Arvind Panagariya: Making Poverty History

If poverty alleviation is to be speeded, the government must reform its redistributive policies

Two central goals of the economic policy in India at independence were poverty alleviation and self-sufficiency. But India learned the hard way that the two goals were in conflict with each other. Poverty alleviation requires rapid growth to pull the poor into gainful employment as well as to generate sufficient fiscal resources to finance anti-poverty programs. But just as a country is unlikely to produce world-class cricket players without competing in the test cricket, it is unlikely to produce world-class entrepreneurs without competing in the world markets. And without world-class entrepreneurs, it cannot achieve sustained rapid growth.

Under progressively inward-looking policies, India essentially lost three and a half decades in its fight against poverty. The economy generated few of the economic opportunities for my generation that the generation of my nephews and nieces now takes for granted. Per-capita incomes grew barely 1.5 percent per-annum and the proportion of the population living below the poverty line hardly budged during 1951-81.

Luckily, by the mid 1970s, it was beginning to be felt by at least a handful of the decision makers that protection and controls were scuttling growth. A fall in the industrial growth rate from 6.6 percent during 1951-65 to 3.3 percent during 1965-75 and inflation exceeding 20 percent during each of 1973-74 and 1974-75 helped drive this message home. Given the stronghold of socialism on the national psyche, no politician was willing to publicly retreat from the existing policy framework. Nevertheless, a piecemeal process of liberalisation was initiated during the second half of the 1970s through a set of administrative measures within the existing policy framework. This liberalisation by stealth was intensified in the 1980s, especially during the second half of the 1980s under Rajiv Gandhi.

But small reforms yielded small results. In particular, though exports grew significantly more rapidly, they remained small as a proportion of the total income. This made the servicing of the voluminous external debt, accumulated to finance large fiscal deficits throughout the 1980s, impossible. The inevitable result was a macroeconomic crisis. As is now common knowledge, that crisis in 1991 gave Prime Minister P. V. Narasimha Rao and his Finance Minister Manmohan Singh the opportunity to convert the covert liberalisation programme into an overt one and to launch systematic and systemic reforms. Though the process slowed down once again between 1994 and 1998, liberalisation picked up in a big way under the determined and decisive leadership of Prime Minister A. B. Vajpayee and his Finance Minister Yashwant Sinha.

The reform spurts under Rajiv Gandhi, Rao-Singh and Vajpayee-Sinha were followed by major favourable shifts in the growth rate as well as poverty ratio. Stimulated by the Vajpayee-Sinha reforms, the average per-capita income has been growing almost 7 percent per annum since 2003-04. Correspondingly, poverty ratio has come tumbling down. It fell from 51.3 percent in 1977-78 to 36 percent in 1993-94 and to 27.8 percent in 2004-05. Thus, whereas the poverty ratio showed no long-run decline during the first three decades, it was cut in almost half in the subsequent three. India can at last claim to be on the way to making poverty history.

Unfortunately, the Congress that scored a surprise victory over rival BJP in the May 2004 election interpreted the latter8217;s defeat as a vote against reforms. It argued that rural masses had risen against the reforms that had bypassed them. But in doing so, the Congress not only erred factually, it also cast a shadow of doubt on the very reforms it had pioneered. Unsurprisingly, the reform process has come to a near standstill under the UPA government. While the reforms undertaken by Vajpayee-Sinha team have shifted per-capita-income growth to near 7 percent per annum, the poor will eventually pay for the near suspension of the reforms in terms of either a return to the lower per-capita income growth of 4 to 5 percent or a failure to shift to a still higher rate.

If poverty alleviation is to be speeded up, the government must reform its redistributive policies as well as the policies aimed at growth. Subsidies on food procurement, water, electricity and fertiliser uniformly benefit large farmers. The government can make a major dent in poverty in one stroke if it replaces these subsidies by direct cash transfers, health insurance and education vouchers to the bottom 30 percent of the population.

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On the reform front, the government needs to create enabling environment for the unskilled-labour-intensive industry. Paradoxically, despite its large endowment of unskilled labour, the fastest growing sectors in India are either capital intensive automobile, auto parts, steel and petroleum refining or skilled-labour intensive pharmaceuticals, software and the financial services. Additionally, the government must bring electricity and reliable roads to the rural economy, repeal the Essential Commodities Act, 1955 and persuade the states governments to adopt reforms that better connect the farmers to the marketplace via direct sales to retailers, contract farming and food processing.

The author is a professor at Columbia University. This article draws on his forthcoming book, India: The Emerging Giant, to be published by OUP, New York