Declining poverty in India: A Decomposition analysis

In an attempt to delineate sources of change in poverty in India and to assess their relative contributions in reducing (or raising) the poverty incidence in the eighties and nineties this paper employs two decomposition exercises. The first one expresses the percentage change in the poverty index between two time points into growth effect, inequality effect and the population shift effect and the second one measures it in terms of changes in per capita income (GDP), sectoral composition of value added, labour productivity and employment in organized manufacturing relative to the poor who are largely engaged in low productivity activities. The growth effect which dominates over the inequality and population shift effects caused poverty to decline both in the eighties and nineties. A rise in the beneficial effect of growth both in the rural and urban areas and a fall in the adverse inequality and population shift effects in the urban areas in the nineties compared to the eighties, are noteworthy. The change in the composition of growth (the shift in value added mix towards industry and tertiary activities) seems to have caused a larger decline in the incidence of poverty in the nineties than the eighties. Labour productivity growth and employment growth in the organized industry are also important for poverty reduction. Economic reforms seem to have a positive effect on the levels of living though a great deal needs to be done to reduce inequality in the process of growth and make the latter pro-poor.