On Markets and Poverty in India

The feudal character of agrarian India is, of course, nothing new, and surely cannot be a major cause for the recent disconnect between growth and depth of poverty.  This is true at one level, but it also needs to be realized that in a feudal milieu, the benefits from engaging with a market system can get captured by a limited few, and the traditional safety nets tend to progressively weaken.  The main reasons, however, probably lie in the fact that a dynamic market economy demands certain capabilities from its participants, the lack of which can either exclude participation or make the persons more susceptible to exploitation.  Education is the most obvious of these.  The reason why erstwhile autocratic countries, whether communist or otherwise, have tended to do spectacularly well after moving to a capitalist system is that they all had enforced practically universal literacy among their people during their autocratic days.  China again is an exemplar in this regard, with more than 92 per cent literacy.  In India, however, despite Constitutional injunctions and best intentions, literacy continues to languish at around 62 per cent.  With 38 per cent of our population illiterate, and another 40 per cent or so barely literate, it is little wonder that the poor in India are unable to meet the demands of the new products, services and processes which are progressively dominating the marketplace.

Credit is another area in which a market economy places demands not experienced before.  As markets widen and integrate, and as competition intensifies, traditional participants tend to be progressively edged out if they cannot the credit demands of their suppliers and customers.  Despite considerable progress, India severely lags behind in this respect.  A telling statistic is the fact that bank credit in India is only 60 per cent of its GDP. In China it is 180 per cent.  The Indian informal sector, which is the source of livelihood for 92 per cent of our households and 100 per cent of the poor, is clearly ill-served by our formal credit arrangements.  The laudable priority sector lending policies of the government have been steadily diluted over the years by inclusion of all manner of formal sector activities, thereby crowding out those at the borderline.  The 'market discipline' that has been imposed even on the public sector banks has further contributed to this process.

It appears inevitable, therefore, that in order to create conditions in which the poor will be able to benefit from market reforms, active government intervention is necessary.  Given the resource limitations of the government, such interventions have to be targeted to those who need it most.  In this context, the recent clamour from various quarters to raise the poverty line, and thereby the poverty ratio, appears to be self-defeating.  It needs to be remembered that despite substantial reduction in the poverty ratio as currently measured from 52 per cent to 28.5 per cent in about 30 years, the number of people below the poverty line remains stubbornly at around 300 million.  This is not a trivial number, and addressing even these presents a daunting challenge.  Further increase in poverty estimates through upward revision of the poverty line will further weaken any effort close and effective targeting.  There is no question that the Indian poverty line is a minimalist one, and identifies only the poorest of the poor. But the sensible way of addressing the issue is to retain the existing definition until such time as the poverty ratio is brought below say 10 per cent through precise targeting, and only then revising the poverty line upwards.  China has done precisely this.  Starting with a poverty line (USD 0.75 PPP) lower than ours (USD 1.00 PPP), they maintained it until the number of poor was brought down to 80 million people.

We have cited the Chinese experience repeatedly, and for good reason.  Although China is perhaps not yet a true market economy, it has created the necessary pre-requisites, which we have singularly failed to do despite our best intentions.

The author, Pronab Sen is a Chief Statistician and Secretary of the Union Ministry of Statistics and Programme Implementation.