 National and Per Capita Income: Patterns, trends, aggregate and

sectoral composition and changes therein

 Broad factors determining National Income and distribution

For the above two (NI, PCI trends and sectoral composition) see own notes
(Macro Misc.)

 Measures of poverty
 Trends in poverty and inequality

Answers are below; first, a survey of inequality trends (from a paper by Jayati
Ghosh):

The most popular means of measuring inequality is Gini coefficient. Another

popular measure is changes and difference between areas in MPCE (Mean/
monthly per-capita consumption expenditure).

Poverty Questions- Chapter 09 (thin book)

1. Which elements affect the magnitude of the poverty ratio?

Answer:
- Nutrition norm (translated into monetary terms) in the base year
- Price deflator used to update the poverty line
- Pro-rata adjustment in the number of households in different
expenditure classes to determine the number of households below
and above the poverty line

2. Define: HDI, HPI

Note: In HDI, final calculation is cube root of the 3 indicators, not a simple
average (Geometric Mean- so that changes in any of the 3 factors do not
reflect linearly)

3. What is India’s rank on the HDI as of 2014?

Answer: 135/ 187

4. What is ‘IHDI’?

Answer: Inequality adjusted HDI; the IHDI is distribution-sensitive

average level of HD. Two countries with different distributions of
achievements can have the same average HDI value. Under perfect
equality the IHDI is equal to the HDI, but falls below the HDI when
inequality rises. The difference between the IHDI and HDI is the human
development cost of inequality, also termed – the loss to human
development due to inequality. The IHDI allows a direct link to
inequalities in dimensions, it can inform policies towards inequality
reduction, and leads to better understanding of inequalities across
population and their contribution to the overall human development cost.

5. What is the Multidimensional Poverty Index?

 Answer:
- The Global Multidimensional Poverty Index (MPI) was developed
by the Oxford Poverty & Human Development Initiative and
the United Nations Development Programme, and uses different
factors to determine poverty beyond income-based lists
- It replaced the previous Human Poverty Index
- It complements traditional income-based poverty measures by
capturing the severe deprivations that each person faces at the same
time with respect to education, health and living standards. The MPI
assesses poverty at the individual level. If someone is deprived in a
third or more of ten (weighted) indicators, the global index identifies
them as ‘MPI poor’, and the extent – or intensity – of their poverty is
measured by the number of deprivations they are experiencing
- Indicators:
- Health: Child mortality, Nutrition
- Education: Years of schooling, School attendance
- Living Standards: Cooking fuel, Toilet, Water, Electricity, Floor,
Assets

- Calculation: (incidence x intensity), where intensity = number of

indicators that the given household lacks
- India’s rank in 2014: 55

6. How do the MPI and HDI differ?

Answer:

- While both the HDI and MPI use the 3 broad

dimensions health, education and standard of living, HDI uses only
single indicators for each dimension of poverty while MPI uses more
than one indicator for each one
- This, amongst other reasons, has led to the MPI only being calculated
for just over 100 countries, where data is available for all these
diverse indicators, while HDI is calculated for almost all countries
- However, though HDI is thus more universally applicable, its relative
sparsity of indicators also makes it more susceptible to bias. Indeed
some studies have found it to be somewhat biased towards GDP per
capita, as demonstrated by a high correlation between HDI and the
log of GDPpc
- Hence, HDI has been criticized for ignoring other development
parameters
- Both HDI and MPI have been criticized by economists such as Ratan
Lal Basu for not taking "moral/emotional/spiritual dimensions" of
poverty into consideration. It has been attempted to capture these
additional factors by the "Global Happiness Index" in which a
country like Bhutan (which has dismal performance on other
indicators) has been ranked no. 1
7. How does India’s poverty ratio compare on MPI as compared to on its
national poverty line?

Answer:
In 2010, India’s poverty ratio according to MPI was over 40% (based on
PPP, $1.25/ day), while 29% under national poverty line. The difference
in poverty line, thus, widens substantially in case of India when this
indicator is used instead of the national poverty line; in some countries,
the opposite is true

8. What is the ‘Gender Development Index’?

Answer:
GDI = (Female HDI/ Male HDI)
India’s rank in 2014: 132/ 148

9. What is the ‘Gender Inequality Index’?

Answer:
Calculated based on 3 indicators:
- Reproductive health (MMR (200/lakh), Adolescent birth rate
(32/1000))
- Empowerment (Women in parliament (11%), Higher education (27%))
- Economic activity (Labour force participation- 29% for India)

- India’s rank in 2014: 127/ 157

10. According the WDR, what are the 4 main culprits that affect human
development worldwide?
Answer:
- Climate change
- Conflict
- Social unrest
- Economic crisis

11. What are the 6 prescriptions to combat these culprits?

Answer:
- Universal basic service: health, education, water supply, sanitation and
public safety (policing)
- A person is most vulnerable at 3 stages in life; government must
protect here: First 1000 days after birth; when Entering workforce;
when leaving workforce (due to retirement or disability). Otherwise,
setback at these three stages can be particularly difficult to overcome
and may have prolonged impacts. e.g. malnutrition => low skilled=>
less social security at retirement
- Social protection (80% of world lacks). Lack of social security = people
sell their assets, takeout children from school & sent them to child
labor
- Full employment (50% world informal jobs). Unemployment = crime,
suicides; children education, health also suffers
- Inclusion of women, disabled and minorities in development
 - Disaster preparedness. Because natural disasters worsen the existing
vulnerabilities, such as poverty, inequality, environmental degradation
and weak governance

12. What % of its GDP does India need to spend to ensure a social security
net? What should it entail?
Answer:
4%; this social security net should include NREGA, universal primary
health coverage, old age and disabled pensions and child benefits

13. Has poverty declined post reforms?

Answer:
Despite high GDP growth, poverty has declined very slowly- only
around 0.81 percentage points per year according to Tendulkar
estimates. Newer Rangarajan estimates are not available for years that
long ago, but it is likely that they will show an even worse situation

14. Explain: Lakdawala, Tendulkar, and Rangarajan methods for constructing

poverty line.
Answer:

Lakdawala: 2,400 calories in rural areas, 2,100 in urban areas, base year:
1973

Tendulkar: 2005 Tendulkar Committee improved upon the Lakdawala

committee methodology, but didn’t really change anything. Just the
bundle of consumption (which was based on 1973 consumption patterns
in Lakdawala) was updated to a 2003 bundle, to reflect changes in
consumption patterns. Differences in estimates arise from the 2 different
committees, but the extent of poverty decline is roughly similar in
percentage point terms

Rangarajan: There were complaints that Tendulkar committee had no

new normative content, and was still relying on old methodology of
consumption basket only (based on calorific value). The Rangarajan
Committee (2014) extended the line to consider (calories + proteins +
fat), and also include expenditure on basic items such as clothing,
education, rent, conveyance etc.

15. State Lakdawala estimates for 1993 and 2004.

Total: 36, 27
Rural: 37, 28
Urban: 32, 25

16. Compare poverty ratio in India in 1993, 2004, and 2011 according to
Tendulkar methodology (total, urban, and rural).
Answer:
 Total: 45, 37, 22
Rural: 50, 42, 26
Urban: 32, 26, 14

17. What are the Rangarajan estimates for 2011-12? How do they differ from
Tendulkar’s?
Answer:
Total: 30, Rural: 31, Urban: 26

Thus, compared to Tendulkar, rural poverty is similar, but urban

nearly doubles. Overall poverty estimates also go up significantly.

18. What has been the state-level performance in poverty reduction:

Answer:
- The four southern states (AP, TN, Kerala, Karnataka) report impressive
reduction in poverty; as do Maharashtra, Odisha (still 46%), MP, and
HP
- No improvement in UP (41%) and Bihar (55%)
- Very little improvement in West Bengal
- Deterioration in Assam
- Punjab and Haryana had relatively lower poverty rates to begin with,
but do not seem to have improved their position (around 20%)

19. What is the ‘Washington Consensus’ view on poverty reduction?

Answer: Government-directed anti-poverty programmes are useless; only
market-led reforms can create the growth that is required for the ‘trickle-
down’ effect to work. This will automatically eradicate poverty

20. How important has growth been in India’s poverty reduction?

Answer:
Until 1977, estimates show that rural and urban poverty proportion
fluctuated with no downward trend, remaining at around 51% in
1977. It is no coincidence that significant reduction in poverty since 1980
were associated with a near tripling of per-capita GDP growth to an
average of around 4% p.a. during 1980-1990, compared to 1.25% during
1950-1980

21. According to Dev and Ravi, if inequality had not increased between 1993
and 2004, what would have ben the effect on poverty reduction?
Answer:
Poverty reduction could have been higher by 4 percentage points (12%
instead of 8%)

22. What are the 2004 NFHS numbers on:

Answer:
- Malnutritioned children below 6 years of age: 49%
- Children not fully immunized: 56%
- Non-institutional deliveries: 60%
- Lack of electricity: 32%
 - No piped drinking water: 58%

Thus, the incidence of non-income poverty is much more alarming

than that of income poverty

Inequality Questions

1. What is Gini Coefficient?

Answer:
Measures the extent to which the distribution of income or consumption
among individuals deviates from equal distribution. A high value denotes
more unequal distribution

2. What was the value for India in 2010?

Answer: 37; some countries that are ranked higher in HDI (SA, Brazil,
China, Malaysia etc.) have higher inequality

3. What are the two measures of inequality used in HDR?

Answer:
Income Gini Coefficient, and the Quintile Income Ratio (measure of
average income of the richest 20% of population to that of poorest 20%)

4. In 2011, what was the MPCE for rural and urban areas in India?
Answer:
Rs. 1300 for rural, Rs. 2400 for urban; this shows high rural-urban income
disparity

5. What has been happening to the share of the richest 1% of the

population?
Answer:
There were no $-billionaires in India in 2000; today there are over 100.
Inequality among the rich is also increasing, with the share of the topmost
1% in the income distribution rising steadily since the 1990s (top 1%
have 50% wealth; 10% have 75%)

6. What is the traditional view on the impact of rising income inequality on

future growth?
Answer:
Traditional view is that rising income inequality fosters higher growth by
generating greater incentives to save and invest; this has largely been
discredited, because higher inequality also leads to social conflict, and in
any case, imperfect credit markets, underinvestment in human and
physical capital etc. are associated with inequality, and these lead to
lower growth

7. What has been the impact of reforms on state-level inequality?

Answer:
States that have grown faster have also experienced higher increases in
inequality. However, this is largely because richer states have grown
 faster than the poorer states, in an environment where the poorer states
have also been growing. It is expected that even with this, due to
migration, prosperity resulting from higher growth will ‘diffuse’ to slow-
growth, poorer regions

8. What has been the impact of reforms on urban inequality?

Answer:
Gini coefficient for urban areas was 34% in 1993; rose to 39% in 2009

9. What has been the impact of reforms on SCs and STs?

Answer:
Studies show that wages of SCs and STs have been converging with those
of non-SCs since 1983

Patterns, trends, aggregate and sectoral composition and changes therein

in National and Per Capita Income

Rates of economic growth in India during the 20th century (CSO data):

1950- 2002- 2007-

1960s 1970s 1980s 1990s 2000s
2004 07 (X) 12 (XI)
Agriculture 2.5 2.5 1.3 4.4 3.2 2.5 2.4 3.3
Industry 5.3 6.3 3.6 5.9 5.7 7.7 9.2 6.7
Services 5.4 4.8 4.4 6.5 7.3 8.6 8.8 9.9

GDP 4.2 4 3 5.6 5.8 7.2 7.6 7.9

GDP per
2.1 1.8 0.9 3.7 3.3 5.5
capita*

* The growth rate of per capita income roughly equals the difference between the
growth rate of income and the growth rate of population

Trends of sectoral shares in GDP:

Sector 1951 1961 1971 1981 1991 2001 2013

Primary 53 48 42 36 30 24 14
Secondary 17 21 24 26 28 27 26
Manufacturing 13.5 14.5 15.4
(part of
secondary)
Tertiary 30 31 34 38 42 50 60

1. Into what broad phases can the Indian growth experience be divided?
Mention salient features of each, along with growth rate of GDP, and GFCF
percentage.
See page 137-139 of the thin book

2. What explains India’s growth turnaround in 1980s?

 Answer:
Growth turnaround in 1980s was puzzling, because it happened before
any large-scale macroeconomic reforms (trade policy actually became
more restrictive, and there was very little product or labour market
reform). Also, growth was not driven by manufactured exports (unlike the
East Asian Tigers). It was, instead, the services sector that led the growth
charge.

Growth turnaround can be attributed to:

 Pro-business tilt (not pro-market- see difference on page 141)
 These small shifts elicited a large productivity response
 Expansionary macroeconomic policies stimulated aggregate demand
 Significant increase in public investment (15% in 1970s; 20% in
1980s) helped alleviate supply constraints
 Liberalization of import of capital goods
 Institutional capacities created during the preceding 30 years helped:
legal framework, higher education, science and technology, managerial
capabilities etc.

3. How would you characterize the ‘boom’ seen in the Indian economy in
2003-2008?

Answer:
Some call it the ‘best’ phase in India’s growth history:
 Annual average growth rate was about 8.5%
 This was an episode of export-led growth, with export-to-GDP ratio
going up by 9 percentage points in the 5 years
 However, it was a debt-led boom, leading to rapid monetary policy
expansion, inflationary pressures, real exchange rate appreciation, and
widening current account deficits
 Expansion of bank credit, topped by a flood of foreign private capital
(FDI rose from 0.6% of GDP in 2003 to 2.8% in 2007) enabled the
expansion of aggregate supply
 Corporate debt burden resulting from the boom years has now turned
onerous, in turn swelling the NPAs of the banking sector
 Most of the FDI seen contributed little by way of technology or to the
economy’s long-term growth potential

4. Roughly, what is the % of GFCF in India’s GDP? How much of this is public,
private corporate, and household? What does this show?

Answer:
Total is around 35%; Public: 8%; Corporate: 9%: Household: 15% (due to
huge acquisition of valuables, including gold). Thus, though the GFCF %
might look high, a major portion of it comes from non-productive
investments such as valuables. Moreover, post-2008, there has been a
sharp slowdown in corporate investment, which is the source of future
supply, and of future growth potential
5. Roughly, what is the domestic savings rate?
Answer: 30% (historic high in 2007 was 37%)

6. See statewise growth experience since reforms, Page 178 or so.