metadata: authors: 0: author: Narayan,Ambar
1: author: Murgai,Rinku
count: India
docna: 0: docna: Looking back on two decades of poverty and
            well-being in India
docty: Policy Research Working Paper
subtopic: Sanitation and Sewerage,Engineering,Reproductive Health,Early Child and Children's Health,Educational Sciences,Water and Human Health,Water Supply and Sanitation Economics,Sanitary Environmental Engineering,Small Private Water Supply Providers,Environmental Engineering,Health and Sanitation,Inequality,Law and Justice Institutions,Town Water Supply and Sanitation
teratopic: Poverty Reduction
abstracts: cdata!: This paper provides an overview of
            poverty and well-being trends in India since the mid-1990s.
            Poverty reduction since 2005 has been much faster than the
            earlier decade, as a result of broad-based growth across
            most geographic areas. Underlying this is a pattern of high
            mobility in economic status that has led to an emerging
            middle class. Still, a vast (and rising) share of the
            population faces significant risk of slipping back into
            poverty. India's poor are increasingly concentrated in
            low-income states with historically lower rates of economic
            progress. Even as India has reduced poverty faster than the
            developing world as a whole, the degree of poverty reduction
            associated with growth has been substantially lower than in
            some of its middle-income peers. India faces important
            challenges in nonmonetary dimensions of welfare as well.
            Despite success on important fronts, such as infant and
            child mortality and secondary education, progress has been
            slow in others, such as sanitation and nutrition, and lags
            behind some other countries that are at a similar stage of development.
geo_reg_key: 517198,517191,517212
repnme: repnme: Looking back on two decades of poverty and
            well-being in India
display_title: Looking back on two decades of
            poverty and well-being in India
listing_relative_url: /research/2016/04/26189868/looking-back-two-decades-poverty-well-being-india
topicv3: Sanitation m1326453 2000,Infant and Child Mortality m1326544 1446,Poverty m1326687 695,Education m1327048 470,Mortality m1504365 3661
publishtoextweb_dt: 2016-04-07T00:00:00Z
historic_topic: Poverty Reduction
no_of_pages: 31
author_keys: 0: author_key: 167324
1: author_key: 165999
model_extractions: WPS7626 Policy Research Working Paper 7626 Looking Back on Two Decades of Poverty and Well-Being in India _Ambar Narayan Rinku Murgai_ Poverty and Equity Global Practice Group April 2016
Policy Research Working Paper 7626

# **Abstract**

This paper provides an overview of poverty and well-being trends in India since the mid-1990s. Poverty reduction since 2005 has been much faster than the earlier decade, as a result of broad-based growth across most geographic areas. Underlying this is a pattern of high mobility in economic status that has led to an emerging middle class. Still, a vast (and rising) share of the population faces significant risk of slipping back into poverty. India’s poor are increasingly concentrated in low-income states with historically lower rates of economic progress. Even as India has reduced poverty faster than the developing world as a whole, the degree of poverty reduction associated with growth has been substantially lower than in some of its middle-income peers. India faces important challenges in nonmonetary dimensions of welfare as well. Despite success on important fronts, such as infant and child mortality and secondary education, progress has been slow in others, such as sanitation and nutrition, and lags behind some other countries that are at a similar stage of development.

This paper is a product of the Poverty and Equity Global Practice Group. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The authors may be contacted at anarayan@worldbank.org.

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team
# **Looking Back on Two Decades of Poverty and Well‐Being in India**

Ambar Narayan and Rinku Murgai<sup>*</sup>

**JEL Codes** : D30, D63, I31, I32

**Keywords:** poverty, shared prosperity, inequality, growth, India

> * The authors gratefully acknowledge the contributions of Christina Wieser and Swati Puri in data analysis and research support, and Urmila Chatterjee for inputs and comments.
# 1. Introduction

Assessing how poverty and related measures of well‐being have evolved, and understanding the pathways to reduce poverty and promote shared prosperity in India are issues of central importance for the country and for the world. The Government of India’s (GoI) 12<sup>th</sup> Five Year Plan recognizes poverty reduction based on faster, sustainable and more inclusive growth as its key objective and lays out ambitious targets for reducing poverty by 10 percentage points over the 2012‐17 Plan period. From the global perspective, India in 2012 is home to 26 percent of the global poor at the newly updated $1.90 (2011 PPP) international poverty line. This implies that meeting the global target of an extreme poverty rate of 3 percent by 2030 (and an interim target of 9 percent by 2020) – originally adopted by the World Bank and now a key element of the Sustainable Development Goals that the global community has set for itself – will be impossible unless India makes substantial inroads in reducing poverty.

This paper examines the evolution of poverty and well‐being in India since the mid‐1990s, focusing primarily on the decade of the 2000s and placing India’s experience in the context of that of the developing world. Section 2 presents the trends and patterns of consumption poverty over two decades, comparing the periods of 1993‐94 to 2004‐05 and 2004‐05 to 2011‐12. It also looks at trends of consumption growth, inequality, the recently adopted World Bank Group indicator of shared prosperity, and the extent of mobility of households over time that help understand the dynamics underlying the headline poverty numbers. Section 3 assesses progress in key non‐monetary indicators of welfare that have intrinsic as well as instrumental value for welfare, comparing these with the monetary poverty trends. Section 4 looks at the spatial pattern of poverty reduction across states, to examine whether the historically large gaps between high and low income states have converged over time. Section 5 uses cross‐country comparisons to analyze how India’s progress in poverty reduction and non‐monetary dimensions of welfare compares with the rest of the developing world and peers among middle‐income countries. Section 6 addresses the question of what rate of progress is needed in India in order for the world to achieve its global goal of ending extreme poverty by 2030, and what would be needed for such progress to occur. Section 7 concludes the paper, summarizing the key findings.

# 2. Poverty and shared prosperity in India in the last two decades

The pace of poverty reduction in India accelerated after 2005 India has made substantial progress in reducing absolute poverty since the mid‐1990s. Between 1993‐94 and 2011‐12, using the Government of India’s official poverty lines, the percentage of people who were poor declined from 45 percent to 22 percent, and 133 million people were lifted out of poverty. The poverty rate roughly halved in both rural and urban areas, as rural poverty fell from 50 to 26 percent and urban poverty from 32 to 14 percent. Improvement in these two decades is an acceleration of a long‐term secular decline of both urban and rural poverty underway in India since the 1970s.

2
<!-- Start of picture text --> (% population below the poverty line)<br>60<br>50.1<br>50 453<br>41.8<br>40 37.2<br>33.8 31.8 598<br>30 25.7 25.7<br>20<br>13.7<br>10<br>0<br>Rural Urban National<br>1993-04 m2004-05 =2009-10 m 2011-12<br><!-- End of picture text -->
Seeing the trends in absolute numbers illustrates vividly the scale of progress and the scale of the challenge. With population growth, the number of poor people remained stubbornly high at over 400 million in the eleven years between 1994 and 2005. In the next seven years, 137 million people (roughly 20 million per year) escaped poverty. Yet, poverty remains widespread; 270 million people still lived in poverty in 2012. Because India is predominantly rural and rural areas are poorer, a huge concentration of poor people (four out of every five) live in rural areas.

Poverty reduction in India was fueled by rising consumption levels, while consumption inequality remained more or less stable since 2005. The pace of poverty reduction tracks the growth in average consumption quite closely, as seen by comparing Figure 2 with Figure 3. Consumption inequality measured by the Gini coefficient, after rising appreciably between 1994 and 2005, has remained almost unchanged in both rural and urban areas since then (Figure 4). The Gini indices of 0.37 and 0.27 for urban and rural areas, respectively, in 2012 are on the low end of the spectrum among developing countries.

# Rising prosperity, but with falling share of the bottom 40% in total consumption

For assessing progress among those at the lower end of the distribution, the World Bank Group’s preferred indicator for “shared prosperity”, which is the annualized per capita consumption (or income) growth of the bottom 40% of the population of a country, is an intuitive and useful metric.<sup>3</sup> This indicator for India shows a significant improvement since 2005 from the earlier period, tracking the poverty trends closely. Consumption growth of the bottom 40% averaged an anemic 0.8 percent per year between 1994 and 2005, and increased four‐fold to 3.3 percent per year between 2005 and 2012, averaging more than 5 percent annually during the last two years of this period (Figure 3).

Consumption growth for the bottom 40% of the distribution has however lagged slightly behind the average growth for the population through the entire period (Figure 3); which implies a declining share of the bottom 40% in total consumption expenditure, even as overall consumption inequality has remained almost unchanged since 2005.<sup>4</sup> Thus there is room for improvement in the extent to which growth is “inclusive” or benefits the least well‐off in society – poverty reduction in India, even during its best years, would have been even higher if consumption growth in the lower half of the distribution had matched or exceeded the average gains for the population. Interestingly, the decline in the share of the two bottom quintiles in total consumption has occurred even with an almost unchanged consumption

> 3 See World Bank (2015), Basu (2013) and Narayan et al (2013) for the normative properties, interpretation and empirical measurement of this indicator. The welfare aggregate – household income or consumption – is typically selected to be the one that is used for poverty measurement in the country.  For India, shared prosperity is estimated by the growth in consumption of the poorest 40 percent in the NSS consumption surveys.

> 4 This follows readily from the following algebraic property of the shared prosperity indicator: the growth of per capita consumption of the bottom 40% is decomposable into (i) the change in the _share_ of total consumption accruing to the bottom 40% and (ii) the growth of the average consumption of the total population (Rosenblatt & McGavock, 2013).

4
Gini, which can occur because the Gini is a broader measure of inequality that takes into account the overall consumption distribution.<sup>5</sup>

**Figure 3: Shared Prosperity has improved over time** Average annual growth in per capita consumption (%)

**Figure 4: Consumption inequality (Gini) has remained stable since 2005**

<!-- Start of picture text --> 6.0 5.6 0.40<br>5.2<br>5.0<br>0.30<br>4.0<br>3.0 0.20<br>2.1<br>2.0 1.7<br>1.3<br>0.10<br>0.8<br>1.0<br>0.0 0.00<br>1994 to 2005 2005 to 2010 2010 to 2012 1993‐94 2004‐05 2009‐10 2011‐12<br>Poorest 40% Average Rural Urban<br>0.36 0.37 0.37<br>0.31<br>0.25 0.27 0.27 0.27<br><!-- End of picture text --> _Note:_ Consumption expressed in constant 2004‐05 All India Rural Rupees, corrected for cost‐of‐living differences between states and rural and urban areas using the official poverty lines. _Source:_ Authors’ estimates from respective NSS rounds.

# High degree of mobility, where movements upward dominate

The true extent of mobility is not evident in trends in the shared prosperity indicator which refers to consumption growth of the “anonymous” bottom 40%, computed from the difference in (per capita) consumption of the bottom 40% of two different distributions at two points of time and _not_ of the same group of households over time. In contrast, consumption growth of the “non‐anonymous” bottom 40% of the distribution would measure the difference in consumption of the same group of households (those in the bottom 40% of the initial year) over time. The implications of anonymity are important to recognize for the correct interpretation of Figure 3.

How much difference does “anonymity” make in measuring shared prosperity in India? Although NSS does not allow for a tracking of expenditures by households over time, the India Human Development Surveys (IHDS) for 2004‐05 and 2011‐12, which include a panel component, offer the opportunity for a test. Between 2005 and 2012, annual per capita consumption growth among households who were in the bottom 40% of the consumption distribution in 2005 (9 percent) was much higher than that of the total population (4.7 percent); whereas consumption growth of the anonymous bottom 40% (4.4 percent) was on par with that of the overall population.<sup>6</sup> In other words, the least well‐off in 2005

> 5 It is possible, for example, for the consumption Gini to remain constant if inequality among top three quintiles falls, even as the share of the bottom 40% in total consumption declines.

> 6 See Balcazar et al (2016) for more details on the incidence of consumption growth across the distribution, using IHDS data for 2005 and 2012.

5
experienced much higher than average growth in consumption. But as many of them rose up the distribution scale, others who did relatively worse took their place, with the net result that the difference in consumption between the bottom 40% in 2005 and the bottom 40% in 2012 was just about the same as the difference in average consumption for the whole population.

To put it differently, India has remained as unequal (or equal) in terms of per capita consumption in 2012 as it was in 2005, but with a lot of “churning” underneath in terms of households moving up and down relative to other households, and in poverty status. As Table 1 shows, nearly one‐third of all households in the IHDS panel changed poverty status from 2005 to 2012, which includes 27 percent who moved out of poverty and 7 percent who moved into poverty.

The IHDS panel also shows that **Table 1: Movements out of poverty exceed shifts into poverty** movements out of poverty dominated movements into poverty: 69 percent of <mark>2012</mark> _% of Households_ households who were poor in 2005 <mark>Poor</mark> Non‐poor moved out of poverty in 2012, and only Poor 12.2 26.8 11 percent of non‐poor households in 2005 2005 fell into poverty in 2012. This is Non‐poor 7.0 54.0 not surprising, given the high rate of _Source:_ Authors’ estimates using IHDS panel (2005, 2012) consumption growth among the (anonymous) bottom 40%, which caused the overall distribution to shift rightwards significantly, lifting all (or most) boats in the process.

A high degree of “churning” amid upward mobility is also observed in synthetic panels constructed from three rounds of NSS data over the period 2005‐2012 (Dang & Lanjouw, 2015a).<sup>7</sup> Their analysis classifies the population into the poor, the vulnerable and the middle‐class (those who are neither poor nor vulnerable), where the vulnerable population are defined as those with consumption above the poverty line and below a “vulnerability line” (VL) that corresponds to a 20 percent probability of falling into poverty.<sup>8</sup> This yields a VL that is about 72 percent higher than the national poverty line – slightly lower than an alternative VL equivalent to twice the poverty line, which has been used in past work by the World Bank in India as a threshold for vulnerability.<sup>9</sup> Figure 5a shows that 52 percent of the population changed status from 2005 to 2012, using the lower VL. As in the IHDS panel, upward mobility (35 percent of the population) is much more common 7 See Dang & Lanjouw (2013, 2014) for a detailed discussion of the methodology of measuring poverty dynamics with synthetic panels and its application to define vulnerability lines in different countries.

8 The vulnerability line (VL) corresponds to a vulnerability index (VI) of 0.2, which is the probability of an individual being poor in 2012 given s/he is non‐poor in 2005. VL is thus a welfare threshold such that an individual with consumption below this level in 2005 has a greater than 20 percent probability of being poor in 2012.

9 The Country Partnership Strategy (2013‐17) for India (World Bank, 2013), uses twice the poverty line as the vulnerability threshold. It is associated with a vulnerability index of around 0.18, which implies that an individual with consumption below this threshold in 2005 has 18 percent or higher probability of being poor in 2012. Thus the seemingly arbitrary standard of twice the poverty line is associated with an estimated risk of becoming poor that is close to the 20 percent risk threshold often used to define vulnerability lines in recent research.

6
<!-- Start of picture text --> Middle-class [ 6.7 14.6<br>15<br>w<br>S Wulnerable 18.2 13.8<br>N<br>0 10 20 30 40 50<br>% of total population<br>@ 2012 Poor 2012 Vulnerable 2012 Middle-class<br><!-- End of picture text --> <!-- Start of picture text --> Middle-class | 5.5 9.1<br>OF<br>uw<br>S Vulnerable 26.6 12.1<br>ws<br>0 10 20 30 40 50<br>% of total population<br>@ 2012 Poor 2012 Vulnerable 2012 Middle-class<br><!-- End of picture text -->
<!-- Start of picture text --> 60<br>c 50<br>2<br>bb<br>= 40<br>a<br>°<br>a<br>wm 30<br>3<br>-<br>‘6 20<br><!-- End of picture text --> <!-- Start of picture text --> x<br>100 :<br>2005 2012 2005 2012<br>Vulnerability index 0.2 2x PL<br>m@ Poor mVulnerable m Middle-class<br><!-- End of picture text -->
than average chances of downward mobility. For example, the likelihood of upward mobility is significantly higher and that of downward mobility lower when the household head has secondary or higher level education as opposed to education at middle‐school or lower levels.

# Data uncertainties cloud the assessment of poverty, shared prosperity, and (especially) inequality

Important caveats apply to India’s estimates of inequality: when income rather than NSS consumption data are used, inequality in India appears to be lower than high‐inequality countries like South Africa, Brazil and Colombia, but comparable with income inequality in Peru and Ecuador, and higher than in the Russian Federation, Turkey, and the United States.<sup>13</sup> Why the gap between India’s income and consumption Gini measures of inequality is so large remains to be explained, but this at a minimum casts doubt on the oft‐rehearsed notion that inequality is low in India. In addition, it is likely that income (or consumption) distribution from household surveys can underestimate the true extent of inequality due to under‐reporting of top incomes (or consumption). Research using Indian tax return data over the period 1922‐2000 shows a rising share of top income earners in total income from the mid‐1980s to 2000.<sup>14</sup> This would have led to greater underestimation of inequality over time if top income earners are insufficiently captured in the NSS data. Under‐reporting of top incomes, however, is likely to have less bearing on the lower end of the distribution and therefore on poverty and shared prosperity estimates and trends.

One symptom of under‐reporting is the large gap in levels and growth rates of mean consumption per person from the NSS and the private consumption component of the National Accounts Statistics (NAS), which have been diverging since the early 1990s (the 2010 to 2012 period is an exception). In levels, aggregate household consumption implied by the NSS is less than half that of the household component of the NAS. Such a gap is unusually large by international standards. The extent of bias in poverty, shared prosperity and inequality estimates depends on how much of the discrepancy is attributed to the NSS or the NAS. It is notable that changes in recall period for collecting consumption data – from URP to MRP and now MMRP – have helped close the gap between the NSS and NAS consumption aggregates.<sup>15</sup> However, some of the gap in consumption is due to errors in NAS consumption (which is determined residually in India). Choosing between the NSS and NAS is not easy 13 Using IHDS data, Gini of household income per‐capita in India is estimated to be 45.3 for 2005 and 45.9 for 2012. The income Ginis for South Africa, Brazil and Colombia are 63.4 (2011), 52.9 and 52.5 (2013), respectively. Countries with income Ginis close to India’s include Peru and Ecuador, while Russia, Turkey and United States had income Ginis between 40 and 42 (2012 or 2013) (all figures other than India’s are from the WDI database, accessed March 21, 2016).

14 See Banerjee & Piketty (2005), who find that the shares of the top 0.01 percent, 0.1 percent, and 1 percent in total income shrank substantially from the 1950s to the early to mid‐1980s but then rose again, with some impact on the overall income distribution. The estimated impact is also large enough to explain 20‐40 percent of the gap observed during the 1990s between average consumption growth in NSS data and national accounts data.

15 URP, or uniform reference period, is collected for a 30‐day recall period for all consumption items. MRP, or mixed reference period, records consumption by combining a 30 day recall period for most items and a 365 day recall for items that are purchased with a lower frequency. The MMRP (modified‐mixed reference period) aggregate introduced in 2009‐10 and 2011‐12 has further closed the gap. The MMRP method which reduces the recall period for some food items to a 7‐day recall (compared to a 30‐day recall in MRP) brings NSSO’s methods closer to the more common practice of a two week or less recall period for food items in other countries.

9
<!-- Start of picture text --> % population<br>without access to<br>Under 5 mortality 69 without% population accessto<br>rate (per 1,000) ae ” piped water on<br>eer rarenee60 at premises<br>ihoti i so i\}itHa<br>. seH iH aa!iti s7 % population7<br>pe SONS a0 i? defecation<br>agTMaeMeSuet23. wt39"‘af49<br>a44<br>% working age % children under<br>adults illiterate 5 stunted<br>9% children under<br>5 underweight<br>sene-== 2005/06 ==-e--= 2012/15<br><!-- End of picture text --> <!-- Start of picture text --> Proportion of population (%)<br>80% f2e5~00_<br>10% + 80%aaeae “enaeWeen,n% === improvedWithout access to sanitation<br>71% “s. 69% 3. ae<br>60% ~ weea 60%~ ~-#-- ‘waterWithout on access premisesto piped<br>“aay --©-~ Practicing open Defecation<br>40% 44%<br>1994 2005 2015<br><!-- End of picture text --> <!-- Start of picture text --> 105 im<br>. ..<br>100 - —<br>say<br>“7S .<br>80 - Lon ‘. --©-- Infant Mortality Rate<br>80 ~/., ~n.<br>60 + “sn, mse ms“=. 50<br>56 wee Oe --0-- Under S MortalityRate<br>40 - Ried “7<br>39<br>20 + T r 1<br>194 2005 2014<br><!-- End of picture text -->
7a). While consumption poverty declined faster during 2005‐2012 from the previous decade, no such acceleration is seen for non‐monetary indicators (Figure 7b).

Education attainment among adults has risen appreciably since the mid‐2000s, mainly due to increase in the share of adults who have completed at least secondary school. The decline in illiteracy among adults – from 38 percent in 2005 to 30 percent in 2012 – is matched by a 9 percent increase in the share of adults who have completed secondary education or more during this period (Figure 8). This indicates a positive trend of skilling of the Indian labor force as secondary school enrollments and completion have increased over the years. This trend could also have an impact in terms of reducing vulnerability, given that secondary education among household heads is associated with higher chances of upward mobility and lower chances of downward mobility for the household, as mentioned earlier.

**Figure 8: Improving literacy and education, mainly due to rising secondary school completion**

<!-- Start of picture text --> (a) Proportion of adults (%), 2005 (b) Proportion of adults (%), 2012<br>Secondary<br>and above, Secondary<br>23% and above Illiterate<br>Illiterate,<br>32% 30%<br>38%<br>Middle<br>completed, Literate or<br>16% Literate or primary Middle primary school<br>completed, school completed17% completed21%<br>23%<br><!-- End of picture text --> _Source:_ Employment, unemployment surveys conducted by the National Sample Survey Office (NSSO), 2005 & 2012; ‘adult’ defined as ages 15 and older.

# 4. Spatial pattern of poverty reduction<sup>16</sup>

Poverty rates declined between 1994 and 2012 across all major states in India. Furthermore, as Figure 9a shows, the acceleration in pace of poverty decline since 2005 is evident in nearly every state, including states classified as “low‐income states” (LIS).<sup>17</sup> Gains in shared prosperity have also been widespread as annual consumption growth of bottom 40% was higher during 2005‐2012 than during 1994‐2005 in all large states with the exception of four, two of which are LIS (Figure 9b).

16 This section draws extensively from Nayyar (2014), which also includes detailed analysis of growth convergence across Indian states.

17 Following World Bank (2013), LIS refers to a group consisting of the following states: Assam (AS), Bihar (BH), Chhattisgarh (CT), Jharkhand (JK), Madhya Pradesh (MP), Uttar Pradesh (UP), Orissa (OR) and Rajasthan (RJ). The other states (out of the 21 larger states considered here for the analysis) are Andhra Pradesh (AP), Delhi (DL), Haryana (HY), Gujarat (GJ), Himachal Pradesh (HP), Jammu & Kashmir (JK), Karnataka (KK), Kerala (KL), Maharashtra (MH), Punjab (PJ), Tamil Nadu (TN), Uttarakhand (UK) and West Bengal (WB).

11
<!-- Start of picture text --> rr)' ous @apAL<br>ePJ einiN<br>OHS _”L Uneot<br>NO ON muy lig<br>at oe<br>8ls9 Ol gesoc aaa<br>?3 eMP @BH wn °oo<br>8 9 euP<br>ec! #DL os,<br>@AS<br>le)<br>2 0 -2 4 6<br>1993-94 to 2004-05<br><!-- End of picture text --> <!-- Start of picture text --> ty) @AP<br>mon_ enue TN<br>e@uK or eHY<br>Nn er eG eHP .<br>ny dae<br>= ews @5H —<br>5NQ.4 *ct eneoD. eeeIDa— exx<br>i a eUK<br>8 a“ eas<br>@y aa<br>aa<br>line ot<br>equalily<br>i nncerennn EE ann<br>-5 0 5 1 15 2<br>1993-94 to 2004-05<br><!-- End of picture text -->
<!-- Start of picture text --> 7 Changes in share (% per year) 1993-94 to 2011-12<br>omy<br>°<br>@OL @HP<br>@Pl<br>“oy‘a7 ey @KL _<br>= oreak a-<br>a owe —<br>8 a<br>: lb 3 a a<br>Ro =>a . © -soonll TTY<br>Lineof TM<br>equality<br>“ a a ! wee<br>7+<br>2 1 0 A 2 ,<br>1993-94 to 2004-05 AP TN HY KLHPMHORKK RJWBPJ GJ JD UP ASMPUK CT BH DL JK<br>AP, 2.9 45<br>TN, 3.1 40<br>40 37<br>UP, 22.2 35 34 33 39 a<br>29<br>30 5<br>25 4<br>21 a9<br>20 v7 17<br>BIH, 13.3 is. ni<br>11 11 11 10<br>10<br>KN, 4.8<br>ORI, 5.1 MP, 8.7 5<br>WB,6.9_ MAH, 7.3 o +=, : : —.. ; L<br>oa Ss ses & SL VIP PF FS +<br><!-- End of picture text -->
Domestic Product or NSDP) had higher rates of poverty reduction on average, an association that also holds strongly for growth of household per capita consumption.<sup>19</sup> Second, poverty reduction became more responsive to growth over time – elasticity of poverty reduction to growth in per capita NSDP and household per capita consumption increased during 2005‐2012 relative to 1994‐2005 in almost all states.<sup>20</sup> The rate at which growth translated into poverty reduction varied widely across states, with the growth elasticity of poverty reduction ranging from ‐0.5 to ‐1.7 during 1994‐2012 (Nayyar, 2014). Elasticity patterns across states highlight two important challenges: relatively low elasticity in the LIS (Rajasthan being the sole exception), and lower effectiveness of growth in lifting people out of vulnerability (2*PL) than out of poverty.<sup>21</sup> The first challenge is a key reason why the LIS are not converging in the rate of poverty reduction with other states. That said, there is a lot of variation in elasticities among the set of higher income states. Elasticity is not strongly correlated with state‐level growth in per capita incomes either.<sup>22</sup> The second challenge is seen in the generally lower range of elasticities when the vulnerability line of 2*PL is used, which suggests that on average, economic growth has been less efficient in lifting people into middle‐class than it has in lifting people out of poverty. Most LIS do relatively poorly on this metric as well, as do several of the other states.

# 5. India and the rest of the developing world in poverty reduction

Reduction in extreme poverty in India has exceeded the pace for the developing world since 2005 Since 2005, India has exceeded the pace of the developing world as a whole – as well as middle‐ income countries (MICs) and lower middle‐income countries (LMICs) – in reducing extreme poverty defined by the international poverty line of $1.90/day (2011 PPP).<sup>23</sup> This marks a change from the decade of the 1990s, when extreme poverty reduced in India at a rate on par with the developing world but lagged behind MICs and the sub‐group of LMICs that India is a part of (Figure 12). Comparisons with individual countries in South Asia and India’s MIC peers illustrate this positive trend, which however falls short of the rate of progress seen among the best performers. Extreme poverty reduction in India since 2005 exceeded the rate of progress in its neighbors Sri Lanka and Pakistan and some of its MIC peers (e.g. Indonesia, Bolivia and the Philippines), but lagged behind strong performers like Vietnam, Bhutan and Nepal (see Figure A‐ 4, Annex).

19 This correlation also holds for the share of population living below twice the poverty line.

20 Jammu and Kashmir and Assam are strong exceptions to this trend, while the low‐income states of Uttar Pradesh and Jharkhand experienced a mild decline in the elasticity of poverty reduction to NSDP growth from 1994‐2005 to 2005‐2012.

21 Refer to Figure A‐ 3, Annex.

22 This is consistent with past literature that finds a high degree of state‐level variation in the association between growth and poverty reduction in India, with no statistically significant relationship between growth rates and growth elasticities of poverty during the period 1994 to 2000 (Datt and Ravallion 2002).

23 See Ferreira et al (2015) for details on the international poverty line based on 2011 PPP, including methodology and results.

14
<!-- Start of picture text --> 50<br>p*<br>a 45 TTT eee<br>J “=<.<br>“40 OTT tsa.<br>3q Tonsem am“.<br>a 34.7 see<br>= ah mes<br>=S30 ae|\<br>2z 25 ‘S *<br><!-- End of picture text -->

<!-- Start of picture text --> 5<br>6 15<br>= 14.1<br>s 10<br>x)<br>&5<br>0<br>1993 1996 1999 2002 2005 2008 2011<br>--8-=- India —*«— Lower middle income —*— Middle income —#*— Developing World<br><!-- End of picture text -->
<!-- Start of picture text --> 600 40<br>&<br>§ 500 5<br>>& 4 30 3a<br>a<br>3“ z<br>3£=z<br>FI<br><!-- End of picture text --> <!-- Start of picture text --> :<br>a#200 £<br>= 10 §<br>100 2<br>z<br>fe) 0<br>1993-94 2004-05 2009-10 2011-12<br>@ Number of Gol poor _® Number of $1.90 poor ¢ India's share in $1.90 poor of the world<br><!-- End of picture text -->
<!-- Start of picture text -->
- HUTT] | |<br><!-- End of picture text -->
Indian population as a whole (3.7 percent) was more than a percentage point higher than the median of the corresponding growth rate for MICs. As a result, India ranked 16<sup>th</sup> among 51 MICs in consumption growth of overall population, but only 27<sup>th</sup> in consumption growth of the bottom 40%.

The lower rank on inclusiveness of growth also implies that even as India outperformed the majority of developing countries and its MIC peers in poverty reduction, the rate of reduction was below par for the average consumption growth that India experienced. Poverty reduction in India, in relation to growth was lower still if overall expansion of the economy (GDP growth) is taken into account. The elasticity of poverty reduction to per capita GDP growth in India is estimated to be approximately ‐0.9 for the period 2005‐12, which puts India near the bottom third (75<sup>th</sup> out of 116 countries) among developing countries for this period.<sup>29</sup> As a point of reference, the top 10 countries (out of 116) in terms of elasticity of poverty to per capita GDP growth during this period had elasticities between ‐6 and ‐18, while the median elasticity was ‐1.3. The relatively low elasticity in India was the reason why for the period 2005‐2012, with per capita GDP growth that was in the top 10 percent among developing countries, India was just above the 60<sup>th</sup> percentile of developing countries in the rate of poverty reduction.<sup>30</sup> Given the size of India and the extent of variation in income levels across states, the challenge of inclusive growth has an important spatial dimension, for which the state level snapshots in Section 4 are useful to revisit briefly. The wide variation in the growth elasticity of poverty reduction across states highlighted in Section 4 demonstrates the complexity of the challenge. Two important trends identified there – the strongly positive association between state level growth and the pace of poverty reduction, and the rise in the responsiveness of poverty reduction to growth from 1994‐2005 to 2005‐2012 in most states – suggest encouraging prospects for inclusive growth nationally. On the flip side, the comparatively lower elasticity in most LIS poses a challenge to inclusiveness of growth, given the rising share of these states in India’s poor and bottom 40 percent. The second challenge, that of growth being less efficient in lifting people above the higher “vulnerability” standard of twice the poverty line than out of poverty, is symptomatic of the constraints to middle‐class expansion in India – and not just in LIS, but almost everywhere including the most economically developed states of the country.

# India has made mixed progress in non‐monetary dimensions of welfare compared to its peers

While key non‐monetary indicators of welfare have improved steadily in India over the last two decades, improvements on some key dimensions do not stand out in comparison with countries that had indicators at a comparable level in the early 1990s. Child and infant mortality rates fell faster in countries like Nepal, Bangladesh and Cambodia, where mortality rates were higher than India’s in 1994 but fell below India’s in 2014. The reduction in mortality rates in India was sufficient to close the gap significantly with countries like Vietnam and Nicaragua between 1994 and 2014. However, the gaps in

> 29 To ensure comparability across countries, these elasticities are estimated for the period 2005‐2012 for all countries (116 for which estimates are possible), using interpolated estimates of poverty rates for countries where survey years do not match the exact period.

> 30 Rankings based on 116 developing countries for which growth elasticity of poverty reduction could be estimated. It is important to note, however, that these elasticity estimates might be affected by the aforementioned divergence between NSS consumption series and NAS, although it is difficult to assign the direction of the bias.

18
infant and child mortality with these countries, as well as with the other BRICS countries, remain large (Figure 15).

**Figure 15: India lags behind many of its comparators in reducing infant and child mortality**

<!-- Start of picture text --> (a) Infant mortality trend: India and selected (b) Child mortality trend: India and selected<br>comparators comparators<br>100 120<br>80 100 India, 112<br>India, 80 India, 75<br>80<br>60 India, 56<br>60<br>India, 39<br>40 India, 50<br>40<br>20 20<br>0 0<br>1994 2005 2014<br>1994 2005 2014<br>Nepal Bangladesh Nepal Bangladesh<br>Cambodia India Cambodia India<br>Vietnam Nicaragua Vietnam Nicaragua<br>(c) Infant, child and maternal mortality, 2014: the BRICS<br>50 200<br>IMR<br>Under‐5 MR<br>40<br>150<br>MMR<br>30<br>100<br>20<br>50<br>10<br>0 0<br>India China S. Africa Brazil Russia<br>Infant mortality rate Under 5 mortality rate<br>estimate<br>rate (per 1,000)<br>Infant, Under 5 mortality (per 100,000), modeled Maternal mortality ratio<br><!-- End of picture text --> _Source:_ World Development Indicators (WDI).

Relatively slow progress in sanitation in India has also meant that the country compares poorly with comparators including South Asian neighbors in access to sanitation and the incidence of open defecation (see Figure A‐ 6, Annex). In undernourishment among children of age 5 and under, stark differences across states mean that a number of states have stunting and underweight rates that are above not only the average for its “peer group” of low‐middle income countries but also the average for Sub‐Saharan Africa, a group with much lower average per capita GDP (Figure A‐ 6, Annex). Low‐income states like UP and Bihar fare particularly poorly, but challenges are not restricted to these states alone.

# 6. The global goal of ending extreme poverty by 2030 – what will it take in India?

India has the largest number of poor people in the world, accounting for roughly one‐fourth of the world’s extreme poor (at the $1.90 poverty line) in 2012. If rural and urban India were considered as separate entities, both would be among the top 10 “countries” of the world in terms of the number of extreme poor – urban India would rank sixth while rural India would top the list (Figure 16). The number 19
<!-- Start of picture text --> 200<br>184<br>= lf Rural and Urban India were separate countries, they<br>= 150 would be in the top six countries with the largest number of<br>Sr"a poor at the international extreme poverty line<br>5<br>3<br>Paes 87 a4<br>y<br><!-- End of picture text --> <!-- Start of picture text --> a<br>S 58<br>Eso 31 46<br>= 29<br>= 27 55 = 16°43 12° 12-49 41g GC Cg<br>0<br>&PLPSF2 oSeo FEESF & £ EESFCP ILOs* PSEEESeq LEeS oF EES2 2 ES= es<br>< eS “ss < wo s Pid<br><!-- End of picture text -->
Low responsiveness of poverty reduction to growth in India is a result of two persistent factors: low elasticity of household consumption (from NSS) growth to GDP growth, and growth in household consumption that is insufficiently pro‐poor. The first one is a recurring feature in India, where growth in GDP (and private consumption) in national accounts (NAS) has consistently surpassed that in household consumption from surveys so that the gap between the two series has widened over time. The second factor, that growth in household consumption is not pro‐poor, is reflected by what is seen for the shared prosperity indicator earlier.

Both these factors have shown significant improvements from the past, which resulted in the elasticity of poverty reduction to GDP growth more than tripling from the period 1994‐2005 to 2005‐ 12.<sup>33</sup> Even _within_ the second period, there was an improving trend, with the last two years (2010‐12) showing a much higher elasticity due to a reversal in both the factors: the gap between NAS consumption growth and household consumption growth narrowed and household consumption growth itself became more pro‐poor. If these changes represent a trend and not an aberration, one would expect poverty reduction to become more responsive to GDP growth in the coming years, with encouraging prospects for the achievement of the global goal of “ending” extreme poverty by 2030. The rise in the growth elasticity of poverty in 2005‐12 compared to the previous decade was also accompanied by fundamental shifts in how the composition of growth – between urban and rural and different sectors – affected rural and urban poverty.<sup>34</sup>

# 7. Conclusion

In concluding, it is useful to recap the highlights of the findings. Compared to the 1994 to 2005 period, poverty reduction accelerated during 2005‐2012, falling from 37 percent nationally in 2005 to 22 percent in 2012. The annual rate of reduction was 2.2 percentage points during 2005‐2012, compared to 0.7 percentage point during 1994‐2005. Poverty fell more rapidly in rural areas. But with a rural poverty rate of 26 percent and urban poverty rate of 14 percent, the number of rural poor was still almost quadruple that of urban poor in 2012. Poverty reduction was driven by rapid growth in consumption; consumption inequality (Gini index), after rising between 1994 and 2005, remained almost unchanged. The World Bank Group’s indicator for “shared prosperity”, annualized per capita consumption growth of the bottom 40% of the population, showed significant improvement since 2005 from the earlier period of 1994‐2005.

International comparisons validate the positive poverty reduction trends for India in the decade of the 2000s. After barely keeping up with the developing world as a whole and lagging behind MICs during the 1990s, India accelerated its progress in reducing monetary poverty after 2005 even in comparison to the rapid progress achieved by the developing world as a whole. The rate of reduction of extreme poverty in India, measured by the international poverty line of $1.90/day (2011 PPP), exceeded that of

> 33 Elasticity of poverty headcount rate (international poverty line of $1.90/day at 2011 PPP) to growth in per capita GDP (constant 2011 PPP $) was ‐0.24 during 1994‐2005 and ‐0.93 during 2005‐12. Within the latter period, the elasticity rose from ‐0.49 in 2005‐10 to ‐2.24 during 2010‐12.

> 34 See Datt, Ravallion & Murgai (2016), who analyze in detail the relationship between the composition of growth and pattern of poverty reduction over time in India.

21
the developing world as well as that of MICs as a group, which resulted in the country’s share in global extreme poor declining from 30 percent in 2005 to 26 percent in 2012.

Comparisons with the rest of the developing world also suggest room for improvement for India relative to some of the strongest performers in poverty reduction, primarily because economic growth in India was less inclusive. Consumption growth for the bottom 40% in India lagged slightly behind the average growth for the population, which led to a falling share of the bottom 40% in total consumption expenditure between 2005 and 2012, even though there was almost no change in overall inequality. India ranked 16<sup>th</sup> among 51 MICs in average consumption growth of the population during 2005‐2012, but 27<sup>th</sup> in consumption growth among the bottom 40%. As a result, poverty reduction was below par for India’s average consumption growth, and even more so for its GDP growth. With per capita GDP growth in the top 10 percent among developing countries, India was just above the 60<sup>th</sup> percentile in poverty reduction rate during 2005‐2012.

The period of 2005‐2012 was also one of high mobility among households between groups defined as the poor, the vulnerable and the middle‐class. Rapid consumption growth across the board meant that upward movements were much more common than movements downward, and especially so among households who were among the poorest in 2005. More than half the population is estimated to have changed their status from 2005 to 2012, including more than a third of the population who moved upward. This was enough for the Indian middle‐class to grow into the second largest segment of the population by 2012 – between a quarter and a third of the population – as befits the country’s emergence as a middle‐income country during the last decade. However, because many of those who escaped poverty moved into the vulnerable group and not into middle‐class, the vulnerable group continued to be the largest segment of the population throughout the period.

That average living standards of the bottom 40% of the distribution improved slower than among the rest of the population, even as upward mobility was high among the poorer households of 2005, is due to the combination of two factors. Primarily, it is a consequence of high mobility across the distribution, which caused significant “churning” in the relative positions of households over time, along with a _pattern_ of mobility that did not raise sufficient numbers above vulnerability and instead yielded a rapid increase in the share of population who remained economically insecure even as they rose out of poverty. This is also consistent with what is seen for the elasticity (responsiveness) of poverty reduction to economic growth across Indian states during 1994‐2012 – growth was on average less effective in reducing “vulnerability” (by the standard of twice the poverty line) than in reducing poverty. Such a pattern could be symptomatic of growth that leads to rapidly rising returns at the lower end of the labor market in relatively low‐productivity activities, but generates insufficient opportunities in higher productivity activities that allow households to move beyond vulnerability and into middle‐class. Whether that is indeed the case is one of the key questions about the drivers of poverty reduction and economic mobility among households, which are beyond the scope of this paper and the subject of other research.<sup>35</sup> Spatial differences across states in poverty and vulnerability persisted over the years even though low‐income states (LIS) narrowed their gaps with other states to some degree. Poverty rates declined

> 35 See, for example, Dang & Lanjouw (2015a), and Jacoby & Dasgupta (2015).

22
between 1994 and 2012 across all major states in India, and at an accelerated rate since 2005 in nearly every major state. While poorer states are gradually closing the gaps with richer states in poverty rates, the rate of convergence is low since states with initially higher poverty rates saw smaller percentage declines in poverty rates. The high poverty rates and large populations of Uttar Pradesh, Bihar and Madhya Pradesh led to these three states accounting for 44 percent of the poor of the country in 2012. Most LIS also lagged behind other states in reducing their share of population living below twice the poverty line, with the result that this “vulnerable group” was much more concentrated in the LIS in 2012 than in 1994.

Despite its rapid gains, India was estimated to account for a quarter of the world’s extreme poor in 2012. The world is thus much more likely to achieve the SDG of ending extreme poverty (no more than three percent of the world population) by 2030 if the recent rate of progress in India is sustained, which will bring down extreme poverty rate in India to around one percent by 2030. The pace of decline could be hastened if growth were to translate to poverty reduction more effectively. That India was ranked near the bottom third of developing countries in responsiveness (elasticity) of poverty reduction to GDP growth for the period 2005‐2012 suggests ample room for improvement on this front, while a trend of rising elasticity of poverty to growth over the years provide cause for optimism. This optimism is reinforced by the rise in the responsiveness of poverty reduction to growth from 1994‐2005 to 2005‐ 2012 in most Indian states.

In a country where a large majority of the population are poor or vulnerable, improving non‐ monetary dimensions of welfare is critically important to promote upward mobility among households and create self‐sustaining paths out of poverty and vulnerability traps. Recent history in India offers a mixed picture in improving human capabilities, with success on some fronts – such as reducing infant and child mortality rates, and boosting secondary education – tempered by relatively slower progress in others like access to piped water, sanitation and stunting among children.

Moreover, unlike what was seen for consumption poverty, the pace of progress in India in many non‐ monetary welfare indicators has not accelerated in the past decade, and still lags behind high‐ performers among other developing countries. For example, by 2014, India had fallen behind some South Asian countries on sanitation, and these countries made even more rapid progress than India in reducing infant and child mortality between 1994 and 2014. Wide gaps with other BRICS countries and fast‐developing MICs like Vietnam persisted for most of these indicators. A particular area of concern is undernourishment among children, with some states, including a few high‐income ones, showing stunting and underweight rates that compared poorly with the 2014 averages for low‐middle income countries, Sub‐Saharan Africa, and some of the other countries in South Asia. On the other hand, substantial increase in the share of adults with secondary school education in India is an important positive development, since higher education attainment, particularly at the secondary level and above, is associated with a significantly higher likelihood of upward mobility and lower chance of downward mobility for a household.

The bird’s eye view of poverty and well‐being in India in this paper raises important questions about the relationships between poverty and vulnerability on the one hand, and macroeconomic changes related to growth, distributional trends and sectoral trends and shifts on the other. These in turn lead to questions about the role of underlying processes, such as structural transformation, including the 23
changing nature of labor markets and urbanization, in shaping the trends and patterns of poverty reduction. Understanding the role of transformation also requires examining the mutually reinforcing relationships between monetary and non‐monetary dimensions of poverty, and how uneven human development limits the pace and inclusiveness of labor market changes and urbanization. A comprehensive accounting of these drivers of recent trends and patterns will help shed light on the all‐ important question for the future: what is needed to facilitate growth with inclusion to sustain and even accelerate poverty reduction and rise of the middle‐class, and to mitigate the risks that might slow down this process?

24