The biggest losers in India’s economic slowdown
(Any opinions expressed here are those of the author and not those of Thomson Reuters Corp.)
The reaction to news that India’s economy grew at its slowest rate in over a decade was predictable. There was frustration over squandered potential, pleas for a rate cut, unshaken optimism and even an opportunity to indulge in clever wordplay. Yet as everyone from economists to businessmen had their say, the demographic affected most by this slowdown was silent – India’s poor.
One of the big successes of India’s economic growth has been its positive impact on poverty reduction. The percentage of the country’s population living below the poverty line declined from 37.2 percent in 2005 to 29.8 percent in 2010 (the last year when exact numbers were available). That translates to 52 million Indians who have been lifted above the poverty line. Encouraging as those gains are, the country still counts over 320 million poor among its citizens.
Higher economic growth has also correlated with a larger rate of poverty reduction. Between 2005 and 2010, the country’s GDP grew at an average of 8.5 percent and the poverty rate (the proportion of the population below the poverty line) registered an average annual decline of 1.48 percent. In the preceding decade, when GDP growth averaged 6.5 percent, the poverty rate declined at 0.74 percent annually.
If these seem like really small percentages to quibble over, consider this: over the next seven years, India has the opportunity to lift anywhere from 66 million to 160 million people out of poverty (see chart). The difference between the two numbers is that the first assumes a 1 percent annual decline in the poverty rate, while the second assumes a 2 percent decline.
A recent paper from the Brookings Institute shows that poverty reduction in India is sensitive to economic growth. That is why the current slowdown is troubling - India’s growth trajectory over the next few years will have a direct impact on how many people can be raised from extreme poverty.
Economic growth in itself doesn’t guarantee poverty alleviation; growth must also be evenly distributed to raise incomes at every level. In this regard, India’s record is unsatisfactory. As the country’s economy has grown, so has inequality. A common measure for income inequality is the Gini coefficient which ranges from 0, where everyone earns the same income to 1, where one person hoards all the income. In urban India, the Gini coefficient went up from 0.34 in 1994 to 0.37 in 2010. Rural India followed a similar trend.
To be fair, the Gini coefficient has gone up in some rich countries as well (in the United States, it increased from 0.34 in the mid-eighties to 0.38 today). But America’s poor are relatively well off when compared with developing countries. In a country like India with income extremes, a widening Gini coefficient indicates that the benefits of growth are accruing to the wealthy or that the poor are worse off.
One reason for the widening gap is uneven growth in the economy. In the past decade, India’s growth has been fuelled by its services sector (trade, banking, technology, etc). But the number of jobs created in this sector is small and concentrated primarily in urban areas. Consequently, the services sector now comprises over 53 percent of the country’s GDP but employs only 26 percent of its workforce. In contrast, the agriculture sector accounts for over 50 percent of the country’s jobs, yet contributes only 14 percent to GDP. As the share of agriculture in the economy continues to fall and with little opportunity for high-paying jobs, the income gap will only widen – particularly in rural India.
The example of China shows that daunting as the numbers are, poverty can be overcome. Thirty years ago, nearly 84 percent of the country’s population was below the poverty line. Today that number is in single digits and China is on track to virtually eliminate poverty by 2020. By some estimates, growth in the agriculture sector had a far greater impact in reducing poverty than growth in either manufacturing or services sectors.
India isn’t China. It’s hard to imagine the country sustaining years of high economic growth like China - the inherent contradictions within a noisy democracy mean that India will always lag China in the pace and scope of reforms. But by targeting more equitable growth, and not just headline growth numbers, India can emulate China’s success in eliminating extreme poverty.