverty-reducing content through improvements in infrastructure, the incentive and regulatory framework to encourage efficiency and demand for labour, a key element in poverty reduction, and the financial system and corporate governance. The following chapter deals with recent developments, the sustainability of growth and ways to reduce vulnerability to macroeconomic crises that hurt the poor. The final chapter provides a brief forecast of India's prospects and summarises policies that would accelerate poverty reduction and sustained development.
The steady decline in rural poverty from the late 60s through the 80s was strongly associated with agricultural growth, particularly the Green Revolution. Despite the improvements in literacy levels and the higher gdp growth, India's household sample surveys suggest that poverty reduction in the 1990s has been sluggish as compared to the 1980s. In the early 1990s, poverty worsened with a poor harvest and decline in food availability. Thereafter, improvement has been either negative or negligible in the rural areas, which contain over 70 per cent of the poor. Moreover, the large poor states in the north and east, containing about half of India's population, have lagged behind in reducing poverty in the 1990s.
The policy approach to agriculture, particularly in the 1990s, has been more to secure increased production through subsidies in inputs such as power, water and fertiliser, rather than through building new capital assets in irrigation and power. The net result has been that the pace and pattern of technological change in agriculture may have changed and tfp (total factor productivity) may have gone down. The equity, efficiency, and sustainability of the current approach remains an open question. The subsidies also do not improve income distribution and the demand for labour. The boost in output from subsidy-stimulated use of fertiliser, pesticides and water may partly be coming at the expense of deterioration in the aquifers and soil an environmentally unsustainable approach that may partly explain the rising costs and slowing growth and productivity in agriculture, notably in Punjab and Haryana.
Although private investment in agriculture has grown, this is partly a substitute for lower public investment and deteriorating quality of public services, in some cases involving macroeconomic inefficiencies (such as private investment in diesel generating sets). At the same time, power capacity is under-utilised because of poor distribution and maintenance, and excessive use of capital on the farms encouraged by low-cost credit. The fiscal problems of the central and state governments suggest that the subsidies cannot continue to grow, and the stock of rural productive assets and technological basis for growth will be limited by the past pattern of spending, unless low cost options are pursued which have a higher capital-output ratio.
In addition, agriculture has seen less reform than other sectors. It is still constrained by central and state regulations that limit movement and intrastate trade, public monopoly procurement and canalisation of trade. The poorer states' problems in infrastructure, human development, and, in some cases, governance, have limited their ability to take full advantage of the post-1991 reforms. Since the late 1980s the states began unsustainable increases in spending and large untargeted subsidies (explicit and implicit) that have never been adjusted, which has led to a large, costly debt build-up. Infrastructure and social spending have slowed in most states as a result of the high debt service particularly in the highly indebted and poorer states. Institutional weaknesses, lack of monitoring and governance issues further exacerbates the lack of funds.
A major issue for sustained development is the large General Government (consolidated Central and State) deficit. India's fiscal deficit has been among the world's largest and in 1998-99 it deteriorated by roughly 2 per cent of gdp . Implicit and explicit subsidies at the Centre and, especially, the state levels are a major factor in the deficit. The Ministry of Finance estimated these subsidies at over 14 per cent of gdp in 1994-95.
Another area of concern is the judicial system, where the enormous case backlog and the legal processes can delay decisions by 10-20 years. These delays add to the problems of the poor in obtaining protection from the legal system. All these problems, as well as the bankruptcy and liquidation processes raise credit costs, increase non-performing assets, hinder good credit allocation and limit the ability of the poor to use their limited real assets effectively.
Faster poverty reduction cannot be accomplished without improving the delivery of health and education services. The effectiveness of public education and health services in reducing poverty can be improved by focussing on meeting consumer needs and the holistic needs of children, realigning the role of the state toward primary education and health, and making efforts to encourage improvements in and better use of private education and health services.
Finally, the environmental dimension needs to be kept in mind. The Finance Ministry's 1998-99 Economics Survey farsightedly included a chapter on environment, which points out the disproportionate burden of environmental and resource degradation on the poor, a concern which this book shares. Environmental degradation and unsustainable usage of resources, encouraged by subsidies and unclear property rights, may be a factor in slowing agricultural growth in some states and a limitation on improvements in the quality of life in general. Often the poor suffer from the environmental problems associated with unclear allocation of property rights to, among other things, clean air and water.
To sum up, the characteristics of agricultural growth in the 1990s; the slowdown of growth in the poor states; and the problems of infrastructure, social services and poverty programmes, especially in the poorer states which are linked to their increasing fiscal problems, poor incentive frameworks and weaknesses in governance and institutions, are all problems that explain the lack of progress in reducing rural poverty at an appropriate pace.
Concerted policy action is needed to lift the 350 million poor out of poverty. This requires not so much additional resources, as better policies and sound delivery mechanisms. Unless teachers attend schools and teach, and doctors attend health centres and provide healthcare, mere increase in the social sector expenditure would only result in further swelling of the already bloated parasitic bureaucracy.
One of the first source book on this subject, it is going to be of immense value to policy makers, state governments, field workers, donors and researchers.
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