# **1. Introduction**

Recent estimates indicate a rapid decline in poverty in India. The Government of India’s Planning Commission (2013) estimates the annual average decline in poverty to be 2.2 percent between 2004/05 and 2011/12—from a poverty headcount ratio of 37.2 percent to 21.9 percent. While there were hints of acceleration in poverty reduction between 1993/94 and 2004/05, the next seven years significantly stepped up in pace. The poverty headcount rate fell at an average annual rate of 1.5 percentage points between 2004/05 and 2009/10 and at nearly 4 percentage points per year between 2009/10 and 2011/12.<sup>2</sup> There are many possible drivers of falling poverty over this period. There is evidence of a stronger feedback effect from urban economic growth to rural poverty reduction (Datt, Ravallion, and Murgai, 2015), consistent with growing linkages—through trade, migration, and transfers—between rural and urban areas (see also United Nations, 2011). Deininger and Liu (2013) find evidence that implementation of the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) since 2006 has significantly increased consumption and accumulation of financial assets. Sen and Himanshu (2013) point to the role of the Public Distribution System (PDS) as a major contributor to poverty decline. And Dang and Lanjouw (2015) find that more education, salaried work and social capital contribute to upward mobility during this period.

In this paper, we examine the relative contributions of different sources—at the household level—to poverty reduction in India during the latter part of the decade of the 2000s. We use panel data from the nationally representative India Human Development Survey (IHDS) for 2005 and 2012. Poverty rates estimated from this survey using a similar welfare standard (consumption levels below official poverty lines) as in the NSS (National Sample Survey, on which official poverty estimates are based) show a large decline in poverty between the two years, which is roughly comparable to the trend estimated from NSS. This allows us to take advantage of the rich information on income sources of households available from the IHDS and its panel nature to decompose the sources of poverty change among households between 2005 and 2012. More specifically, we look at the extent to which shifts in household composition and income sources have contributed to changes in household income; and with that, to changes in the real value of household consumption. In our analysis, these household level factors can be grouped into broad categories of interest such as the demographic composition of households, extent of engagement in the labor market and labor earnings, and non-labor earnings such as remittances and social benefits.

To conduct this analysis, we employ a nonparametric decomposition method based on the counterfactual simulations done previously by Inchauste et al. (2012) and Azevedo et al. (2013), following Barros et al. (2006)—see also Inchauste et al. (2014). Our results should not be interpreted in causal terms, since the method we use adopts a simple “accounting” approach toward decomposing incomes, with counterfactual simulations that do not take into account behavioral responses of individuals and households to changes in different components of household income. In spite of these limitations, our results are useful for assessing the relative importance of different forces that

> 2 Dang and Lanjouw (2015) find that the remarkable decline in poverty between 2009/2010 and 2012 is not driven by statistical noise or changes in survey design.

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