Income Convergence and the Flow Out of Poverty in Rural India

Abstract

This article explores the income growth and poverty of rural Indian households, 1994–2005. The estimation strategy consists, first, of a convergence analysis to examine whether poor households are catching up in terms of income, which is then followed by a transition analysis to examine whether poor households are more likely to exit poverty than to remain poor—that is, to essentially test for whether poverty traps are escapable. The identification strategy explicitly addresses issues pertaining to the potential endogeneity and measurement error of initial income and poverty. We find evidence of both income convergence and poverty persistence, but with a higher probability of exiting poverty than of the remaining poor. This suggests that poverty traps, though existent, are not entrapping in rural India. The key variables driving these results are education, occupation and asset ownership. Finally, we discuss the policy implications and provide directions for future research in this area. JEL Codes: I32, J15, O15, O18, O47, Z12, Z13