Economic Growth: The Key to Poverty Reduction in India

Abstract

INTRODUCTION Poverty continues to remain a serious problem in India, with its consequent toll on human welfare in the form of poor health, low levels of education and a poor quality of life. Unfortunately, about 33 per cent of India's population still lives in acute poverty (less than $1.25 per person per day). Thus, a careful analysis of the determinants of poverty and of various government policies that can help reduce poverty is very desirable. This is the purpose of this chapter. Many economic studies have emphasized the role of higher economic growth to tackle the problem of poverty. This has been supported empirically by the work of Tendulkar (1998), Ravallion and Datt (1996) and Besley and Robins (2000). Using data from nearly 80 countries, Kray (2006) shows that in the medium-to-long-run, between 66 per cent and 90 per cent of the variation in changes in poverty can be accounted for by growth in average incomes, and all of the remainder is due to changes in relative incomes. The role of economic growth in poverty reduction has also been supported by Deaton and Dreze (2001), Bhagwati (2001) and Datt and Ravalion (2002). Sen (1996) has strongly emphasized the need for higher government expenditure on social assistance to the poor, especially in provision of education, as the most important determinants of poverty reduction. However, since government social expenditure that helps the poor is dependent on government revenue, which in turn grows with economic growth, the key role of economic growth is likely. In this chapter, we examine these issues empirically for India and show that economic growth indeed plays a key role in poverty reduction. The change in poverty over a period can be broken into two components: the impact of income growth over the period and the impact of change in income distribution over the period.