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Preliminary. Please do not cite.

Growth, Structural Change, and Poverty Reduction in India*


Rana Hasan Click India to edit Master subtitle style Resident Mission South Asia Regional Department Asian Development Bank

Based on ongoing research by Rana Hasan, Abhijit Sengupta, and Sneha Lamba. 4/14/12

Outline
I. Background and motivation (including some stylized facts about the growth process and poverty from recent literature) II. What will promote greater inclusion? Answers through the lens of poverty reduction and structural change III. Policy messages
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I. Background and motivation


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The Indian Growth Story

While much debate exists between when exactly Indias growth rates took off, it seems to be some time in the early/mid-1980s

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Source: Staff estimates based on WDI (2010) data.

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Services have been key to growth

Services have contributed almost 2/3rds of growth The share of agriculture has declined as would be expected But the share of manufacturing has been roughly constant
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Sectoral Contribution to Growth, Selected Periods

Source: Gupta et al (2009)

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What has driven growth in India?

Policy drivers

Trade and industrial policy liberalization from early 1980s and especially 1990s

(mean) avginrp 50 100

150

Average (output) tariff rates, %

IT Revolution (1990s) Technological capabilities (pre1980s) Demography (2000s)

1985

1990

1995 year

2000

2005

Source: Staff estimates. Cumulative Share of Industries Delicensed

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Source: Gupta et al (2009)

Who all have benefited from India's growth?


MPCE(occupation)
2000 1500 1000 500 0 Rural - High skilled Urban - High skilled 1983 1994 Rural - Low skilled 2005 Urban - Low skilled

MPCE (level of education of household head)


2500 2000 1500 1000 500 0 Rural Below Urban Below Rural Ter & Urban Ter & Primary Prim ary above above 1983 1994 2005
1500 1000 500 0

MPCE (soical group of household head)

Rural- SC/ST Urban- SC/ST Rural- Other Urban- Other headed hh headed hh headed hh headed hh 1983 1994 2005

Note: MPCE=Monthly per capita expenditures (urban Delhi 2005 Rupees) 4/14/12 et al (2010) 77 Source: Cain

Given this basic feature of the data, it should be no surprise to find that consumption (or expenditure) poverty in India has declined over time This result holds regardless of the poverty line i.e., whether it is the Government of Indias official poverty line or the international $1.25 per day poverty line
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Source: Cain et al (2010)

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From a longer term perspective.

Source: Datt and Ravallion, (2009 and 2010) 4/14/12

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The real debate: How can the pace of poverty reduction be accelerated?

Source: Cain et al (2010)

Source: Ravallion (2009)

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II. What will promote greater inclusion?


Looking through the lens of poverty reduction and structural Click to edit Master subtitle style change across Indian states

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Diversification, structural change, and poverty reduction

Are states that diversify their structure of production (e.g., away from agriculture/traditional sectors) the ones with greater success in reducing poverty? How much does diversification in the structure of employment matter? Does the policy and institutional context matter in the answers to the above questions?
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Using diversity of experiences with poverty reduction across Indian states


AP
20 40 60 80

ASA

BIH

GUJ

HAR

KAR
20 40 60 80

KER

MAH

MP

ORI

PUN
20 40 60 80

RAJ

TN

UP

WB

0 1980

1990

2000 2010 1980 1990

2000 2010 1980

1990

2000 2010 1980 1990

2000 2010 1980

1990

2000 2010

Years Poverty Rate 1


Graphs by statename

Poverty Rate 2

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Diversification in production is associated with higher productivity


AP
.3

ASA

BIH

GUJ

HAR

KAR

KER

MAH

Index of Concentration

.1

.15

.2

.25

10

12

MP
.3

ORI

PUN

RAJ

TN

UP

WB

.1 10

.15

.2

.25

12

10

12

10

12

10

12

10

12

10

12

10

12

Log of Average Labour Productivity


Graphs by statename

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Note: The Extent of concentration is measured by the Herfindahl Index. A higher value implies greater concentration.

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Diversification in employment is associated with higher productivity


AP
.6

ASA

BIH

GUJ

HAR

KAR

KER

MAH

Index of Concentration

.2

.3

.4

.5

10

12

MP
.6

ORI

PUN

RAJ

TN

UP

WB

.2 10

.3

.4

.5

12

10

12

10

12

10

12

10

12

10

12

10

12

Log of Average Labour Productivity


Graphs by statename

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Note: The Extent of concentration is measured by the Herfindahl Index. A higher value implies greater concentration.

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Is higher productivity always associated with better poverty outcomes?

As Rodrik and McMillan (2011) note, there are two ways in which aggregate labour productivity can grow

Capital accumulation, technological improvement etc. can improve productivity within a sector Labour can move across sectors i.e. from low productivity to high productivity sectors. (Structural change)

If the latter effect is non-existent or weak, then the benefits of productivity growth may, in effect, bypass workers

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Cross Country Comparison


Thailand
12 10 8 6 4 2 0 12 10 8 6 4 2 0

Indonesia

India
12 10 8 6 4 2 0

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10 8 6 4 2

Brazil

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Indian states have experienced beneficial structural change in employment


Productivity Decomposition in Indian States 1983-2009
Annual Growth Rates
HAR GUJ KAR MAH TN AP ORI RAJ KER WB PUN BIH MP UP ASA 0 .02 .04 .06 .08

Sectoral Productivity Growth


Source: Authors' Calculations

Structural Change

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Our preliminary findings

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States with faster aggregate labour productivity growth also experienced faster reduction in poverty Productivity growth due to both within sector and structural change in employment have contributed to poverty reduction The contribution of structural change in employment seems greater (though less precisely estimated).
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III. Policy messages


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Obstacles to structural transformation in output and employment will impede reductions in poverty Removing these involves addressing

Infrastructure bottlenecks (power, roads, etc.) Issues with land acquisition Education and skills Getting the design of labor regulations and social protection right
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Thank you
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