GOVERNMENT SPENDING, GROWTH AND POVERTY: AN ANALYSIS OF INTERLINKAGES IN RURAL INDIA

Poverty in rural India has declined substantially in recent decades. The percentage of the rural population living below the poverty line fluctuated between 50 and 65 percent prior to the mid-1960s, but then declined steadily to about one-third of the rural population by the early 1990s. This steady decline in poverty was strongly associated with agricultural growth, particularly the green revolution, which in turn was a response to massive public investments in agriculture and rural infrastructure. Public investmentin rural areas has also benefitted the poor through its impact on the growth of the rural nonfarm economy, and government expenditure on rural poverty and employment programs, which has grown rapidly, has directly benefitted the rural poor. The primary purpose of this study is to investigate the causes of the decline in rural poverty in India, and particularly to disentangle the specific role that government investments have played. We seek to quantify the effectiveness of different types of government expenditures in contributing to poverty alleviation. Such information can assist policy makers in targeting their investments more effectively to reduce poverty. More efficient targeting has become increasingly important in an era of macroeconomic reforms in which the government is under pressure to reduce its total budget. The study uses state level data for 1970 to 1993 to estimate an econometric model that permits calculation of the number of poor people raised above the poverty line for each additional million rupees spent on different expenditure items. The model is also structured to enable identification of the different channels through which different types of government expenditures impact on the poor. We distinguish between direct and indirect effects. The direct effects arise in the form of benefits the poor receive from employment programs directly targeted to rural poor. The indirect effects arise when government investments in rural infrastructure, agricultural research, health and education of rural people, stimulate agricultural and nonagricultural growth, leading to greater employment and income earning opportunities for the poor, and to cheaper food. Understanding these different effects provides useful policy insights for helping to improve the effectiveness of government expenditures in reducing poverty. But targeting government expenditures simply to reduce poverty is not sufficient. Government expenditures also need to stimulate economic growth. This is needed to help generate the resources needed for future government expenditures. It is also the only way of providing a permanent solution to the poverty problem, as well as to increase the overall welfare of rural people. The model is therefore formulated so as to measure the growth as well as the poverty impact of different items of government expenditure. This enables us not only to rank different types of investment in terms of their growth and poverty impacts, but also to quantify any tradeoffs or complementarities that may arise between the achievement of these two goals. The results from our model show that government spending on productivity enhancing investments, such as agricultural R&D and irrigation, rural infrastructure (including roads and electricity), and rural development targeted directly on the rural poor, have all contributed to reductions in rural poverty, and most have also contributed to growth in agricultural productivity. But differences in their poverty and productivity effects are large. The model has also been used to estimate the marginal returns to agricultural productivity growth and poverty reduction obtainable from additional government expenditures on different technology, infrastructure and social investments. Additional government expenditure on roads is found to have the largest impact on poverty reduction as well as a significant impact on productivity growth. It is a dominant “win-win” strategy. Additional government spending on agricultural research and extension has the largest impact on agricultural productivity growth, and it also leads to large benefits for the rural poor. It is another dominant “win-win” strategy. Additional government spending on education has the third largest impact on rural poverty reduction, largely as a result of the increases in non-farm employment and rural wages that it induces. Additional irrigation investment has only a modest impact on growth in agricultural productivity and an even smaller impact on rural poverty reduction, even after trickle down benefits have been allowed for. Additional government spending on rural and community development, including Integrated Rural Development Programs (IRDP), contributes to reductions in rural poverty, but its impact is smaller than expenditures on roads, agricultural R&D, and education. Additional government expenditures on soil and water conservation and health have no impact on productivity growth, and their poverty effects through employment generation and wage increase are also small. The results of this study have very important policy implications. In order to reduce rural poverty, the Indian government should give priority to increasing its spending on rural roads and agricultural research and extension. These types of investment not only have large poverty impact per rupee spent, but also give the greatest growth in agricultural productivity growth. Additional government spending on irrigation and rural electrification has low productivity effects, and no discernable impact on poverty reduction. While these investments have been essential investments in the past for sustaining agricultural growth, the levels of investment stocks achieved may now be such that it may be more important to maintain those current stocks rather than to increasing them further. On the other hand, additional government spending on rural development is an effective way of helping the poor in the short-term, but since it has little impact on agricultural productivity, then it contributes little to long-term solutions to the poverty problem.