Growth. Employment and Poverty Reduction: Growth. Employment and Poverty Reduction: The Post Reform Indian ExperienceThe Post Reform Indian Experience

Himanshu and Abhijit Sen Himanshu and Abhijit Sen

The Indian Economy grew at more than 5% per year for the last 25 years (1980-2005). It rose in the early 1980s because of improved efficiency of capital use and again after 2001, because of higher investment. Liberalisation in 1991 was a less significant break for either investment or efficiency of capital use.

0.10

0.15

0.20

0.25

0.30

0.35

0.40

19

55

-56

19

59

-60

19

63

-64

19

67

-68

19

71

-72

19

75

-76

19

79

-80

19

83

-84

19

87

-88

19

91

-92

19

95

-96

19

99

-00

20

03

-04 2.00

3.00

4.00

5.00

6.00

7.00

8.00

investment rate GDP growth 5 years

The 1990s was a period of very slow growth of non-farm employment. Agriculture grew quite fast till mid-1990s, but has become stagnant since then. However, non-farm employment growth has picked up from late 1990s onwards.

350

370

390

410

430

450

470

1983

-84

1985

-86

1987

-88

1989

-90

1991

-92

1993

-94

1995

-96

1997

-98

1999

-00

2001

-02

2003

-04

80

100

120

140

160

180

200

220

Agricultural GDP per capita Non-farm Employment (in millions)

The share of profits in Net Value Added in organised manufacturing increased slightly in the early 1990s, and almost doubled during 1999-05.

0.0

10.0

20.0

30.0

40.0

50.0

60.0

1981

-82

1982

-83

1983

-84

1984

-85

1985

-86

1986

-87

1987

-88

1988

-89

1989

-90

1990

-91

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

Wages/NVA Profits/NVA

Nominal wages of workers grew slowly, and real wages declined after mid-1990s in both rural and urban areas. But managerial emoluments increased much faster after reforms. This gap has increased very sharply after 1999.

0.0

75.0

150.0

225.0

300.0

375.0

450.0

525.0

1981

-82

1983

-84

1985

-86

1987

-88

1989

-90

1991

-92

1993

-94

1995

-96

1997

-98

1999

-00

2001

-02

2003

-04

w orker w ages/day managerial emoluments/day

Distribution of national income by factor shares over the 1990s: Only the private non farm sector has increased its share, mainly organised sector surpluses. Shares of both agriculture and the public sector have declined.

5%8%

25%

26%

5%7%

16%8%

4%10%

21%

26%

5%

10%

19%

5%

3%11%

16%

6%

13%

16%

6%

29%

ag-wages

nonag wages

self-emp agri

self-emp nonagri

private salaries

private surplus

govt salaries

govt surplus

Innermost circle (1993-94), middle circle (1999-00) and outer circle (2004-05)

But employment shares show no growth in private organised employment and a sharp decline in agricultural wage

employment. The real expansion was in self-employment.

26%

13%

38%

16%2%5%

25%

15%

35%

18%

2%5%20%

18%

36%

20%

2%4%

ag-wages

nonag wages

self-emp agri

self-emp nonagri

private salaries

govt salaries

Innermost circle (1993-94), middle circle (1999-00) and outer circle (2004-05)

Monthly incomes of cultivators have declined in the latest period. All other workers’ incomes have increased, especially in the organised sector.

0

3000

6000

9000

12000

15000

18000ag-w

ages

nonag

wages

self-e

mp

agri

self-e

mp

nonagri

private

sala

ries

govt

sala

ries

1993-94

1999-00

2004-05

The gap between organised sector salaries and self-employed/wages started at the end of 1990s and has been growing thereafter. Real incomes of self-employed in agriculture have declined since the onset of agrarian crisis after 1997-98

Indices of per worker income (1999-00 series)

80.0

130.0

180.0

230.0

280.0

330.0

380.0

430.0

480.0

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

ag-wages

nonagwages

self-empagri

self-empnonagri

privatesalaries

govtsalaries

Consumption inequality has increased quite sharply after the early 1990s. This has happened in both rural and urban areas but more in urban areas.

Rural Gini

28

29

30

31

32

1977-78 1983 1987-88 1993-94 1999-00 2004-05

25.5

26.5

27.5

28.5

29.5

URP MRP

Urban Gini

33

34

35

36

37

38

39

40

1977-78 1983 1987-88 1993-94 1999-00 2004-05

30.5

31.5

32.5

33.5

34.5

35.5

36.5

37.5

URP MRP

However, despite inequality increase and agrarian stagnation, the period after 1999 has seen significant poverty reduction, and this is much more in rural areas than in urban.

Rural Poverty HCR

20

25

30

35

40

45

50

1983 1987-88 1993-94 1999-00 2004-05

CES-URP CES-MRP EUS-MRP

Urban poverty HCR

20

25

30

35

40

45

1983 1987-88 1993-94 1999-00 2004-05

CES-URP CES-MRP EUS-MRP

The major reason for higher poverty reduction in the period 1999-05 was the sharp decline in inflation particularly of food prices. But this was also the source of distress among farmers.

Growth rate of consumer prices by groups

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Rural Urban Rural Urban

1993-94 to 1999-00 1999-00 to 2004-05

Food

Non-food

Total

The other reason for poverty decline is because demographic changes permit higher worker participation rates. Per capita consumption expenditure of workers has grown much less than average consumption expenditure in the more recent period.

Growth Rate of Per Worker and Per Capita Consumption Expenditure in nominal prices (Rural)

1.00

2.50

4.00

5.50

7.00

8.50

10.00

Self-

emp

Non

-farm

Farm

Labo

ur

Non

-farm

labo

ur

Cul

tivat

ors

Oth

ers

Tota

l

Self-

emp

Non

-farm

Farm

Labo

ur

Non

-farm

labo

ur

Cul

tivat

ors

Oth

ers

Tota

l

1993-94 to 1999-00 1999-00 to 2004-05

Monthly Per Worker Consumption Expenditure Monthly Per Capita Consumption Expenditure

Why did poverty reduce faster during 1999-05?

The two obvious things are: lower inflation, particularly food prices and higher worker participation rates However, wages per worker have grown

much less during this period and this has increased profits and allowed more private investment.

The Indian economy has become more Lewisian

Income distribution has worsened but poverty has declined

But is it sustainable?

After 2004-05, consumer price inflation is again on the rise, led primarily by increase in food prices. This can not be solved without faster growth in agriculture.

There are limits to what the non-farm sector can absorb without driving down wages further

Most of the self-employed are in informal sector in low productivity sectors and any further increases in these sectors do not appear sustainable.