PROJECT REPORT

ON
A STUDY ON FACTORS AFFECTING THE ROLE
OF MICRO-FINANCE IN THE DEVELOPMENT
OF STARTUPS IN INDIA

Submitted in partial fulfillment of the requirements

for the award of the degree of

Master of Business Administration (MBA)

To
Guru Gobind Singh Indraprastha University, Delhi

Guide: Submitted by:

Dr. Vikas Gupta Chitraksh Murgai
Enrollment No.:101213100210

GITARATTAN INTERNATIONAL BUSINESS SCHOOL

DELHI-110085
Batch: (2021-2023)
 CERTIFICATE

I, Mr. Chitraksh Murgai Dr Roll No.101213100210, certify that the Project

Report/Dissertation entitled “A Study on Factors Affecting the Role of Micro-

Finance in the Development of Startups in India” is completed by me and it is an

authentic work carried out by me at A Study on Factors Affecting the Role of

Micro-Finance in the Development of Startups in India. The matter embodied in

this project work has not been submitted earlier for the award of any degree or

diploma to the best of my knowledge and belief.

Signature of the Student

Date:

Certified that the Project Report/Dissertation (entitled “A Study on Factors

Affecting the Role of Micro-Finance in the Development of Startups in India”

done by Mr.Chitraksh Murgai, Enrollment No.101213100210, is completed under

my guidance.

Signature of the Guide

Date:
Dr. Vikas Gupta

Countersigned
Director/Project Coordinator

ii
 ACKNOWLEDGEMENT
It was a great learning experience for me to work on my project for two months in

such a charged and highly motivated organization. As a student of Gitarattan

International Business School, I got an opportunity for doing my summer internship

in A Study on Factors Affecting the Role of Micro-Finance in the Development of

Startups in India I would like to express my deep gratitude to in A Study on

Factors Affecting the Role of Micro-Finance in the Development of Startups in

India for giving me the opportunity to hone my skills and learning through a practical

approach with this summer Internship Project.

I am deeply grateful to my faculty guide Dr.Vikas Gupta, , Gitarattan

International Business School, my internal mentor, who supported me immensely

throughout the project through discussions and by always showing me the right course

to pursue. The information and suggestions provided by he proved to be most

valuable.

Chitraksh Murgai
Enrolment No:101213100210

iii
 EXECUTIVE SUMMARY

The present study on “A Study on Factors Affecting the Role of Micro-Finance in

the Development of Startups in India” Microfinance is a basis of financial services

for entrepreneurs and small businesses deficient in contact with banking and

associated services. The two key systems for the release of financial services to such

customers include ‘relationship-based banking’ for individual entrepreneurs and small

businesses along with ‘group-based models’ where several entrepreneurs come

together to apply for loans and other services as a group. Similar to banking operation

traditions, microfinance entities are supposed to charge their lender’s interests on

loans. In most cases the so-called interest rates are lower than those charged by

normal banks, certain rivals of this concept accuse microfinance entities of creating

gain by manipulating the poor people’s money.

MFI (Micro Finance In India) is play very important role in development.

Microfinance is a very important source of financial services for people and

microenterprises that do not have easy access to banking and related services. It is a

delivery of financial services to such clients were Relationship Based banking for

individuals entrepreneurs ,Small Business, Group Based Models Many of those who

promote MFI generally believe that such access will help poor people out of poverty..

For others it is a way for poor to manage their finances more effectively & take

advantage of economic opportunities while managing the risks. The terms have

evolved-from micro-credit to micro-finance, & now 'financial inclusion'.Microfinance

programs provide small loans to borrowers who are poor people for their varied needs

such as consumption, shelter, income generation and self employment etc. In some

cases, microfinance programs offer a combination of several other services to their

iv
clients, in addition to credit. These include linkages with savings and insurance

avenues, skill development training and marketing network. Microfinance programs,

thus, assumes significance since they facilitate poverty reduction through promotion

of sustainable livelihood.

Purpose:

1. To know the Concept of Micro finance India

2. To study the role of Micro finance In India

Approach/Methodology:

The research was conducted by: The sources of secondary data for the study are the

reports of the Role of Microfinance in India.

Secondary Data: The secondary data is collected from company publications,

magazines, journals newspapers and websites.

TOOLS USED
• MS EXCEL

Findings:

As a part of dynamic industry. This study or Microfinance movement in India is

making rapid strides and has raised high expectations in the country about the role

that it can play in poverty reduction and economic development. The study is mainly

concentrated around eastern Uttar Pradesh. For this study we have considered

Gorakhpur district. The data provided has been collected from different sources to

reach to a proper conclusion detailed in other chapter further. This study showcases

the significant contribution of the MFIs to fairly large section of the clients and how it

does help in the economic development of developing nation. This will help in

understanding and appreciating the role that MFIs can play, in ameliorating the lot of

poor and the underserved.

v
 CONTENTS

S No Topic Page No

1 Certificate (s) -

2 Acknowledgement (s) -

3 Executive Summary -

4 List of Tables -

5 List of Figures -

6 List of Symbols -

7 List of Abbreviations -

8 Chapter-1: Introduction

9 Chapter-2: Literature Review

10 Chapter-3: Data Presentation & Analysis

11 Chapter-4: Summary and Conclusions

12 Chapter-5: Recommendations

13 References/Bibliography

14 Appendices/Annexure

vi
 LIST OF TABLES

Table No Title Page

No

Table No. 3.1 52

Table No. 3.2 55

LIST OF FIGURES

Figure No Title Page No

Fig. 1.1 11

Fig. 3.1 32

LISTABLE OF SYMBOLS

S No Symbol Nomenclature & Meaning

1  Sigma (Summation)

2 @ At the rate

3 % Percentage

vii
 LISTABLE OF ABBREVIATIONS

S No Abbreviated Name Full Name

1. AMEX American Stock and Options Exchange

2. B-B IPO Buyout-backed IPO

3. CS Customer Satisfaction

4. CRM Customer Relationship Management

5. DAI Data Analysis & Interpretation

6. EPS Earning Per Share

7. ES Employee Satisfaction

8. FA Financial Analysis

9. IP Industry profile

10. IPO Initial public offering

11. MKTS Marketing Strategy

12. MSE Bombay Stock Exchange

13. OBS Objective of the study

14. REIT Real estate investment trust

15. RM Research methodology

viii
 CHAPTER-1
INTRODUCTION
Microfinance is a basis of financial services for entrepreneurs and small businesses

deficient in contact with banking and associated services. The two key systems for the

release of financial services to such customers include ‘relationship-based banking’

for individual entrepreneurs and small businesses along with ‘group-based models’

where several entrepreneurs come together to apply for loans and other services as a

group. Similar to banking operation traditions, microfinance entities are supposed to

charge their lender’s interests on loans. In most cases the so-called interest rates are

lower than those charged by normal banks, certain rivals of this concept accuse

microfinance entities of creating gain by manipulating the poor people’s money.

MFI (Micro Finance In India) is play very important role in development.

Microfinance is a very important source of financial services for people and

microenterprises that do not have easy access to banking and related services. It is a

delivery of financial services to such clients were Relationship Based banking for

individuals entrepreneurs ,Small Business, Group Based Models Many of those who

promote MFI generally believe that such access will help poor people out of poverty..

For others it is a way for poor to manage their finances more effectively & take

advantage of economic opportunities while managing the risks. The terms have

evolved-from micro-credit to micro-finance, & now 'financial inclusion'.

This research aims at exploring the role of micro finance in empowerment of small

scale entrepreneurs. This chapter presents the background to the study, role of

microfinance, objectives of microfinance and small scale industries, relationship

between microfinance, entrepreneurship and financial inclusion, need for the study,

research gap, statement of the problem, the purpose and significance of the study. It

1
also provides a brief description about methodology. Further scope of the study and

definition of the key terms to be used in this study are included. Microfinance can be

defined as any activity that includes the provision of financial services such as credit,

savings, and insurance to low income individuals which fall just above the nationally

defined poverty line, and poor individuals which fall below that poverty line, with the

goal of creating social value. The creation of social value includes poverty alleviation

and the broader impact of improving livelihood opportunities through the provision of

capital for micro enterprise, and insurance and savings for risk mitigation and

consumption smoothing.

So, Microfinance is the provision of broad range of financial services such as

deposits, loans, payment services, money transfers and insurance to poor people and

low income households and their micro enterprises. It is an effective tool for making

the banking services accessible to the rural unbanked areas. Improved access and

efficient provision of savings, credit and insurance facilities would enable the poor to

set up micro enterprise, build up economic assets, manage the risks better and

enhance income earning capacity and resultantly improve their standard of living.

Microfinance is usually understood to entail the provision of financial services to

micro- entrepreneurs and small businesses that lack access to banking and related

services due to the high transaction costs associated with serving these client

categories. The two main mechanisms for the delivery of financial services to such

clients are (1) relationship-based banking for individual entrepreneurs and small

businesses; and (2) group-based models, where several entrepreneurs come together

to apply for loans and other services as a group.

2
In some regions, for example Southern Africa, microfinance is used to describe the

supply of financial services to low-income employees, which is closer to the retail

finance model prevalent in mainstream banking.

For some, microfinance is a movement whose object is "a world in which as many

poor and near-poor households as possible have permanent access to an appropriate

range of high quality financial services, including not just credit but also savings,

insurance, and fund transfers." Many of those who promote microfinance generally

believe that such access will help poor people out of poverty. For others, microfinance

is a way to promote economic development, employment and growth through the

support of micro-entrepreneurs and small businesses. Microfinance is a broad

category of services, which includes microcredit. Microcredit is provision of credit

services to poor clients. Although microcredit is one of the aspects of microfinance,

conflation of the two terms is endemic in public discourse. Critics often attack

microcredit while referring to it indiscriminately as either 'microcredit' or

'microfinance'.

Microfinance Background & History in World: Over the past centuries, practical

visionaries, from the Franciscan monks who founded the community-oriented

pawnshops of the 15th century to the founders of the European credit union

movement in the 19th century (such as Friedrich Wilhelm Raiffeisen) and the

founders of the microcredit movement in the 1970s (such as Muhammad Yunus and

Al Whittaker), have tested practices and built institutions designed to bring the kinds

of opportunities and risk-management tools that financial services can provide to the

doorsteps of poor people.

While the success of the Grameen Bank (which now serves over 7 million poor

Bangladeshi women) has inspired the world, it has proved difficult to replicate this

3
success. In nations with lower population densities, meeting the operating costs of a

retail branch by serving nearby customers has proven considerably more

challenging. Hans Dieter Seibel, board member of the European Microfinance

Platform, is in favour of the group model. This particular model (used by many

Microfinance institutions) makes financial sense, he says, because it reduces

transaction costs. Microfinance programmes also need to be based on local funds.

The history of micro financing can be traced back as far as the middle of the 1800s,

when the theorist Lysander Spooner was writing about the benefits of small credits to

entrepreneurs and farmers as a way of getting the people out of poverty.

Independently of Spooner, Friedrich Wilhelm Raiffeisen founded the first

cooperative lending banks to support farmers in rural Germany.

1.1 Profile Organisation/Company

1.1.1 Briefly explain the nature of the organisation and its business

Microfinance is a general term to describe financial services to low-income

individuals or to those who do not have access to typical banking services.

Microfinance is also the idea that low-income individuals are capable of lifting

themselves out of poverty if given access to financial services. While some studies

indicate that microfinance can play a role in the battle against poverty, it is also

recognized that is not always the appropriate method, and that it should never be seen

as the only tool for ending poverty.

Microfinance is defined as any activity that includes the provision of financial

services such as credit, savings, and insurance to low income individuals which fall

just above the nationally defined poverty line, and poor individuals which fall below

that poverty line, with the goal of creating social value. The creation of social value

includes poverty alleviation and the broader impact of improving livelihood

4
opportunities through the provision of capital for micro enterprise, and insurance and

savings for risk mitigation and consumption smoothing. A large variety of actors

provide microfinance in India, using a range of microfinance delivery methods. Since

the ICICI Bank in India, various actors have endeavored to provide access to financial

services to the poor in creative ways. Governments also have piloted national

programs, NGOs have undertaken the activity of raising donor funds for on-lending,

and some banks have partnered with public organizations or made small inroads

themselves in providing such services. This has resulted in a rather broad definition of

microfinance as any activity that targets poor and low-income individuals for the

provision of financial services. The range of activities undertaken in microfinance

include group lending, individual lending, the provision of savings and insurance,

capacity building, and agricultural business development services. Whatever the form

of activity however, the overarching goal that unifies all actors in the provision of

microfinance is the creation of social value.

‘Microfinance refers to small scale financial services for both credits and deposits-

that are provided to people who farm or fish or herd; operate small or micro enterprise

where goods are produced, recycled, repaired, or traded; provide services; work for

wages or commissions; gain income from renting out small amounts of land, vehicles,

draft animals, or machinery and tools; and to other individuals and local groups in

developing countries in both rural and urban areas’.

1.1.2 Type of industry & business

In the late 1970s the concept of microfinance had evolved. Although, microfinance

have a long history from the beginning of the 20th century we will concentrate mainly

on the period after 1960.

5
Many credit groups have been operating in many countries for several years, for

example, the "chit funds" (India), tontines" (West Africa), "susus" (Ghana),

"pasanaku" (Bolivia) etc. Besides, many formal saving and credit institutions have

been working for a long time throughout the world.

During the early and mid 1990s various credit institutions had been formed in Europe

by some organized poor people from both the rural and urban areas. These institutions

were named Credit Unions, People's Bank etc. The main aim of these institutions was

to provide easy access to credit to the poor people who were neglected by the big

financial institutions and banks.

In the early 1970s, few experimental programs had started in Bangladesh, Brazil and

some other countries. The poor people had been given some small loans to invest in

micro-business. This kind of micro credit was given on the basis of solidarity group

lending, that is, each and every member of that group guaranteed the repayment of the

loan of all the members.

Many banks and financial institutions have been pioneering the microfinance program

after 1970. These are listed below.

ACCION International: This institution had been established by a law student of

Latin America to help the poor people residing in the rural and urban areas of the

Latin American countries. Today, in 2008, it is one of the most important

microfinance institutions of the world. Its network of lending partner comprises not

only Latin America but also US and Africa.

SEWA Bank: In 1973, the Self Employed Women's Association (SEWA) of Gujarat

(in India) formed a bank, named as Mahila SEWA Cooperative Bank, to access

certain financial services easily. Almost 4 thousand women contributed their share

6
capital to form the bank. Today the number of the SEWA Bank's active client is more

than 30,000.

GRAMEEN Bank: Credit unions and lending cooperatives have been around

hundreds of years. However, the pioneering of modern microfinance is often credited

to Dr. Mohammad Yunus, who began experimenting with lending to poor women in

the village of Jobra, Bangladesh during his tenure as a professor of economics at

Chittagong University in the 1970s. He would go on to found Grameen Bank in 1983

and win the Nobel Peace Price in 2006.

Since then, innovation in microfinance has continued and providers of financial

services to the poor continue to evolve. Today, the World Bank estimates that about

160 million people in developing countries are served by microfinance. Grameen

Bank (Bangladesh) was formed by the Nobel Peace Prize (2006) winner Dr

Muhammad Younus in 1983. This bank is now serving almost 400, 0000 poor people

of Bangladesh. Not only that, but also the success of Grameen Bank has stimulated

the formation of other several microfinance institutions like, ASA, BRAC and

PROSHIKA .

1.1.3 Company is operating: Earlier Bandhan Bank Limited was known as Bandhan

Financial Services Limited, the largest microfinance company based out of Kolkata.

Bandhan Financial Services Limited received the banking license from RBI in April

2014. Presently, Bandhan Bank Limited has 4559 banking outlets helping it reach

2.01 crore customers.

India's microfinance sector is fragmented with more than 3000 microfinance

companies (MGIs), NGOs and NGO-MFIs. The top 10 microfinance companies in

India are estimated to account for almost 74 per cent of the total loans outstanding.

7
According to International Labor Organization (ILO), “Microfinance is an economic

development approach that involves providing financial services through institutions

to low income clients”.

In India, Microfinance has been defined by “The National Microfinance Taskforce,

1999” as “provision of thrift, credit and other financial services and products of very

small amounts to the poor in rural, semi-urban or urban areas for enabling them to

raise their income levels and improve living standards”.

"The poor stay poor, not because they are lazy but because they have no access to

capital.

"Microfinance is the supply of loans, savings, and other basic financial services to the

poor."

As these financial services usually involve small amounts of money - small loans,

small savings, etc. - the term "microfinance" helps to differentiate these services from

those which formal banks provide

It's easy to imagine poor people don't need financial services, but when you think

about it they are using these services already, although they might look a little

different.

"Poor people save all the time, although mostly in informal ways. They invest in

assets such as gold, jewelry, domestic animals, building materials, and things that can

be easily exchanged for cash. They may set aside corn from their harvest to sell at a

later date. They bury cash in the garden or stash it under the mattress. They participate

in informal savings groups where everyone contributes a small amount of cash each

day, week, or month, and is successively awarded the pot on a rotating basis. Some of

these groups allow members to borrow from the pot as well. The poor also give their

money to neighbors to hold or pay local cash collectors to keep it safe.

8
"However widely used, informal savings mechanisms have serious limitations. It is

not possible, for example, to cut a leg off a goat when the family suddenly needs a

small amount of cash. In-kind savings are subject to fluctuations in commodity prices,

destruction by insects, fire, thieves, or illness (in the case of livestock). Informal

rotating savings groups tend to be small and rotate limited amounts of money.

Moreover, these groups often require rigid amounts of money at set intervals and do

not react to changes in their members' ability to save. Perhaps most importantly, the

poor are more likely to lose their money through fraud or mismanagement in informal

savings arrangements than are depositors in formal financial institutions.

“Poor rarely access services through the formal financial sector. They address their

need for financial services through a variety of financial relationships, mostly

informal."

Role of Microfinance: The micro credit of microfinance prename was first initiated

in the year 1976 in Bangladesh with promise of providing credit to the poor without

collateral , alleviating poverty and unleashing human creativity and endeavor of the

poor people. Microfinance impact studies have demonstrated that

1. Microfinance helps poor households meet basic needs and protects them against

risks.

2. The use of financial services by low-income households leads to improvements in

household economic welfare and enterprise stability and growth.

3. By supporting women’s economic participation, microfinance empowers women,

thereby promoting gender-equity and improving household well being.

4. The level of impact relates to the length of time clients have had access to

financial services.

9
Difference between micro credit and microfinance: Micro credit refers to very

small loans for unsalaried borrowers with little or no collateral, provided by legally

registered institutions. Currently, consumer credit provided to salaried workers based

on automated credit scoring is usually not included in the definition of micro credit,

although this may change.

Microfinance typically refers to micro credit, savings, insurance, money transfers, and

other financial products targeted at poor and low-income people.

Borrowers: Most micro credit borrowers have micro enterprises—unsalaried,

informal income-generating activities. However, micro loans may not predominantly

be used to start or finance micro enterprises. Scattered research suggests that only half

or less of loan proceeds are used for business purposes. The remainder supports a

wide range of household cash management needs, including stabilizing consumption

and spreading out large, lumpy cash needs like education fees, medical expenses, or

lifecycle events such as weddings and funerals.

Some MFIs provide non-financial products, such as business development or health

services. Commercial and government-owned banks that offer microfinance services

are frequently referred to as MFIs, even though only a portion of their assets may be

committed to financial services to the poor.

Activities in Microfinance:

Micro credit: It is a small amount of money loaned to a client by a bank or other

institution. Micro credit can be offered, often without collateral, to an individual or

through group lending.

Micro savings: These are deposit services that allow one to save small amounts of

money for future use. Often without minimum balance requirements, these savings

accounts allow households to save in order to meet unexpected expenses and plan for

10
future expenses Micro insurance: It is a system by which people, businesses and other

organizations make a payment to share risk. Access to insurance enables

entrepreneurs to concentrate more on developing their businesses while mitigating

other risks affecting property, health or the ability to work.

Remittances: These are transfer of funds from people in one place to people in

another, usually across borders to family and friends. Compared with other sources of

capital that can fluctuate depending on the political or economic climate, remittances

are a relatively steady source of funds.

Product Design: The starting point is: how do MFIs decide what product s to offer?

The actual loan products need to be designed according to the demand of the target

market. Besides the important question of what risks to cover, organizations also have

to decide whether they want to bundle many different benefits into one basket policy,

or whether it is more appropriate to keep the product simple. For marketing purposes,

MFI‘s sometimes prefer the basket cover, since it can make the policies sound

comprehensive, but is that the right approach for the low-income market? After

picking products, one must also understand how they are priced. What assumptions do

the organizations make with regard to operating costs, risk premiums, and

reinsurance, and how did they come to those conclusions? Would their clients be

willing to pay more for greater benefits? From price, the logical next set of questions

involves efficiency. Indeed, given the relative high costs of delivering large volumes

of small policies, maximizing efficiency is a critical strategy to ensuring that the

products are affordable to the low-income market. One way is to make the products

mandatory, which increases volumes, reduces transaction costs and minimizes

adverse selection. What does an organization lose by offering mandatory insurance,

and how does it overcome the disadvantages? MFI‘s can combine a mandatory

11
product with some voluntary features to make the service more us to mar-oriented

while.

Techniques of Product Design: To design a loan product to meet borrower needs it

is important to understand the cash pattern of the borrowers. Cash pattern is important

so far as they affect the debt capacity of the borrowers. Lenders must ensure that

borrowers have sufficient cash inflow to cover loan payments when they are due

efficiency depends less on the delivery model than on the simplicity of the product or

product menu. Simple products work best because they are easier to administer and

easier for clients to understand. Another efficiency strategy is to use technology to

reduce paperwork, manual processing and errors.

MFIs need to conduct a costing analysis to determine how much they need to earn in

commission to cover their administrative expenses.

1.1.4 Mission, Vision & Values

The long-term vision of MFI is a society 'where citizens have equal and sufficient

economic and social opportunities to improve their standards of living, and where

they can contribute productively towards the overall development of the country'.

To empower the poor particularly poor women in rural areas to take greater control of

their own lives and significantly improve their standard of living by increasing their

opportunities for making productive economic investments.

• To be a leading financial institution who provides excellent services to poor

families in order to create benefits for clients, shareholders and society.

• Bank’s vision is to be Nation’s leading commercial bank providing superior

financial services to all segments of the community.

• To be a top commercial bank Who Gives Priority To Customer Satisfaction.

• We bring interactive entertainment to the world.

12
• With the help of our customers and staff we bring good things to life.

• The Public Library creates opportunities.

THE MISSION

The mission of About Microfinance + is to serve as a clearinghouse of valuable

information on microfinance, financial inclusion, and impact investing to meet the

needs of professionals and students alike.

• To improve income in agricultural, commercial and manufacturing enterprises in

the rural areas of XXX by providing loans at reasonable interest rates and

encouraging savings, and specifically targeting women and poor families in order

to help them achieve a higher income.

• To promote the general well-being of the poor people in the province and

transform them into self-reliant, self-managing, just and peaceful living

communities Our mission is to provide micro, small and medium entrepreneurs

with the wherewithal to manage their financial resources efficiently and by doing

so to improve the quality of their lives. Our business is to promote human dignity

through the development of self reliant, participatory financial institutions.

• To provide quality and innovative financial and nonfinancial services that

empowers rural banks and productive poor to excellence.

• To provide financial services that are suitable for the needs of most of the rural

population while ensuring MFI's long term sustainability". XXX is an MFI who is

persistent in our quest for excellent financial products, quality services and

continuous learning.

1.1.5 Geographical & Functional area of Operation

MIX is privileged to take this opportunity to showcase the result of this collaboration:

the India Microfinance Geographical Index. The India Microfinance Geographical

13
Index is part of an interactive platform created by MIX that maps the reach of Indian

MFIs across the various states and districts. The Microfinance Geographical Index

measures the geographical spread of microfinance institutions. In this first edition, the

Microfinance Geographical Index covers 642 districts and 35 states/UTs at a quarterly

interval. The current index scores are calculated based on the data provided by the

institutions for the period of December 2014 quarter, March 2015 quarter and June

2015 quarter. This can be viewed on MIX Market and FinclusionLab. The following

analysis is divided into three sections: 1. Methodology for the Index 2. State-level

Analysis 3. District-level Analysis

Function Area: The studies carried out by Pollinger and Cordero (2007) confirmed

that microfinance banks in their various models assist to reduce and alleviate poverty

and enhance economic development, particularly in developing economies. In

Nigeria, they have accelerated the operation of poverty alleviation programmes of the

Government and supported promising entrepreneurs while aiding new ones to emerge.

The role of microfinance banks in the promotion of national economic development is

entrenched in the objectives of the microfinance banking scheme in Nigeria that was

formulated in line with the objectives of the Millennium Development Goals (MDGs),

the National Economic Empowerment and Development Strategy (NEEDS) and the

Vision 2020. These roles include the promotion of rural development through

financial intermediation, stimulation of productive activities in the rural sector,

development of banking habits among rural dwellers, ensuring the development of an

integrated national financial system and improving the economic status of smallscale

producers in the rural and urban areas. Microfinance banks (MFBs) are therefore

strategically positioned to expand the financial frontier and stimulate the exploitation

and development of economic opportunities in the informal sector through the

14
provision of traditional and even non-traditional banking services such as technical

and managerial assistance, sale of output and input purchase financing, machinery and

equipment leasing and community development financing.

Operations: Microfinance is a banking service provided to unemployed or low-

income individuals or groups who otherwise would have no other access to financial

services. Microfinance allows people to take on reasonable small business loans

safely, and in a manner that is consistent with ethical lending practices.

• SHG-Bank Linkage Programme (SBLP) - This channel was initiated by

NABARD in the year 1992. This model encourages financially backward

women to come together to form groups of 10-15 members. They contribute

their individual savings to the group at regular intervals. Loans are provided to

members of the group from these contributions. SHGs are also offered bank

loans at later stages, and these loans can be used for funding income

generating activities.

• This model has achieved a lot of success in the past and it has also gained a lot

of popularity for contributing to the empowerment of women in the country.

Once these self-sustaining groups reach stability, they function almost

independently with minimal support from NABARD, SIDBI, and NGOs.

• Microfinance Institutions (MFIs) - These institutions have microfinance as

their primary operation. These lend through the concept of Joint Liability

Group (JLG), i.e., an informal group that consists of 5-10 members who seek

loans either jointly or individually.

1.1.6 Size of organisation & its structure

The structure of the MFI's in India is either the SHG Model or the JLG Model and

there are large numbers of MFIs who practice one of these models.

15
Groups Organised by Microfinance Institutions in India

• Joint Liability Group (JLG) This is usually an informal group that consists of

4-10 individuals who seek loans against mutual guarantee. ...

• Self Help Group (SHG) ...

• Grameen Model Bank. ...

• Rural Cooperatives.

1.1.7 Market share & position of the company in the industry

Market share in the microfinance industry in India from Published by Statista

Research Department, Jun 17, 2021 2020, scheduled commercial banks in India had a

market share of 42 percent on loans within the microfinance industry. This was an

increase by two percent in comparison to December 2019. Microfinance institutions

16
within non-banking financial companies came second with a market share of 32

percent. Small finance banks had a market share of 17 percent. The total value of

outstanding portfolios stood at over two trillion Indian rupees.

As a result, the share of NBFC-MFIs in microfinance sector stands at a little over 30

per cent as on September 2020 in terms of gross loan portfolio of `2.27 lakh crore.

Product range

Microfinance is a way in which loans, credit, insurance, access to savings accounts,

and money transfers are provided to small business owners and entrepreneurs in the

underdeveloped parts of India. The beneficiaries of microfinance are those who do not

have access to these traditional financial resources.

Microfinance products

Product Purpose Terms

Mid-Term Loan Same as IGL, available at middle (week 50 weeks loan paid

(MTL) 25) of IGL weekly

17
Emergency Loan All emergencies such as health, funerals, 20 weeks loan

(EL) hospitalization

Individual Loan Income generation, asset development 1-2 years loan repaid

(IL) monthly

Product & services of Microfinance

Financial Services Other Financial Services Non Financial Services

1. Credit Services-i Small Micro-insurance, Life Family Health and

Credit, Small Business Insurance , Health Sanitation Education,

Credit. Insurance , Loan for Financial Education,

2. Deposit Services - Housing, Education, Micro-entrepreneur

Voluntari Savings Health. Training.

Services, Manda tory

Savings.

18
Microfinance institutions act as a supplement to the services offered by banks. Apart

from offering micro credit, financial services such as insurance, savings, and

remittance are provided. Non-financial services such as training, counselling, and

supporting borrowers are offered in the most convenient manner as well.

Microfinance Services

• Group Loans. ...

• Individual Business Loans. ...

• Agriculture Loans. ...

• Insurance. ...

• Money Transfers. ...

• Energy Loans. ...

• Savings Accounts.

Present leadership-Management

Regular Members

• Ahon Sa Hirap, Inc. ...

• Alalay Sa Kaunlaran Microfinance Social Development Inc. ...

• ARDCI Microfinance, Inc. ...

• ASA Philippines Foundation. ...

• Bangko Kabayan (A Private Development Bank) ...

• Bayan Enterprise Developers Growers and Evolvers-Microfinance and

Business Services Inc. ...

• Bicol Microfinance Council, Inc.

19
Strengths & weaknesses

SWOT stands for Strength, Weakness, Opportunity, and Threat.

Strength

• Helped in reducing the poverty: The main aim of Micro Finance is to provide

the loan to the individuals who are below the poverty line and cannot able to

access from the commercial banks. As we know that Indian, more than 350

million people in India are below the poverty and for them the Micro Finance is

more than the life. By providing small loans to this people Micro finance helps in

reducing the poverty.

• Huge networking available: For MFIs and for borrower, both the huge network

is there. In India there are many more than 350 million who are below the poverty

line, so for MFIs there is a huge demand and network of people. And for borrower

there are many small and medium size MFIs are available in even remote areas.

Weakness

• Not properly regulated: In India the Rules and Regulation of Micro Finance

Institutions are not regulated properly. In the absent of the rules and regulation

there would be high case of credit risk and defaults. In the shed of the proper rules

and regulation the Micro finance can function properly and efficiently.

• High number of people access to informal sources: According to the World

Bank report 80% of the Indian poor can‘t access to formal source and therefore

they depend on the informal sources for their borrowing and that informal charges

40 to 120% p.a.

• Concentrating on few people only: India is considered as the second fastest

developing country after China, with GDP over 8.5% from the past 5 years. But

33
 this all interesting figures are just because of few people. India‘s 70% of the

population lives in rural area, and that portion is not fully touched.

Opportunity

• Huge demand and supply gap: There is a huge demand and supply gap among

the borrowers and issuers. In India around 350 million of the people are poor and

only few MFIs there to serving them.

• There is huge opportunity for the MFIs to serve the poor people and increase their

living standard. The annual demand of Micro loans is nearly Rs 60,000 crore and

only 5456 crore are disbursed to the borrower.( April 09)

• Employment Opportunity: Micro Finance helps the poor people by not only

providing them with loan but also helps them in their business; educate them and

their children etc.

• So in this Micro Finance helping in increase the employment opportunity for them

and for the society.

• Huge Untapped Market: India‘s total population is more than 1000 million and

out of 350 million is living below poverty line. So there is a huge opportunity for

the MFIs to meet the demand of that unsaved customers and Micro Finance

should not leave any stones unturned to grab the untapped market.

• Opportunity for Pvt. Banks: Many Pvt. Banks are shying away from to serve the

people are unable to access big loans, because of the high intervention of the

Govt. but the door open for the Pvt. Players to get entry and with flexible rules

Pvt. Banks are attracting towards this segment.

Threat

• High Competition: This is a serious threat for the Micro Finance industry,

because as the more players will come in the market, their competition will rise ,

34
 and we know that the MFIs has the high transaction cost and after entrant of the

new players there transaction cost will rise further, so this would be serious threat.

• Neophyte Industry: Basically Micro Finance is not a new concept in India, but

that was all by informal sources. But the formal source of finance through Micro

Finance is novice, and the rules are also not properly placed for it.

• Over involvement of Govt.: This is the biggest that threat that many MFIs are

facing. Because the excess of anything is injurious, so in the same way the excess

involvement of Govt. is a serious threat for the MFIs. Excess involvement

definition is like waive of loans, make new rules for their personal benefit etc.

1.2 Objectives of the study

➢ To know the Concept of Micro finance India

➢ To study the role of Micro finance In India

➢ To analyze the Factors Affecting the Role of Micro-Finance in the

Development of Startups in India
➢ To test the relationship between microfinance practices and poverty
alleviation.
➢ To analyze the role of micro credit in the economic development of India,
particularly in the sector of poverty eradication.
➢ To identify the remedial measures for effective functioning of micro credit
institutions in India.
➢ To study the effectiveness of Microfinance in improving the standard of living

for poorer sections of society with special reference to Lucknow (Uttar

Pradesh state).

1.3 Scope of the study

The scope of the 100 Respondents from Delhi NCR Microfinance is the prerequisite

of a broad range of financial services such as loans, payment services, deposits,

money transfers and insurance products to the poor and low-income households, for
35
their microenterprises and small businesses, to facilitate them to increase their income

levels and improve their standard of living. The poor needs access to appropriate

financial services, the poor has the capability to repay loans, and pay the real cost of

loans and generate savings, and Microfinance is an effective tool for poverty

alleviation (Randhawa and Gallardo, 2013).

In spite of growing number of policies and programs the government has taken to

assist entrepreneurial activities by enacting laws to support entrepreneurs’ social and

economic well-being (Global Entrepreneurship Summit, 2017), the reach of

microfinance to Small Scale Entrepreneurs still remains an impenetrable issue. The

Government has made an effort to include entrepreneurs in decision-making; however

entrepreneurs still are facing serious problems in accessing microfinance institutions

(Randhawa and Gallardo, 2013)

Many studies relating to micro –finance have already been done in India. Most of the

studies have concentrated on the role of micro finance in alienating poverty in rural

and semi-urban areas. A few studies have been done in Tamil Nadu which is about

Self Help Groups and their role in raising the standards of living. Apart from it,

financial inclusion is one important aspect currently concentrated by both the Central

and State Government. To the knowledge of the researcher there are only a few

studies relating micro finance and Economic Empowerment. Hence the researcher has

chosen both Economic and Psychological Empowerment and also taken up this study

to find out the role of micro finance and the mediating role of financial inclusion in

Empowering Small Scale Entrepreneurs.

1.4 Methodology

The sources of secondary data for the study are the reports of the Role Of

Microfinance In India.

36
The purpose of this chapter is to describe the methodological approach and techniques

that have been used in the study. It includes the area of study and the study

population. It also describes the methods and techniques that will be used in choosing

sample and data collection. It further describes how data will be collected, processed

and finally analyzed to give the implication of findings.

Research design: The study will be conducted using descriptive research design as it

employed descriptive statistics during data presentation, the correlation and linear

regression research design has been employed to test hypothesis. The study adopted

both quantitative and qualitative approaches. The quantitative approach will be used

because the study will be based on variables that will be measured with numbers and

analyzed with statistical procedures. While qualitative approach will be used as the

study used some open ended and closed questionnaire to explore the depth

understanding, views and attitudes of members on the contribution of Microfinance

(SACCOs) to alleviation of their poverty.

The Population of the Study: According to Grinnell and Williams (1990:118),

population of the study is a totality of personsor objects with which a study is

concerned or the total group of people from which the information is to obtain. The

population of study is a set which includes all measurements of interest to the

researcher (The collection of all responses, measurements, or counts that are of

interest).The study sought to evaluate the impact of microfinance on poverty

alleviation in UP. Hence the population under this study involved all members

/accounts holders of Microfinance (SACCOs) operating in Lucknow in UP that will

be made of 12,688borrowers as per 31st December, 2020.

Secondary Sources:

37
• Books

• Journals

• Reports of the Reserve Bank of India

• Other government and non-government publications relevant to the problem of the

study.

Primary Sources: The primary source comprised of a set of structured and

unstructured and open-ended questions, to elicit pertinent responses from the

respondents.

Sample Size: 100

Sample Area: Officials of NCR Delhi & UP

Sampling

A sample size is a finite part/subset of the statically population whose properties are

studied to gain information about the population. (Webster, 1985). The sample size

for this study will be determined using the Slovin’s formula (Ndangizi J.C, 2020:49)

whereby n: is the sample size, N: is the total population, e: is the margin of error, we

used this formula because nothing about the behavior of a population is known at all.

Remember that for this case N=12,688 taking the confidence level of 90% that is with

a permissible error of 10%, e=0.1.Therefore, this gives = = 99.8 which are roughly

equal 100 respondents.

Data collection techniques

There are a number of research instruments available to researchers to gather

information such as guide for interview, questionnaire, documents, and the guide for

observation.

38
To carry this study a variety of tools have been used, as practical means of obtaining

information related to the research topic. The research focused mainly on

documentation, questionnaire, and interview as techniques of data collection.

Tools of analysis

Pie-Charts

Tables

Graphs

Diagram.

1.5 Hypothesis

In order to conduct impact assessment and to address the main objectives of the study,
this particular study has the following hypotheses:

1. H01: There is no significant variation between different demographic groups

(Gender, Marital status, Age, Educational Qualification, Business Profit Level
and Experience) of the small scale entrepreneurs with respect to different
perceived roles of microfinance, financial inclusion and empowerment.

2. H02a:There is no significant influence of the different perceived roles of

microfinance on economic empowerment of small scale entrepreneurs

3. There is a good perception of respondents on microfinance practices in terms

of membership, credit and savings;

4. Members have a positive perception on Microfinance impact on poverty

alleviation in terms of standard of living (Health, education, shelter and
nutrition…) and member’s income level;

5. There exist a statistically significant relationship between microfinance

activities and poverty alleviation;

39
 CHAPTER -2

LITERATURE REVIEW

2.1 Literature Review:

Review of literature is a vital part of any research. It helps the researcher to know the

areas where earlier studies had focused on and certain aspects untouched by them.

The survey of related literature may be justified because it provides a firm and

objective ground to the research for identifying a meaningful questions in the field in

which the researcher wants to pursue. So, for a researcher if he/she wants to do

research in a subject and needs up-to-date information, it is necessary that the

researcher should be fully acquainted with the past of that subject.

Therefore, the investigator thought it pertinent to review the related researches and

literatures to study the specific problem.

Sharma and Deshmukh (2013) in their study entitled “A Study Of Micro Finance

Facilities And Analyzing The Awareness Level Of Rural People About Micro

Finance In Nagpur City” studied the awareness of microfinance in the Nagpur

city. This study found out that awareness of microfinance level is very high.

Moreover The study reveals that most of the poor people of Nagpur city are aware

about micro saving schemes and also these schemes are the most opted for options

amongst the targeted consumers.

Anand Kumar, T.S.; Praseeda, S.and Jeyanth K. N. (2008) explained in their

paper titled "Operational guidelines for sustainable housing micro-finance in India"

that housing micro- finance is emerging globally as an important financial activity to

help alleviate the housing needs of economically vulnerable people. Micro-finance

institutions (MFIs) planning to include housing product must carefully assess whether

they have the management and technical capacity to do so. The purpose of this paper

40
is to give practical guidance to MFIs in adopting the housing programme, in addition

to their existing line of micro-finance services. The paper finds that MFIs should also

ensure that housing micro-finance suits their strategy from institutional and financial

perspectives.

Gordon, A.N. and others (2011) this paper aims to examine links between women's

access to micro-finance and how they use maternal healthcare services in sub-

Saharan Africa (SSA).It is found that improved access to micro-finance by women,

combined with education may enhance maternal health service uptake.

Kamath, R. and Srinivasan, R. (2009) Grameen replicators in India, using a for-profit

Non- Banking Finance Company legal form, have grown rapidly in terms of client

numbers. Loan sizes are relatively small compared to per capita income, while

portfolio quality was until recently very high. There is evidence in field of multiple

borrowing, with clients borrowing simultaneously from multiple sources including

micro-finance institutions. This research build a model of the microfinance sector

that explains why such multiple borrowings result optimally in small loan sizes and

high portfolio quality.

Fields, G.S. (2010) this article is based on Fields (forthcoming) and on NCEUS

(2009). The first part of the paper about global poverty and how the world‘s poor

work. As many as six- and-a-half times the number of the unemployed are the

working poor, which indicates that the world has on employment problem. So does

India. The second part of the paper is about combating poverty in India and

Internationally. The policies discussed here are workplace protections, harnessing the

energies of the private sector, economic growth, labour market policies for generating

more paid employment, the raising self-employment earnings.

41
Fe Bureau (2009) the population living in poverty could fall to 6% in 2025 if

aggressive reforms are implemented, the report suggested. The country need four

transition to change the labour market and speed up poverty removal, these are farm

to non-farm, rural to urban, unorganized to organized and subsistence self

employment to decent wage employment. The report further added that 60% of

country‘s workforce is engaged in agriculture, generating 18% of the gross domestic

product. Agriculture condemns many Indian farmers to poverty because of low

productivity. The key step that the country should take to enable the transition from

farm to non-farm employment is to move public expenditure from input subsidies like

fertilizers, seeds

DR.Anant Deshmukh (2012) The purpose of this article is to introduce the finance

academic community to the discipline of microfinance and microfinance institutions

(MFIs) address the issues of MFI sustainability, products and services, management

practices, clientele targeting, regulation and policy, and impact assessment.

N. Tejmani Singh (2009)The purpose of this article is to introduce that micro finance

can contribute to solving the problem of inadequate housing and urban services as an

integral part of poverty alleviation programmes. The challenges lies in finding the

level of flexibility in the credit instrument that could make it match the multiple credit

requirements of the low income borrowers without improving unbearably high cost of

monitoring to end use lenders. In the long run in a profitable manner; going by the

increasing number of commercial banks that have evinced interest in this area, the

future does seem bright.

Dr.C.Rangarajan (2006) in his topic ‘Microfinance and its future directions’ in the

introductory part of the book, outline the evolution of SHG through microfinance

evolve through in three stages. First, to meet survival requirement need, in the second

42
stage is to meet the subsistence level through investing in tradition activities and in

the final stage by setting up of enterprises for sustainable income generation.

Robert Peck Christen (2006) in his paper “Microfinance and Sustainable

International Experience and lesson for India”, he articulates the changing general

perception of bankers, that SHGs areprofitable clients or bank.

Lanmdau Mayoux’s study (1998) on Participatory Learning for Women’s

Empowerment in Micro Finance Programs (IDS Bulletin,Vol. 29 No.4, 1998)

proposes a participatory approach for integrating women’s empowerment concerns

into ongoing programs learning, which itself would be a contribution to

empowerment. Micro finance programs for women are currently promoted not only as

a strategy for poverty alleviation but also for women’s empowerment.

DR.Ashok (2012),in his paper “availability and awareness of microfinance in J&K

state”.this study found that micro finance institutions micro loans and credit is

high.more information regarding microfinance is provide by NGO and awareness

towards fund transfer and insurance is very poor.

Holt, (1994). The purpose of this article is to introduce that Village banks are

community- managed credit and savings associations established by NGOs to provide

access to financial services, build community self-help groups, and help members

accumulate savings.

Stefan Derconand Martina Kirchberger (2008) The purpose of this article is to

introduce that what are the changes coming in micro finance.

Malhotra (2002) constructed a list of the most commonly used dimensions of

women’s empowerment, drawing from the frameworks developed by various authors

in different fields of social sciences. Allowing for overlap, these frameworks suggest

that omen’sempowerment needs to occur along multiple dimensions

43
including: economic,socio-cultural, familial/interpersonal, legal, political, and

psychological.The World Bank defines empowerment as “the process of

increasing the capacity of individuals or groups to make choices and to transform

those choices into desired actions and outcomes.

“The Microfinance promise in Financial Inclusion: Evidence from India” by Naveen

K.Shetty and Dr.Veerashekharappa (2009) studies the importance of

microfinance in bringing about financial inclusion. The paper studies impact of the

increasing gap in demand and supply of financial services in India which has led to

the increasing population of the country to be excluded from the formal financial

credit system.

“Financial performance of Microfinance Institutions: A comparison to performance of

Regional Commercial banks by geographic regions” by Michael Tucker and Gerald

Miles studies the performance of MFIs which are self-sufficient and comparing those

with the regional commercial banks based on selected financial ratios. Microfinance

institutions provide small loans to the rural low income population. However

with growth of the microfinance institutions and with increasing competition, the

MFIs have very limited access to funds.

“Microfinance in India: Discussion” by R.Srinivasan and M.S.Sriram shows the

various views of people from various microfinance institutions. Microfinance has

been viewed as an effective tool in bringing about financial inclusion and as a

measure to alleviate poverty. This discussion also is a study on the various models of

microfinance prevailing in India and aims to discuss if these models contribute to the

growth and sustainability. It also aims to discuss about the various government

policies and regulatory framework prevailing in microfinance sector.

44
Theoretical Description: It has raised the controversies on true trend in

poverty especiallybetween1993-94 and 2000 (Bhalla,2005;Datt,1999;Datt and

Ravallion,1998;Datt,Kozel and Ravallion,2005; Jha,2000;Sen,2000;

Sundaram,2000; Sen,2005;Saith,2005; Tendulkar and Jain,1995 ; etc.)The researchers

in this group have made revised estimates of poverty and some opined that the rate of

decline in the poverty especially in the 90s is rather lower than what is claimed on the

basis of the NSSO estimates. However Meenakshi et al have found the incidence of

poverty to rise substantially when calorie based measure is adopted and the same to

decline when the income based measure is adopted. On the other hand Jones and Sen

have found a large divergence between calorie based measure of poverty and official

poverty line.

The third group of economists raise the doubt on data and the notion of poverty used

so far. Therefore there has been a storm of controversy regarding (a) the

comparability of various rounds of NSSO data (Bhalla,2005; Datt et el, 2005;

Sen,2001; Sundaram,2000; etc) and (b) the notion of poverty as is conceptualised by

the conventional poverty line discourse In fact there is doubt about whether the

conventional notion of poverty line is at all meaningful while assessing the

nature ,forms and extent of deprivation experienced by the people of our

society(Bhalla,2005; Gaiha,2003; Saith,2005, Sen,2005; etc).In fact the most

of the debates centres round the comparability of the data on the income poverty

because of the differences in the recall period from round to round surveys of NSSO.

However, Datt et al in their model based on panel estimates of poverty found

substantial increase in poverty not only at the national level but at the cross-state level

also.

45
Given these limitations the third group of literature has recently come onto the surface

which concentrates on the incidence of chronic poverty i.e. a sub-category of

chronically poor who experience poverty continuously for a long

period(Gaiha,2003; Mehta and Shah,2003; Radhakrishna et al,2003; etc).Since

the NSS per capita consumption data are available for the reference period of one

month for the duration of one year, it is not possible to estimate the number of people

who is chronically poor for long duration. So Radhakrishna et al have constructed a

standard of living index for each household by using the NFHS data and then

established correspondence between NSS poverty line and the standard of living

index. Accordingly a poor household with a mal-nourished child on the basis of

height for age index is considered as chronically poor. According to their

estimates57% of the poor household in rural areas and 50% of poor household in

urban areas are found to be chronically poor in 1999-2000. On the other hand Gaiha

has used a panel data of 4118 household from NCAER survey during the period 1968-

69 to 1970-71 for estimating chronic poverty and found that 47% of the poor on an

income criterion were chronically poor in 1968.

So the brief review of the literature clearly indicates there is a storm of controversy

regarding the magnitude of the incidence of poverty, its rate of decline and

methodologies of estimation. But there is as such no study (excepting that of Jha, et al

2000) on the estimation of the impact of the growth, social sector expenditure,

literacy, inequality as well as the sectoral growth on the incidence of poverty across

the states of India .So instead of entering into the controversy we have actually tried

to find out the principal correlates of cross-state and cross-time variations in the

magnitude of poverty in India. Under this backdrop our study concentrates on the

detection of the proximate explanatory factors behind the persistence of poverty by

46
using a panel data econometric technique. The rest of this paper is structured as

follows. Section II presents the data and methodology; Section III analyses the growth

dynamics experienced by our economy and its states; Section IV concentrates on the

analysis of poverty dynamics and its nature; Section V presents the results of the

panel data analysis on poverty and finally section V gives the concluding

observations.

Measurement of inequality in the modern world: A study entitled "Divided we

Stand: Why Inequality Keeps Rising” by the Organisation for Economic Co-operation

and Development (OECD) reported its conclusions on the causes, consequences and

policy implications for the ongoing intensification of the extremes of wealth and

poverty across its 22 member nations (OECD 2017-12-05).

• "Income inequality in OECD countries is at its highest level for the past half

century. The average income of the richest 10% of the population is about nine

times that of the poorest 10% across the OECD, up from seven times 25 years

ago."

• In the United States inequality has increased further from already high levels.

• "Other traditionally more egalitarian countries, such as Germany, Denmark

and Sweden, have seen the gap between rich and poor expand from 5 to 1 in

the 1980s, to 6 to 1 today."

A study by the World Institute for Development Economics Research at United

Nations University reports that the richest 1% of adults alone owned 40% of global

assets in the year 2000. The three richest people in the world possess more financial

assets than the lowest 48 nations combined. The combined wealth of the "10 million

47
dollar millionaires" grew to nearly $41 trillion in 2008. A January 2020 report by

Oxfam claims that the 85 wealthiest individuals in the world have a combined wealth

equal to that of the bottom 50% of the world's population, or about 3.5 billion people.

According to a Los Angeles Times analysis of the report, the wealthiest 1% owns 46%

of the world's wealth; the 85 richest people, a small part of the wealthiest 1%, down

about 0.7% of the world's wealth, which is the same as the bottom half of the

population.

According to PolitiFact and others, the top 400 richest Americans "have more wealth

than half of all Americans combined."

In 2001, 46% of people in sub-Saharan Africa were living in extreme poverty. Nearly

half of all Indian children are undernourished, however, even among the wealthiest

fifth one third of children are malnourished. An Oxfam report stated that the change

in net worth of the top 100 wealthiest individuals from 2017 to 2018 was four times

more than enough to eliminate global malnutrition in 2019. Oxfam Executive Director

Jeremy Hobbs said that "We can no longer pretend that the creation of wealth for a

few will inevitably benefit the many – too often the reverse is true."

Over the two decades prior to the onset of the global financial crisis, real disposable

household incomes increased an average of 1.7% a year in its 34 member countries.

However, the gap between rich and poor widened in most nations – the OECD

journalist resource (2017-20) entitled "Growing Income Inequality in OECD

Countries" states that with the exceptions of only France, Japan and Spain, wages of

the 10% best-paid workers have risen relative to those of the 10% least-paid workers

and the differential between the top and bottom 10% varies greatly from country to

country: “While this ratio is much lower in the Nordic countries and in many

48
continental European countries, it rises to around 14 to 1 in Israel, Turkey and the

United States, to a high of 27 to 1 in Chile and Mexico.”

Although a discussion exists about the recent trends in global inequality, the issue is

anything but clear, and this holds true for both the overall global inequality trend and

for its between-country and within-country components. The existing data and

estimates suggest a large increase in international (and more generally inter-

macroregional) component between 1820 and 1960. It might have slightly decreased

since that time at the expense of increasing inequality within countries.

Factors impacting economic inequality: There are many reasons for economic

inequality within societies. Recent growth in overall income inequality, at least within

the OECD countries, has been driven mostly by increasing inequality in wages and

salaries. Economist Thomas Piketty, who specializes in the study economic

inequality, argues that widening economic disparity is an inevitable phenomenon of

free market capitalism.

The labor market: A major cause of economic inequality within modern market

economies is the determination of wages by the market. Some small part of economic

inequality is caused by the differences in the supply and demand for different types of

work. However, where competition is imperfect; information unevenly distributed;

opportunities to acquire education and skills unequal; and since many such imperfect

conditions exist in virtually every market, there is in fact little presumption that

markets are in general efficient. This means that there is an enormous potential role

for government to correct these market failures.

In a purely capitalist mode of production (i.e. where professional and labor

organizations cannot limit the number of workers) the workers wages will not be

49
controlled by these organizations, or by the employer, but rather by the market.

Wages work in the same way as prices for any other good. Thus, wages can be

considered as a function of market price of skill. And therefore, inequality is driven

by this price. Under the law of supply and demand, the price of skill is determined by

a race between the demand for the skilled worker and the supply of the skilled worker.

"On the other hand, markets can also concentrate wealth, pass environmental costs on

to society, and abuse workers and consumers." "Markets, by themselves, even when

they are stable, often lead to high levels of inequality, outcomes that are widely

viewed as unfair." Employers who offer a below market wage will find that their

business is chronically understaffed. Their competitors will take advantage of the

situation by offering a higher wage to snatch up the best of their labor. For a

businessman who has the profit motive as the prime interest, it is a losing proposition

to offer below or above market wages to workers.

A job where there are many workers willing to work a large amount of time (high

supply) competing for a job that few require (low demand) will result in a low wage

for that job. This is because competition between workers drives down the wage. An

example of this would be jobs such as dish-washing or customer service. Competition

amongst workers tends to drive down wages due to the expendable nature of the

worker in relation to his or her particular job. A job where there are few able or

willing workers (low supply), but a large need for the positions (high demand), will

result in high wages for that job. This is because competition between employers for

employees will drive up the wage. Examples of this would include jobs that require

highly developed skills, rare abilities, or a high level of risk. Competition amongst

employers tends to drive up wages due to the nature of the job, since there is a relative

shortage of workers for the particular position. Professional and labor organizations

50
may limit the supply of workers which results in higher demand and greater incomes

for members. Members may also receive higher wages through collective bargaining,

political influence, or corruption.

These supply and demand interactions result in a gradation of wage levels within

society that significantly influence economic inequality. Polarization of wages does

not explain the accumulation of wealth and very high incomes among the 1%. Joseph

Stiglitz believes that "It is plain that markets must be tamed and tempered to make

sure they work to the benefit of most citizens."

Taxes: Another cause is the rate at which income is taxed coupled with the

progressivity of the tax system. A progressive tax is a tax by which the tax rate

increases as the taxable base amount increases. In a progressive tax system, the level

of the top tax rate will often have a direct impact on the level of inequality within a

society, either increasing it or decreasing it, provided that income does not change as

a result of the change in tax regime. Additionally, steeper tax progressivity applied to

social spending can result in a more equal distribution of income across the board.

The difference between the Gini index for an income distribution before taxation and

the Gini index after taxation is an indicator for the effects of such taxation.

There is debate between politicians and economists over the role of tax policy in

mitigating or exacerbating wealth inequality. Economists such as Paul Krugman,

Peter Orszag, and Emmanuel Saez have argued that tax policy in the post World War

II era has indeed increased income inequality by enabling the wealthiest Americans

far greater access to capital than lower-income ones.

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Education

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Illustration from a 1916 advertisement for a vocational school in the back of a US

magazine. Education has been seen as a key to higher income, and this advertisement

appealed to Americans' belief in the possibility of self-betterment, as well as

threatening the consequences of downward mobility in the great income inequality

existing during the Industrial Revolution.

An important factor in the creation of inequality is variation in individuals' access to

education. Education, especially in an area where there is a high demand for workers,

creates high wages for those with this education, however, increases in education first

increase and then decrease growth as well as income inequality. As a result, those

who are unable to afford an education, or choose not to pursue optional education,

generally receive much lower wages. The justification for this is that a lack of

education leads directly to lower incomes, and thus lower aggregate savings and

52
investment. In particular, the increase in family income and wealth inequality leads to

greater dispersion of educational attainment, primarily because those at the bottom of

the educational distribution have fallen further below the average level of education.

Conversely, education raises incomes and promotes growth because it helps to

unleash the productive potential of the poor.

During the mass high school education movement from 1910–1940, there was an

increase in skilled workers, which led to a decrease in the price of skilled labor. High

school education during the period was designed to equip students with necessary

skill sets to be able to perform at work. In fact, it differs from the present high school

education, which is regarded as a stepping-stone to acquire college and advanced

degrees. This decrease in wages caused a period of compression and decreased

inequality between skilled and unskilled workers. Education is very important for the

growth of the economy, however educational inequality in gender also influence

towards the economy. Lagerlof and Galor stated that gender inequality in education

can result to low economic growth, and continued gender inequality in education, thus

creating a poverty trap. It is suggested that a large gap in male and female education

may indicate backwardness and so may be associated with lower economic growth,

which can explain why there is economic inequality between countries.

More of Barro studies also find that female secondary education is positively

associated with growth. His findings show that countries with low female education;

increasing it has little effect on economic growth, however in countries with high

female education, increasing it significantly boosts economic growth. More and better

education is a prerequisite for rapid economic development around the world.

Education stimulates economic growth and improves people's lives through many

channels.
53
By increasing the efficiency of the labour force it create better conditions for good

governance, improving health and enhancing equality. Labor market success is linked

to schooling achievement, the consequences of widening disparities in schooling is

likely to be further increases in earnings inequality

Economic neoliberal views: John Schmitt and Ben Zipperer (2006) of the CEPR

point to economic liberalism and the reduction of business regulation along with the

decline of union membership as one of the causes of economic inequality. In an

analysis of the effects of intensive Anglo-American neoliberal policies in comparison

to continental European neoliberalism, where unions have remained strong, they

concluded "The U.S. economic and social model is associated with substantial levels

of social exclusion, including high levels of income inequality, high relative and

absolute poverty rates, poor and unequal educational outcomes, poor health outcomes,

and high rates of crime and incarceration. At the same time, the available evidence

provides little support for the view that U.S.-style labor-market flexibility

dramatically improves labor-market outcomes. Despite popular prejudices to the

contrary, the U.S. economy consistently affords a lower level of economic mobility

than all the continental European countries for which data is available."

Views on globalization: Trade liberalization may shift economic inequality from a

global to a domestic scale. When rich countries trade with poor countries, the low-

skilled workers in the rich countries may see reduced wages as a result of the

competition, while low-skilled workers in the poor countries may see increased

wages. Trade economist Paul Krugman estimates that trade liberalisation has had a

measurable effect on the rising inequality in the United States. He attributes this trend

to increased trade with poor countries and the fragmentation of the means of

production, resulting in low skilled jobs becoming more tradeable. However, he

54
concedes that the effect of trade on inequality in America is minor when compared to

other causes, such as technological innovation, a view shared by other experts.

Lawrence Katz estimates that trade has only accounted for 5-15% of rising income

inequality. Robert Lawrence argues that technological innovation and automation has

meant that low-skilled jobs have been replaced by machine labor in wealthier nations,

and that wealthier countries no longer have significant numbers of low-skilled

manufacturing workers that could be affected by competition from poor countries.

Impact of gender

The gender gap in median earnings of full-time employees according to the OECD

2008.

In many countries, there is a gender income gap which favors males in the labor

market. For example, the median full-time salary for U.S. women is 77% of that of

U.S. men. Several factors other than discrimination may contribute to this gap. On

average, women are more likely than men to consider factors other than pay when

looking for work, and may be less willing to travel or relocate.[56][57] Thomas Sowell,

55
in his book Knowledge and Decisions, claims that this difference is due to women not

taking jobs due to marriage or pregnancy, but income studies show that that does not

explain the entire difference. A U.S. Census's report stated that in US once other

factors are accounted for there is still a difference in earnings between women and

men. The income gap in other countries ranges from 53% in Botswana to -40% in

Bahrain.

Gender inequality and discrimination is argued to cause and perpetuate poverty and

vulnerability in society as a whole. Gender Equity Indices seek to provide the tools to

demonstrate this feature of equity.

19th century socialists like Robert Owen, William Thompson, Anna Wheeler and

August Bebel argued that the economic inequality between genders was the leading

cause of economic inequality; however Karl Marx and Fredrick Engels believed that

the inequality between social classes was the larger cause of inequality.

Development patterns

A Kuznets curve

Main article: Kuznets curve

Economist Simon Kuznets argued

that levels of economic inequality

are in large part the result of stages

of development. According to Kuznets, countries with low levels of development

have relatively equal distributions of wealth. As a country develops, it acquires more

capital, which leads to the owners of this capital having more wealth and income and

introducing inequality. Eventually, through various possible redistribution

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mechanisms such as social welfare programs, more developed countries move back to

lower levels of inequality.

Plotting the relationship between level of income and inequality, Kuznets saw middle-

income developing economies level of inequality bulging out to form what is now

known as the Kuznets curve. Kuznets demonstrated this relationship using cross-

sectional data. However, more recent testing of this theory with superior panel data

has shown it to be very weak. Kuznets' curve predicts that income inequality will

eventually decrease given time. As an example, income inequality did fall in the

United States during its High School Movement in the 1940s and after. However,

recent data shows that the level of income inequality began to rise after the 1970s.

This does not necessarily disprove Kuznets' theory. It may be possible that another

Kuznets' cycle is occurring, specifically the move from the manufacturing sector to

the service sector. This implies that it may be possible for multiple Kuznets' cycles to

be in effect at any given time.

Diversity of preferences: Related to cultural issues, diversity of preferences within a

society may contribute to economic inequality. When faced with the choice between

working harder to earn more money or enjoying more leisure time, equally capable

individuals with identical earning potential may choose different strategies. The trade-

off between work and leisure is particularly important in the supply side of the labor

market in labor economics.

Likewise, individuals in a society often have different levels of risk aversion. When

equally-able individuals undertake risky activities with the potential of large payoffs,

such as starting new businesses, some ventures succeed and some fail. The presence

57
of both successful and unsuccessful ventures in a society results in economic

inequality even when all individuals are identical.

Wealth concentration: Main article: Wealth concentration

Wealth concentration is a theoretical process by which, under certain conditions,

newly created wealth concentrates in the possession of already-wealthy individuals or

entities. According to this theory, those who already hold wealth have the means to

invest in new sources of creating wealth or to otherwise leverage the accumulation of

wealth, thus are the beneficiaries of the new wealth. Over time, wealth condensation

can significantly contribute to the persistence of inequality within society.

Rent-seeking: Economist Joseph Stiglitz argues that rather than explaining

concentrations of wealth and income, market forces should serve as a brake on such

concentration, which may better be explained by the non-market force known as

"rent-seeking". While the market will bid up compensation for rare and desired skills

to reward wealth creation, greater productivity, etc., it will also prevent successful

entrepreneurs from earning excess profits by fostering competition to cut prices,

profits and large compensation. A better explainer of growing inequality, according to

Stiglitz, is the use of political power generated by wealth by certain groups to shape

government policies financially beneficial to them. This process, known to

economists as rent-seeking, brings income not from creation of wealth but from

"grabbing a larger share of the wealth that would otherwise have been produced

without their effort"

Rent seeking is often thought to be the province of societies with weak institutions

and weak rule of law, but Stiglitz believes there is no shortage of it in developed

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societies such as the United States. Examples of rent seeking leading to inequality

include

• the obtaining of public resources by "rent-collectors" at below market prices

(such as granting public land to railroads, or selling mineral resources for a

nominal price[65][66] in the US),

• selling services and products to the public at above market prices (medicare

drug benefit in the US that prohibits government from negotiating prices of

drugs with the drug companies, costing the US government an estimated $50

billion or more per year),

• securing government tolerance of monopoly power (The richest person in the

world in 2017, Carlos Slim, controlled Mexico's newly privatized

telecommunication industry.

Since rent seeking aims to "pluck the goose to obtain the largest amount of feathers

with the least possible amount of hissing" – it is by nature obscure, avoiding public

spotlight in legal fine print, or camouflaged its extraction with widely accepted

rationalizations (markets are naturally competitive and so need no government

regulation against monopolies.

Impact of finance sectors: Jamie Galbraith argues that countries with larger financial

sectors have greater inequality, and the link is not an accident.

Single-parent families: There is statistical evidence shows strong links between

single-parent families and lower income. Inspite of the statistical evidence about the

economic advantages enjoyed by married couples and also by their children, evidence

that is at odds with ideological positions of many influential voices, Maranto and

59
Crouch point out that "in the current discussions about increased inequality, few

researchers... directly address what seems to be the strongest statistical correlate of

inequality in the United States: the rise of single-parent families during the past half

century."

Mitigating factors: Countries with a left-leaning legislature have lower levels of

inequality. Many factors constrain economic inequality – they may be divided into

two classes: government sponsored, and market driven. The relative merits and

effectiveness of each approach is a subject of debate.

Typical government initiatives to reduce economic inequality include:

• Public education: increasing the supply of skilled labor and reducing income

inequality due to education differentials.

• Progressive taxation: the rich are taxed proportionally more than the poor,

reducing the amount of income inequality in society if the change in taxation

does not cause changes in income.

• Minimum wage legislation: raising the income of the poorest workers (for the

ones that don't lose their jobs due to the minimum wage)

• Nationalization or subsidization of products: providing goods and services that

everyone needs cheaply or freely (such as food, healthcare, and housing),

governments can effectively raise the purchasing power of the poorer

members of society.

• Unionization supportive legislation such as the Wagner Act.

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These provisions may lower inequality, but have sometimes resulted in increased

economic inequality (as in the Soviet Union, where the distribution of these

government benefits was controlled by a privileged class). Political scientists have

argued that public policy controlled by organizations of the wealthy have steadily

eroded economic equality in the US since the 1970s.

Market forces outside of government intervention that can reduce economic inequality

include:

• propensity to spend: with rising wealth & income, a person must spend more.

In an extreme example, if one person owned everything, they would

immediately need to hire people to maintain their properties, thus reducing the

wealth concentration.

• Unionization: although not a market force, per se, labor organizations may

reduce inequality by negotiating standard pay rates (though probably

increasing unemployment). As union power has declined, and performance

related pay has become more widespread, economic inequality has mirrored

productive inequality.

Effects of inequality: Among the effects of inequality researchers have found include

higher rates of health and social problems, and lower rates of social goods, a lower

level of economic utility in society from resources devoted on high-end consumption,

and even a lower level of economic growth when human capital is neglected for high-

end consumption.

2019 Economics Nobel prize winner Robert J. Shiller said that rising inequality in the

United States and elsewhere is the most important problem. Increasing inequality

61
harms economic growth. High and persistent unemployment, in which inequality

increases, has a negative effect on subsequent long-run economic growth.

Unemployment can harm growth not only because it is a waste of resources, but also

because it generates redistributive pressures and subsequent distortions, drives people

to poverty, constrains liquidity limiting labor mobility, and erodes self-esteem

promoting social dislocation, unrest and conflict. Policies aiming at controlling

unemployment and in particular at reducing its inequality-associated effects support

economic growth.

The economic stratification of society into "elites" and "masses" played a central role

in the collapse of other advanced civilizations such as the Roman, Han and Gupta

empires.

Health and social cohesion:

British researchers Richard G. Wilkinson and Kate Pickett have found higher rates of

health and social problems (obesity, mental illness, homicides, teenage births,

62
incarceration, child conflict, drug use), and lower rates of social goods (life

expectancy, educational performance, trust among strangers, women's status, social

mobility, even numbers of patents issued) in countries and states with higher

inequality. Using statistics from 23 developed countries and the 50 states of the US,

they found social/health problems lower in countries like Japan and Finland and states

like Utah and New Hampshire with high levels of equality, than in countries (US and

UK) and states (Mississippi and New York) with large differences in household

income.

Income inequality and mortality in 282 metropolitan areas of the United States.

Mortality is strongly associated with higher income inequality, but, within levels of

income inequality, not with per capita income.

For most of human history higher material living standards – full stomachs, access to

clean water and warmth from fuel – led to better health and longer lives. This pattern

of higher incomes-longer lives still holds among poorer countries, where life

expectancy increases rapidly as per capita income increases, but in recent decades it

has slowed down among middle income countries and plateaued among the richest

thirty or so countries in the world. Americans live no longer on average (about 77

years in 2004) than Greeks (78 years) or New Zealanders (78), though the USA has a

higher GDP per capita. Life expectancy in Sweden (80 years) and Japan (82) – where

income was more equally distributed – was longer.

In recent years the characteristic that has strongly correlated with health in developed

countries is income inequality. Creating an index of "Health and Social Problems"

from nine factors, authors Richard Wilkinson and Kate Pickett found health and social

problems "more common in countries with bigger income inequalities", and more

63
common among states in the US with larger income inequalities. Other studies have

confirmed this relationship. The UNICEF index of "child well-being in rich

countries", studying 40 indicators in 22 countries, correlates with greater equality but

not per capita income.

Pickett and Wilkinson argue that inequality and social stratification lead to higher

levels of psychosocial stress and status anxiety which can lead to depression,

chemical dependency, less community life, parenting problems and stress-related

diseases.

Social cohesion: Further information: Social cohesion Research has shown an inverse

link between income inequality and social cohesion. In more equal societies, people

are much more likely to trust each other, measures of social capital (the benefits of

goodwill, fellowship, mutual sympathy and social connectedness among groups who

make up a social units) suggest greater community involvement, and homicide rates

are consistently lower.

Comparing results from the question "would others take advantage of you if they got

the chance?" in U.S General Social Survey and statistics on income inequality, Eric

Uslaner and Mitchell Brown found there is a high correlation between the amount of

trust in society and the amount of income equality. A 2008 article by Andersen and

Fetner also found a strong relationship between economic inequality within and

across countries and tolerance for 35 democracies.

In two studies Robert Putnam established links between social capital and economic

inequality. His most important studies established these links in both the United States

and in Italy. His explanation for this relationship is that

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Community and equality are mutually reinforcing... Social capital and economic

inequality moved in tandem through most of the twentieth century. In terms of the

distribution of wealth and income, America in the 1950s and 1960s was more

egalitarian than it had been in more than a century... [T]hose same decades were also

the high point of social connectedness and civic engagement. Record highs in equality

and social capital coincided. Conversely, the last third of the twentieth century was a

time of growing inequality and eroding social capital... The timing of the two trends is

striking: somewhere around 1965–70 America reversed course and started becoming

both less just economically and less well connected socially and politically.

Albrekt Larsen has advanced this explanation by a comparative study of how trust

increased in Denmark and Sweden in the latter part of the 20th century while it

decreased in the US and UK. It is argued that inequality levels influence how citizens

imagine the trustworthiness of fellow citizens. In this model social trust is not about

relations to people you meet (as in Putnam's model) but about people you imagine.

The economist Joseph Stiglitz has argued that economic inequality has led to distrust

of business and government.

Crime: Crime rate has also been shown to be correlated with inequality in society.

Most studies looking into the relationship have concentrated on homicides – since

homicides are almost identically defined across all nations and jurisdictions. There

have been over fifty studies showing tendencies for violence to be more common in

societies where income differences are larger. Research has been conducted

comparing developed countries with undeveloped countries, as well as studying areas

within countries. Daly et al. 2001found that among U.S States and Canadian

Provinces there is a tenfold difference in homicide rates related to inequality. They

65
estimated that about half of all variation in homicide rates can be accounted for by

differences in the amount of inequality in each province or state. Fajnzylber et al.

(2002) found a similar relationship worldwide. Among comments in academic

literature on the relationship between homicides and inequality are:

• The most consistent finding in cross-national research on homicides has been

that of a positive association between income inequality and homicides.

• Economic inequality is positively and significantly related to rates of homicide

despite an extensive list of conceptually relevant controls. The fact that this

relationship is found with the most recent data and using a different measure

of economic inequality from previous research, suggests that the finding is

very robust.

Social, cultural, and civic participation: Higher income inequality led to less of all

forms of social, cultural, and civic participation among the less wealthy. When

inequality is higher the poor do not shift to less expensive forms of participation.

Utility, economic welfare, and distributive efficiency: Following the utilitarian

principle of seeking the greatest good for the greatest number – economic inequality

is problematic. A house that provides less utility to a millionaire as a summer home

than it would to a homeless family of five, is an example of reduced "distributive

efficiency" within society, that decreases marginal utility of wealth and thus the sum

total of personal utility. An additional dollar spent by a poor person will go to things

providing a great deal of utility to that person, such as basic necessities like food,

water, and healthcare; while, an additional dollar spent by a much richer person will

very likely go to luxury items providing relatively less utility to that person. Thus, the

marginal utility of wealth per person ("the additional dollar") decreases as a person

66
becomes richer. From this standpoint, for any given amount of wealth in society, a

society with more equality will have higher aggregate utility. Some studies have

found evidence for this theory, noting that in societies where inequality is lower,

population-wide satisfaction and happiness tend to be higher.

Economist Arthur Cecil Pigou argues that it is evident that any transference of income

from a relatively rich man to a relatively poor man of similar temperament, since it

enables more intense wants, to be satisfied at the expense of less intense wants, must

increase the aggregate sum of satisfaction. The old "law of diminishing utility" thus

leads securely to the proposition: Any cause which increases the absolute share of real

income in the hands of the poor, provided that it does not lead to a contraction in the

size of the national dividend from any point of view, will, in general, increase

economic welfare.

Conservative economist Schmidtz argues that maximizing the sum of individual

utilities will harm incentives to produce.

A society that takes Joe Rich’s second unit [of corn] is taking that unit away from

someone who . . . has nothing better to do than plant it and giving it to someone who .

. . does have something better to do with it. That sounds good, but in the process, the

society takes seed corn out of production and diverts it to food, thereby cannibalizing

itself.

However, in addition to the diminishing marginal utility of unequal distribution,

Pigou and others point out that a "keeping up with the Joneses" effect among the well

off may lead to greater inequality and use of resources for no greater return in utility.

67
a larger proportion of the satisfaction yielded by the incomes of rich people comes

from their relative, rather than from their absolute, amount. This part of it will not be

destroyed if the incomes of all rich people are diminished together. The loss of

economic welfare suffered by the rich when command over resources is transferred

from them to the poor will, therefore, be substantially smaller relatively to the gain of

economic welfare to the poor than a consideration of the law of diminishing utility

taken by itself suggests.

When the goal is to own the biggest yacht – rather than a boat with certain features –

there is no greater benefit from owning 100 metre long boat than a 20 m one as long

as it is bigger than your rival. Economist Robert H. Frank compare the situation to

that of male elks who use their antlers to spar with other males for mating rights.

The pressure to have bigger ones than your rivals leads to an arms race that consumes

resources that could have been used more efficiently for other things, such as fighting

off disease. As a result, every male ends up with a cumbersome and expensive pair of

antlers, and "life is more miserable for bull elk as a group."

Economic incentives: Some modern economic theories, such as the neoclassical

school, have suggested that a functioning economy entails a certain level of

unemployment. These theories argue that unemployment benefits must be below the

wage level to provide an incentive to work, thereby mandating inequality. Such

theories state additionally that the unemployment rate cannot reduce to zero.

Many economists believe that one of the main reasons that inequality might induce

economic incentive is because material well-being and conspicuous consumption

relate to status. In this view, high stratification of income (high inequality) creates

high amounts of social stratification, leading to greater competition for status.

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One of the first writers to note this relationship, Adam Smith, recognized "regard" as

one of the major driving forces behind economic activity. From The Theory of Moral

Sentiments in 1759:

[W]hat is the end of avarice and ambition, of the pursuit of wealth, of power, and pre-

eminence? Is it to supply the necessities of nature? The wages of the meanest labourer

can supply them... [W]hy should those who have been educated in the higher ranks of

life, regard it as worse than death, to be reduced to live, even without labour, upon the

same simple fare with him, to dwell under the same lowly roof, and to be clothed in

the same humble attire? From whence, then, arises that emulation which runs through

all the different ranks of men, and what are the advantages which we propose by that

great purpose of human life which we call bettering our condition? To be observed, to

be attended to, to be taken notice of with sympathy, complacency, and approbation,

are all the advantages which we can propose to derive from it. It is the vanity, not the

ease, or the pleasure, which interests us.

Modern sociologists and economists such as Juliet Schor and Robert H. Frank have

studied the extent to which economic activity is fueled by the ability of consumption

to represent social status. Schor, in The Overspent American, argues that the

increasing inequality during the 1980s and 1990s strongly accounts for increasing

aspirations of income, increased consumption, decreased savings, and increased debt.

In the book Luxury Fever, Robert H. Frank argues that satisfaction with levels of

income is much more strongly affected by how someone's income compares with

others than its absolute level. Frank gives the example of instructions to a yacht

architect by a customer – shipping magnate Stavros Niarchos – to make Niarchos'

69
new yacht 50 feet longer than that of rival magnate Aristotle Onassis. Niarchos did

not specify or reportedly even know the exact length of Onassis's yacht.

Inequality and economic growth: In the 1960s, economist Arthur Melvin Okun

argued that there was a "trade-off" between economic growth and equality. Pursuing

equality could reduce efficiency (the total output produced with given resources) by

reducing incentives to work, save, and invest and through the “leaky bucket” of

wasteful government efforts to redistribute (such as a progressive tax code and

minimum wages). Some resources “will simply disappear in transit, so the poor will

not receive all the money that is taken from the rich”. Along the same lines, earlier

writers had argued that wealthier individuals save proportionally more of their

incomes, so that more inequality would lead to higher overall savings and thus capital

accumulation and growth.

Cross-country evidence: Many authors have empirically examined the relationship

between economic growth and income inequality in a large group of countries.

Following the broader economic growth literature, the typical approach was to relate

countries' real GDP per capita growth over a long period of time (e.g., 1965 through

1990) to the income distribution at the start of the period, simultaneously taking into

account other standard determinants such as the initial level of real GDP per capita. A

typical conclusion was that more unequal countries tend to grow slower (Alesina and

Rodrik, 1994), though the evidence was contested.

Because of general dissatisfaction with the empirical approach, including difficulties

in determining causality and capturing country-specific factors, attention turned to the

analysis of how changes in the income distribution affected the growth rate in

subsequent time period (usually five years) in a large group of countries. Forbes

70
(2000) found that an increase in inequality tends to raise growth during the

subsequent period. This literature did not go too far as Banerjee and Duflo (2003)

found a complex relationship between inequality and growth, in which changes in

inequality in either direction lowered growth subsequently. They interpreted this

finding as supporting the notion that redistribution hurts growth, at least over the

short- to medium-run, but also cautioned about interpreting income distribution-

economic growth analysis of this type.

In recent years, the economic growth literature has recognized that growth in most

countries does not follow a smooth path, but is characterized by sharp turning points –

periods of sustained growth and stagnation. The interesting empirical questions, then,

are about the determinants of the turning points (Pritchett, 2000).

Ostry and Berg (2017) studied factors affecting the duration of economic growth in

developed and developing countries. They found that income equality has a more

beneficial impact than trade openness, sound political institutions, and foreign

investment.

71
Along these lines, Andrew Berg and Jonathan D. Ostry (2017) examined the question

of what sustains long periods of strong growth, and found that one of the most robust

and important determinants is the level of income inequality. In particular, they found

that high 'growth spells' were much more likely to end in countries with less equal

income distribution, and that the measured effect was large. For example, they

estimate that closing half the inequality gap between Latin America and emerging

Asia would more than double the expected duration of a 'growth spell.' Their findings

were robust to the inclusion of other variables in the model, and to alternate

definitions of growth spells. According to their study, which has featured prominently

in the financial press, inequality is of course not the only thing that matters but it

clearly belongs in the "pantheon" of well-established growth factors such as the

quality of political institutions or trade openness.

Berg and Ostry postulate that high levels of inequality might damage long term

growth by amplifying the potential for financial crisis, discouraging investment

because of political instability, making it more difficult for governments to make

difficult choices (such as raising taxes or cutting public expenditure) in the face of

shocks, or by discouraging investment in education and health for the poor.

Comparisons with the United States: Economic sociologist Lane Kenworthy has

found no correlation between levels of inequality and economic growth among

developed countries, among states of the US, or in the US over the years from 1947 to

2005. Nor did Jared Bernstein find a correlation, plotting yearly real GDP growth and

the share of income going to the top 1%, 1929–2016.

Mechanisms: According to economist Branko Milanovic, while traditionally

economists thought inequality was good for growth

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"The view that income inequality harms growth – or that improved equality can help

sustain growth – has become more widely held in recent years. ... The main reason for

this shift is the increasing importance of human capital in development. When

physical capital mattered most, savings and investments were key. Then it was

important to have a large contingent of rich people who could save a greater

proportion of their income than the poor and invest it in physical capital. But now that

human capital is scarcer than machines, widespread education has become the secret

to growth."

"Broadly accessible education" is both difficult to achieve when income distribution is

uneven and tends to reduce "income gaps between skilled and unskilled labor."

A study by Perotti (1996) examines of the channels through which inequality may

affect economic growth. He shows that in accordance with the credit market

imperfection approach, inequality is associated with lower level of human capital

formation (education, experience, apprenticeship) and higher level of fertility, while

lower level of human capital is associated with lower growth and lower levels of

economic growth. In contrast, his examination of the political economy channel

refutes the political economy mechanism. He demonstrates that inequality is

associated with lower levels of taxation, while lower levels of taxation, contrary to the

theories, are associated with lower level of economic growth.

The credit market imperfection approach, developed by Galor and Zeira (1993),

demonstrates that inequality in the presence of credit market imperfections has a long

lasting detrimental effect on human capital formation and economic development.[

The political economy approach, developed by Alesian and Rodrik (1994) and

Persson and Tabellini (1994), argues that inequality is harmful for economic

73
development because inequality generates a pressure to adopt redistributive policies

that have an adverse effect on investment and economic growth.

The sovereign-debt economic problems of the late twenty-oughts do not seem to be

correlated to redistribution policies in Europe. With the exception of Ireland, the

countries at risk of default in 2017 (Greece, Italy, Spain, Portugal) were notable for

their high Gini-measured levels of income inequality compared to other European

countries. As measured by the Gini index, Greece as of 2008 had more income

inequality than the economically healthy Germany.

Inequality and housing: A number of researchers (David Rodda, Jacob Vigdor, and

Janna Matlack), argue that a shortage of affordable housing – at least in the US – is

caused in part by income inequality. David Rodda noted that from 1984 and 1991, the

number of quality rental units decreased as the demand for higher quality housing

increased (Rhoda 1994:148) Through gentrification of older neighbourhoods, for

example, in East New York, rental prices increased rapidly as landlords found new

residents willing to pay higher market rate for housing and left lower income families

without rental units. The ad valorem property tax policy combined with rising prices

made it difficult or impossible for low income residents to keep pace.

Aspirational consumption and household risks: Firstly, certain costs are difficult to

avoid and are shared by everyone, such as the costs of housing, pensions, education

and health care. If the state does not provide these services, then for those on lower

incomes, the costs must be borrowed and often those on lower incomes are those who

are worse equipped to manage their finances. Secondly, aspirational consumption

describes the process of middle income earners aspiring to achieve the standards of

living enjoyed by their wealthier counterparts and one method of achieving this

74
aspiration is by taking on debt. The result leads to even greater inequality and

potential economic instability.

Perspectives regarding economic inequality: 2.17.1 Socialism and Marxian

economics

From the socialist perspective, the primary cause of the excessive inequalities in

modern society is the private ownership of the means of production by a class of

owners, which results in a society where this class of owners receives unearned

income through ownership of capital equipment, financial assets, or corporate stock

while the majority of the population receives income in the form of a wage or salary.

In order to rectify this situation, socialists argue that the means of production should

be publicly owned, so that income differentials would be reflective of individual

contribution to the social product.

In Marxist economic analysis, income inequality increases under capitalism because

capitalist firms substitute workers for capital equipment in the course of development

(under competitive pressures to maximize profit). Over the long-term, this results in a

rising organic composition of capital where less human labor is required in proportion

to capital equipment, increasing unemployment and thereby exerting a downward

pressure on wages by increasing the size of the reserve army of labour. The adoption

of capital equipment that substitutes labor (or job automation) increases productivity

and profits for the capitalist class, resulting in a situation of relatively stagnant wages

for the working class amidst rising levels of income for the capitalist class.

Ultimately, Marxists predict the emergence of a communist society which would be

based on the common ownership of the means of production, where each individual

citizen would have free access to the articles of consumption (From each according to

75
his ability, to each according to his need). According to Marxist philosophy, equality

in this sense is essential for freedom because equal access to the output of the means

of production frees individuals from dependent relationships, allowing them to

transcend alienation.

Meritocracy: Meritocracy favors an eventual society where an individual's success is

a direct function of his merit, or contribution. Economic inequality would be a natural

consequence of the wide range in individual skill, talent and effort in human

population and, being the result of natural variation, individual effort and voluntary

exchange, would not be considered ethically problematic in its own right.

Liberal perspectives: Most modern social liberals, including centrist or left-of-center

political groups, believe that the capitalist economic system should be fundamentally

preserved, but the status quo regarding the income gap must be reformed. Social

liberals favor a capitalist system with active Keynesian economics macroeconomic

policies, neoliberalism, and progressive taxation (to even out differences in income

inequality).

However, contemporary classical liberals and libertarians generally do not take a

stance on wealth inequality, but believe in equality under the law regardless of

whether it leads to unequal wealth distribution. In 1966 Ludwig von Mises, a

prominent figure in the Austrian School of economic thought, explains:

The liberal champions of equality under the law were fully aware of the fact that men

are born unequal and that it is precisely their inequality that generates social

cooperation and civilization. Equality under the law was in their opinion not designed

to correct the inexorable facts of the universe and to make natural inequality

disappear. It was, on the contrary, the device to secure for the whole of mankind the

76
maximum of benefits it can derive from it. Henceforth no man-made institutions

should prevent a man from attaining that station in which he can best serve his fellow

citizens.

Robert Nozick argued that government redistributes wealth by force (usually in the

form of taxation), and that the ideal moral society would be one where all individuals

are free from force. However, Nozick recognized that some modern economic

inequalities were the result of forceful taking of property, and a certain amount of

redistribution would be justified to compensate for this force but not because of the

inequalities themselves. John Rawls argued in A Theory of Justice[37] that inequalities

in the distribution of wealth are only justified when they improve society as a whole,

including the poorest members. Rawls does not discuss the full implications of his

theory of justice. Some see Rawls's argument as a justification for capitalism since

even the poorest members of society theoretically benefit from increased innovations

under capitalism; others believe only a strong welfare state can satisfy Rawls's theory

of justice.

Classical liberal Milton Friedman believed that if government action is taken in

pursuit of economic equality then political freedom would suffer. In a famous quote,

he said:

A society that puts equality before freedom will get neither. A society that puts

freedom before equality will get a high degree of both.

Social justice arguments: Patrick Diamond and Anthony Giddens (professors of

Economics and Sociology, respectively) hold that 'pure meritocracy is incoherent

because, without redistribution, one generation's successful individuals would become

the next generation's embedded caste, hoarding the wealth they had accumulated'.

77
They also state that social justice requires redistribution of high incomes and large

concentrations of wealth in a way that spreads it more widely, in order to "recognise

the contribution made by all sections of the community to building the nation's

wealth." (Patrick Diamond and Anthony Giddens, 27 June 2005, New Statesman)

Claims that inequality lowers social welfare: In most western democracies, the

desire to eliminate or reduce economic inequality is generally associated with the

political left. One practical argument in favor of reduction is the idea that economic

inequality reduces social cohesion and increases social unrest, thereby weakening the

society.

There is evidence that this is true (see inequity aversion) and it is intuitive, at least for

small face-to-face groups of people. Alberto Alesina, Rafael Di Tella, and Robert

MacCulloch find that inequality negatively affects happiness in Europe but not in the

United States.

It has also been argued that economic inequality invariably translates to political

inequality, which further aggravates the problem. Even in cases where an increase in

economic inequality makes nobody economically poorer, an increased inequality of

resources is disadvantageous, as increased economic inequality can lead to a power

shift due to an increased inequality in the ability to participate in democratic

processes.

The capabilities approach: Further information: Capability approach The

capabilities approach – sometimes called the human development approach – looks at

income inequality and poverty as form of “capability deprivation”.[144] Unlike

neoliberalism, which “defines well-being as utility maximization”, economic growth

and income are considered a means to an end rather than the end itself. [145] Its goal is

78
to “wid[en] people’s choices and the level of their achieved well-being” through

increasing functionings (the things a person values doing), capabilities (the freedom to

enjoy functionings) and agency (the ability to pursue valued goals).

When a person’s capabilities are lowered, they are in some way deprived of earning

as much income as they would otherwise. An old, ill man cannot earn as much as a

healthy young man; gender roles and customs may prevent a woman from receiving

an education or working outside the home. There may be an epidemic that causes

widespread panic, or there could be rampant violence in the area that prevents people

from going to work for fear of their lives. As a result, income and economic

inequality increases, and it becomes more difficult to reduce the gap without

additional aid. To prevent such inequality, this approach believes it’s important to

have political freedom, economic facilities, social opportunities, transparency

guarantees, and protective security to ensure that people aren’t denied their

functionings, capabilities, and agency and can thus work towards a better relevant

income.

Policy responses intended to reduce economic inequality: Progressive taxation

reduces absolute income inequality when the higher rates on higher-income

individuals are paid and not evaded, and transfer payments and social safety nets

result in progressive government spending. When income inequality is low, aggregate

demand will be relatively high, because more people who want ordinary consumer

goods and services will be able to afford them, while the labor force will not be as

relatively monopolized by the wealthy. These principles have recently been confirmed

by game theoretic economic models.

79
 Chapter-3
Data Presentation & Analysis
3.1 Growth Performance
Since the level of income and its growth, other factors apart are the crucial

determining factor for the levels of living as well as the incidence of poverty of

people we, in this section highlight the growth performance of our economy both at

the aggregative level and also at the cross state level. One cannot of course deny the

fact that Indian Economy since her independence has gradually been moving towards

the achievements of faster rate of growth of GDP after surpassing the long term (1950

– 75) persistence of Hindu Growth rate. In fact, it has been found that our economy

continued to achieve the trajectory of high growth path between 1975 and 1990,

which eventually culminated by the crisis of 1991 caused by high fiscal deficit vis-à-

vis the current account deficit. Obviously the fall out of the crisis was the switching of

the economy from plan to market. Of course during the post reform period and

especially during the first five years of new millennium the growth rate of GDP has

reached such a conspicuous level (i.e. 8% - 9% per annum) that India has been

recognized as one of the fastest growing economies in the world .Interestingly during

the period of half a century the economy has also experienced remarkable structural

transformation in respect of her composition of GDP. Parallely it has also been found

that in course of structural transformation of our economy the service sector has been

enjoying a comparative advantage in playing a leading role towards the achievements

of remarkable growth rate such that the service sector driven growth has been

christened as ‘service sector revolution’ in our economy (Rakshit, 2007, 2009,

Bhaduri, 2008). Figure 1 below gives an overview of the dynamic behaviour of the

level of GDP and its sectoral composition. It reveals more or less an increasing trend

over the period between 1950 – 51 and 2008 – 09.

80
 Components of GDP in India
4000000

3500000
Agriculture
GDP, Agriculture and allied
activities, Industry, Services 3000000 and Allied
Activities
2500000
Industry
2000000

1500000 Services

1000000
GDP
500000

0
1940 1960 1980 2000 2020
Year

Figure-1.
The sectoral growth also has a close bearing on the incidence of poverty. For instance
the higher agricultural growth is likely to produce cushion against the rural poverty.
Similarly the industrial and service sector growth may also help reducing the
incidence of poverty .So we have computed the decadal growth rates of the three
sectors at constant (1993-94) prices which are presented in table-1 below
Table: 3.1 Growth Rate of GDP and its components in India

Agricultural
and Services
Period GDP Industry
Allied
Activities
1951-1961 3.901 3.029 6.138 4.478
1961-1971 3.724 2.313 5.396 4.879
1951-1971 7.77 5.411 11.865 9.575
1971-1981 3.088 1.495 4.34 4.165
1981-1991 5.375 3.395 6.716 6.327
1951-1991 5.327 3.257 6.946 6.615
1991-2000 5.127 2.766 5.023 6.463
2001-2020 6.002 2.426 5.188 7.495
1991-2000 11.913 5.233 11.157 15.079
1951-1990 4.768 2.654 5.771 5.928
Source: Author’s own computation from RBI data.
81
We have a mixed picture on the decadal annual growth rates of GDP and the three

major sectors. While the annual growth rate of GDP hovers between 3.9% and 6.0%,

that of agricultural sector lies between 1.5% and 3.03% per annum over the period of

our study. Conversely the decadal annual growth rates of industry hovers between

3.34% and 6.95% and that of service sector lies between 4.123% and 7.5% over the

six decades. But if we analyze growth rates of GDP and its major sectors during the

pre and post reform period, then we find a tremendous increase in the growth rates

during the post reform period (1991 –2020) as compared with that in the pre reform

period (1951 – 1991). The annual growth rate of GDP at factor cost was 5.33%

followed by agricultural growth rate of 3.26% and the industry and service sector

growth rates of 6.95% and 6.62% respectively. But during the post reform period the

service sector has experienced a sharp increase in its annual growth rates to 15.08%,

followed by industry (11.16%) and agriculture 5.23% respectively. However, one

cannot deny the fact that the reform process has given a boost to the economy, the

outcome of which has been reflected in terms of the break through in service sector

growth during the post reform period.

Now since in our panel data exercise we have considered 16 major states as our

observation s for the analysis of the cross state variations in the incidence of income

poverty we have also computed the growth rates of NSDP (at factor cost) and its

sectoral compositions across the states for each decade and also for the pre and post

reforms period, the estimates of which are given in the appendix tables 1–4. The

decadal annual growth rates NSDP reveal a mixed picture over the period and it also

reveals a tremendous inter-state variability measured in terms of the time profile of

the values of coefficient of variation. Similarly the growth performance between the

pre and post reform period also reveals a sharp contrasting scenario across the states.

82
The appendix table 1 clearly reveals that the states excepting Bihar, UP, MP, AP, and

Rajasthan have achieved an increasing trend in their rates of growth of NSDP during

the five decades since 1961. In fact the above states have registered lower rates of

growth of their NSDP during the first decade of economic reform. It seems these

states could not initially adjust to reap the benefit of the market. Further the

withdrawal of the public sector from development process as an implication of the

IMF-World bank dictated policy of economic reform seems partly to be the

explanation of the fall in growth rates of NSDP of the states.

Another striking feature of the growth rates of NSDP as is discernable from the

Appendix table- 1 is that during the post reform period almost all the states have

registered very high growth rates in varying degrees as compared to the growth rates

achieved during the pre-reform period and also to the overall period of our study. So,

it is plausible to conclude that the reform process has given a tremendous boost to the

growth performance of all the states such that the states have been able to reap the

benefits of the market in varying degrees. It is no less note worthy that the cross state

variability in the growth rates of the states as is revealed by the time profile of the

C.Vs which were very high during the sixties and the seventies and have gradually

reduced overtime. Surprisingly the in the post reform period this has witnessed sharp

reduction in the cross state volatility in the growth rate of NSDP also. So, one can say

that the reform process might have helped reducing the inter-state disparity in

economic growth also.

As far as the growth rates of the major three sectors are concerned the Appendix

Table -2 gives a mixed picture on the growth experienced by the states in their

agriculture and allied sector. No definite conclusion on the performance of decadal as

well as pre and post reform agricultural growth can be drawn. In fact, the states with
83
high degree of application of new seed fertilizer technology during sixties have

achieved higher growth rates in agriculture, but the states with delayed application of

new technology have achieved higher growth rates during 1970s and 1980s. However,

there has been sluggishness in the growth rates of agriculture in almost in all the states

during the 1990s coupled with a bit improvement in the first decades of the new

millennium. So, one can plausibly conclude that liberalization of agricultural sector

after the formation of WTO has not produced favorable impact on the growth of

agriculture across the states of India. The time profile of C.V also reveals that the

cross–state variability in the growth rates of agriculture was very high during the pre-

reform period and it has fallen during post reform period albeit it is still very high. On

the other hand as far as the industrial sector is concerned the Appendix Table 3 clearly

brings out the fact that all the states have achieved growth of NSDP originating from

industry in varying degrees with some states like AP, HP, Gujarat, Karnataka etc.

achieving high growth rates and some achieving moderate growth rates and very few

states like WB Orissa, achieving lower growth rates. We also find that the first

decades of reform has registered sluggishness in the growth rates of industrial

production across all the states excepting Assam Gujarat and to some extent WB.

However, it is worth noting that our economy has experienced industrial stagnation

during 1965-1979. The estimates of industrial growth rates during pre and post reform

period also reveal (see appendix table 3) that some states have performed better

during the post reform period and some have performed better during the entire pre-

reform period. It seems to be the outcome of the variability in the access to market

economy on the part of the states. The time profile of C.V of the growth rates of

NSDP originating from the industrial sector reveal a very striking feature that the

cross-state variability in the growth rates of the industrial; sector have been increased

84
remarkably during the post reform period.

On the other hand as far as the cross-state growth of service sector in concerned

Appendix Table- 4 clearly brings out the fact that almost all the states have

experienced tremendous increase in the growth of service sector in varying degrees.

Surprisingly the post reform period has witnessed a tremendous break through in the

growth rates of the service sector in almost all the states as compared to their growth

performance of service sector during the pre-reform period.

It is further no less noteworthy that the cross state variability in the growth rates of

service sector as is evident from the time profile of C.V has declined remarkably

during the post reform period. So it is plausible to conclude that the reform process in

India has not only helped bring about the service sector revolution that we have

experienced but also reducing inter-state disparity in the growth rates of service sector

tremendously. So one can expect that the higher growth rates of the service sector and

the declining trend in inter-state disparity would have produced a favourable impact

on the incidence of poverty at the cross state level. However in our panel exercise we

have used the per capita cross state five yearly annual average growth rates of the

three sectors as possible explanatory factors instead of using the aggregate sectoral

growth rates.

The temporal behaviour of the growth rates of per capita NSDP at constant prices

across the 16 major states is discernable from the table -2 below.

85
Table-3.2: Five yearly Annual Compound Growth Rates of Per-Capita NSDP (at 1970-71 prices)

1971-75 1975-80 1980-85 1985-90 1990-95 2000-05 2005-10 2015-20

Andhra Pradesh 1.79(4) 0.49(15) -0.90(16) 7.43(2) 3.28(8) 2.09(12) 5.26(3) 7.50(7)
Assam -0.33(9) 0.53(14) 2.47(6) 4.20(7) 0.13(14) 5.04(3) 2.34(13) 3.86(16)
Bihar -0.57(10) 1.36(10) 2.38(9) 1.84(14) -3.97(16) 3.10(8) 1.29(16) 8.32(4)
Gujarat 10.52(1) 5.60(1) 2.43(8) -3.15(16) 7.54(1) 1.63(15) 9.74(1) 8.89(3)
Haryana -2.27(13) 4.75(2) 1.23(11) 5.93(3) 1.23(13) 3.30(6) 4.75(6) 7.85(5.5)
Himachal
Pradesh 2.221(3) -0.05(16) 0.18(14) 5.92(4) 1.50(11) 4.36(5) 4.83(4) 4.56(15)
Karnataka -0.04(7) 1.19(12) 2.96(4) 17.57(1) 5.07(3) 6.59(1) 2.93(11) 7.01(9)
Kerala 0.08(6) 0.72(13) 0.16(15) 3.78(10) 4.38(6) 3.28(7) 5.30(2) 7.85(5.5)
Madhya
Pradesh -0.76(11) 2.19(7) 2.70(5) 4.11(8) 1.37(12) 1.64(14) 3.30((10) 5.03(13)
Maharashtra 2.223(2) 1.90(8) 1.38(10) 5.56(6) 4.96(4) 2.60(11) 4.41(7) 9.85(1)
Orissa -3.76(15) 2.55(6) 0.31(13) 0.84(15) 3.37(7) 1.17(16) 3.58(9) 6.75(10)
Punjab 1.15(5) 3.21(3) 4.11(2) 3.48(11) 2.54(9) 2.78(9) 2.21(14) 5.47(12)

Rajasthan -6.46(16) 1.27(11) 4.05(3) 5.87(5) 1.98(10) 2.69(10) 4.11(8) 7.23(8)

Tamil Nadu -3.60(14) 2.62(4) 5.88(1) 4.08(9) 5.75(2) 4.54(4) 1.82(15) 9.21(2)

Uttar Pradesh -2.12(12) 2.56(5) 2.46(7) 3.22(12) -0.18(15) 1.65(13) 2.72(12) 4.61(14)
West Bengal -0.14(8) 1.61(9) 0.87(12) 2.04(13) 4.92(5) 5.25(2) 4.77(5) 6.29(11)
Source: Authors Computation from EPW Research Foundation data base
and RBI Database. Figures in Brackets represent ranks.

It is discernable from the table that almost all the states have experienced increase in

the growth rates of their real per capita NSDP in varying degrees with the evidences

of quinquinnial ups and down over the period of our study. In fact no states have

experienced smooth continuous increasing trend in their growth rates of per capita

NSDP. If we look at growth performance of the pre-reform period then we find that

the states like AP, Rjasthan, Tamil Nadu, Haryana, Punjab, Karnataka, have been able

to enjoy higher growth rates especially during the two phases in the 80’s. The only

state Gujarat experienced negative growth rate during 1985-90. During the post

86
reform period however almost all the states have experienced steady increase in the

growth rates in varying degrees with some states experiencing tremendous increase in

the growth rates of their per capita NSDP especially during 2005-10 and 2015-20.

Interestingly the phase 2015-20 marks a phase of very high growth rates for some

states like Maharastra (9.85%), Tamil Nadu (9.21%), Bihar (8.32), Gujrat (8.89%)

A.P (7.550, Harayana (7.85%), Orissa (6.75), Kerala (7.85), Rajasthan (7.23%) and

West Bengal (6.29%). It is also worth noting that a large number of states have

experienced sluggishness in their growth rates in the early phase after reforms

i.e.1990-95 albeit they have been able to recover later. Obviously one should expect

positive impact of this higher growth rates on the incidence of poverty. Further the

relative position (ranks) of the states in respect of the achievement of the growth of

per capita NSDP has changed sporadically over the period. Another interesting

feature of the cross state performance of growth rates has been that we find a

divergent nature of growth both for the period from 1971 to 2019-20 and the post

reform period i.e. 1991-2016. The regression results (given in appendix table-5) with

positive values of slope coefficients reveal the same directions.

Now if we look at the cross state temporal behaviour of the inequality in the

distribution of monthly per capita consumption expenditure measured in terms of Gini

coefficients which is also a good surrogate of the distribution of per capita income

also and compare it with the cross state temporal behaviour of the growth rates of per

capita NSDP then we find a paradoxical situation. The table -3 gives an over view of

the cross state temporal trend in inequality which is measured in terms of Gini

coefficient and expressed in percentage terms. We actually do not find any

definite/unique relation between the temporal behaviour of growth and inequality

across the states over the period of our study.

87
Table-3.3: Gini Inequality in Monthly Per-Capita consumption expenditure.

State 1985 1990 1995 2000 2005 2010 2015 2020

Andhra Pradesh 28.05 30.97 31.3 32.98 30.98 29.8 34.32 32.33
Assam 24.69 24.76 21.2 26.2 24.56 24.5 27.22 28
Bihar 25.53 27.93 27.8 25.76 25.8 24.1 28.26 27.45
Gujarat 23.94 29.97 28.4 26.78 27.06 28.6 29.52 28.69
Haryana 29.94 29.97 30.6 29 29.6 26.9 35.5 32.72
Himachal 29
Pradesh 25.41 27.93 27.94 39.08 27.1 32 33.04
Karnataka 28.47 32.97 33.2 31.42 29.94 31.3 32.68 27.76
Kerala 33.82 36.73 33.6 34.02 32.62 30.4 39.92 45.48
Madhya 30.7
Pradesh 28.06 35.41 31.68 32.16 29.3 34.54 32.28
Maharashtra 29.29 41.17 34.1 32.64 33.7 35.3 35.16 32.93
Orissa 29.75 30.96 28.4 28.54 28.26 27.8 32.64 31.5
Punjab 27.94 33.86 30.3 29.34 28.1 27.1 35.98 32.87
Rajasthan 28.47 38.28 35 32.74 28.18 24.6 32.36 29.64
Tamil Nadu 28.88 32.48 37.1 34.12 33.36 36.6 34.54 29.47
Uttar Pradesh 26.35 31.45 30.2 30.5 30.88 28.2 33.74 30.65
West Bengal 30.94 30.45 32.8 29.32 30.5 29.8 33.94 29.94
Source: Computed from various reports of NSSO
All the states excepting Himachal Pradesh have experienced a tremendous increase in

the inequality in the distribution of income during 1994 -2005 in varying degrees in

the post reform period with some states like Kerala , Maharastra , A.P, Punjab , W.B,

U.P, T.N having the highest figures of Gini inequality. However during the period

between 2005 and 2020 all the states excepting Kerala have experienced a falling

trend in the inequality. Kearla has experienced tremendous increase in inequality even

in this phase, the value of Gini inequality being 45.48%. The values of Gini inequalty

coefficients in almost all the states are however found to remain high over the entire

period. If we compare the growth performance of the states with their experience with

the degree of inequalities then it is surprising to note that there some states like

Gujrat, T.N, Kerala, Maharastra, A.P, Orissa, which have achieved high growth rates

during the post reform period (i.e. from 1995-2020) coupled with the higher degrees

of inequality. On the contrary there are some states like Karnataka, W.B etc which

have achieved higher growth rates with a declining tendency of the degree of

inequality. Now if we compare the phase wise analysis of growth and inequality the

88
we see that almost all the states have experienced tremendous increase in their growth

rates during 2015-20 ,but the degree of inequality in the distribution of income in all

the states excepting Kerala and H.P has fallen in the same period. There are also states

with lower growth rates accompanied by higher inequality. So the relation between

the growth rates and inequality is indeed paradoxical. It is really doubtful whether

growth causes inequality or the reverse. This paradoxical relation between the

temporal behaviour of growth and inequality across the states also becomes critical if

take into consideration of the temporal behaviour of the incidence of income poverty

along with this.

3.2 Analysis of the trend in poverty and its nature

Now as far as the incidence of poverty is concerned it is well recognised that because

of the growth mediated strategy of development and later the inclusion of the direct

public intervention programmes of the Govt the magnitude of the incidence of poverty

has declined not only at the national level but also at the rural and urban areas across

the states in varying degrees. However the dynamics behaviour of the extent of

poverty clearly reveals that the rate of decline was almost negligible up to1970

because of the failure of the trickle down hypothesis so that about 51% of our total

population lived below the official poverty line in the mid70s.Later since mid 70s the

extent of poverty started declining at a faster space both at the national level and

cross-state level such that between 1977-78 and 1987-88 national level poverty

declined to 39% and there after by 2019-20 it has reached the figure of 29.8%.It is

worth mentioning that while analysing the temporal behaviour of the incidence of

income poverty across the states we have used the planning commission estimates of

poverty .Now since the Planning commission has changed the methodology of

estimation of poverty for 2017-18 and 2019-20 by switching over from Lakdawala

methodology to the Tendulkar methodology which covers broader perspective for

measuring poverty, we have also used the same estimates for the periods 2017-18 and

2019-20 respectively. Obviously because of the change of methodology causing an

89
upward shift in state specific poverty lines we find rather a mild increasing trend in

the incidence of poverty across the states between 1999-2000 and 2017-18. This

seems to have produced little impact on our panel regression analysis.

The time profile of the incidence of poverty across the states which are given in table

-4 clearly reveals that almost all the excepting Bihar experienced a declining trend in

the incidence of poverty during 1973-74 to 1983 -84 in varying degrees. Similarly the

period from 1983-84 to 1993-94 also records a declining trend in the incidence of

poverty for almost all the states excepting Harayana and H.P. Interestingly it

discernable from the table -4 that almost all the states have experienced declining

trend in the incidence of poverty in varying degrees over the period from 1993-94 to

2019-20 i.e. during the post reform period. It is worth mentioning that since there is a

switch over of methodology of estimation of poverty between 1999-2000 and 2004 -

05, we find relatively higher figures of head count poverty for almost all the states.

However if we compare the figures of poverty estimated by using Lakdawala

methodology for the same periods then we find almost all the states excepting M.P,

Maharastra, Punjab, Rajasthan, and Orissa have experienced falling trend in poverty

(Ghosal, 2020) It also interesting to note that in all the states excepting Assam the

incidence poverty has fallen between 2017-18 and 2019-20., estimates for both years

are based on Tendulkar methodology. It is also interesting to note that our calorie

based estimate of poverty for 2019-20 reveals same declining trend in the poverty

with a relatively lesser degree of incidence of poverty across the states as compared to

the Tendulkar based estimates for the same period. Now to judge the relative positions

of states in respect of their ability towards the reduction of poverty we have ranked all

the states such that the state having the lowest incidence of poverty has got rank one

and so on. It is obvious from table-4 that no state has been able to retain constant

rank. We find that the relative positions of the states in respect of their ability of

reduction of poverty varies remarkably at the inter temporal level over the period of

our study.

90
Table -4: Trend in Poverty (Head Count Ratio) Across the States.

States 1973- 1977- 1983- 1987- 1993- 1999- 2017-18* 2018- 2019 2020
74 78 84 88 94 2016 19*** 20** 21***
A.P 48.86 28.91 28 25.86 22.19 21.3 15.8 29.6(6) 19.07 21.1(6)
( 6) (4) (4) (4) (2) (7)
Assam 51.21 40.47 40.47 36.21 40.86 36.09 19.7 34.4(11.5) 19.42 37.9(15)
( 7) (9) (9) (8) (12) (13)
Bihar 61.91 62.22 62.22 52.13 54.96 41.5 41.4 54.4(15) 23.5 53.5(16)
(14) (15) (15) (15) (16) (15)
Guj 48.15 32.79 32.79 31.54 24.21 16.2 16.8 31.6(8) 27.11 23(7)
( 5) (5) (5) (5) (3) (5)
Haray 35.36 21.37 21.37 16.64 25.05 11.1 14.0 24.6(4) 22.44 20.1(5)
( 3) (3) (3) (3) (4) (2)
H.P 26.39 16.4 16.4 15.45 28.44 11.7 10.0 22.9(3) 22.98 9.5(1)
( 1) (2) (3) (2) (7) (3)
Karnat 54.47 38.24 38.24 37.53 33.16 25.6 25 33.3(10) 22.16 23.6(8)
( 9) (7) (7) (9) (8) (9)
Kerala 59.79 40.42 40.42 31.79 25.43 15.7 15 19.6(1) 23.68 12(2)
(12) (8) (8) (6) (5) (4)
M.P 61.78 49.78 49.78 43.07 42.52 37.65 38.3 48.6(14) 27.17 36.7(12)
(13) (12) (12) (12) (14) (14)
Maha 53.24 43.44 43.44 40.41 36.86 28.65 30.7 30.2(7) 22.18 24.5(9)
( 8) (10) (10) (10) (11) (11)
Orissa 66.18 65.29 65.29 55.58 48.56 44.35 46.4 57.2(16) 17.6 37(9)
(16) (16) (16) (16) (15) (16)
Punjab 28.15 16.18 16.18 13.2 11.77 6.15 8.4 20.9(2) 17.6 15.9(3)
( 2) (1) (1) (1) (1) (1)
Rajas 46.14 34.46 34.46 35.15 27.41 21.2 22.1 34.4(11.5) 17.5 24.8(10)
( 4) (6) (6) (7) (6) (6)
T.N 54.98 51.66 51.66 43.39 35.03 22.15 22.5 29.4(5) 22.23 17.1(4)
(10) (13) (13) (13) (9) (8)
U.P 57.07 47.07 47.07 41.46 40.85 32.05 32.8 40.9(13) 23.55 37.7(14)
(11) (11) (11) (11) (12) (12)
W.B 63.43 54.85 54.85 44.72 35.66 28.3 24.7 34.2(9) 28.11 26.7(11)
(15) (14) (14) (14) (10) (10)
C.V. 24.195 28.699 37.027 35.542 32.706 43.306 43.31 43.82807

Source: Planning Commission 2002. Figs in brackets are Ranks. * Planning

commission’s estimates based on Lakdawala Methodology ** Author’s Estimate
based on Calorie consumption (2100 Kcal for Urban and 2400 K cal for Rural).
*** Planning commission’s estimates based on Tendulkar Methodology.

91
Now to judge the compatibility between the temporal behaviour of quiquennial

average growth rates, the degree of inequality and the relative change in the incidence

of poverty across the states we have computed the percentage point changes in the

incidence of poverty across the states and time, the estimates of which are give in the

table -4A. It is evident from the table that during the periods between (i)1973-74 and

1983-84 ; (ii)1983-84 and 1993-94 and also between 1993-94 and 1999-00 all the

states have experienced negative percentage point changes in the incidence of poverty

in varying degrees. . The phase wise analysis of the percentage point changes in the

extent of poverty across the states reveals that over the period between 1973-74 and

1983-84 all the states excepting Bihar have experienced faster fall in the magnitude of

poverty in varying degrees while in next phase (1983-84 to 1993-94) most of the

states excepting Harayana ,H.P and Assam have shown relatively smaller rate of

decline in the extent of poverty with high degree of variability (see table 4 and

4A).But in the third phase (1993-94to 1999-2000) all the states are found to have

experienced much faster fall in the extent of poverty. Further, during the 4th phase

(i.e. between 1999-2000 and 2017-18) we find relatively smaller rates of decline in

the magnitude of poverty in some of the states if the comparison is made between

poverty figures based on Lakdawala method (not shown in the Table-4a).. However in

such case a few states like Harayana, Maharastra, Orissa, Rajasthan are found to have

experienced the increase in the extent of poverty in varying degrees. But if we

consider the percentage point changes in the poverty across the states by comparing

the poverty ratios for 2017-18 which is based on Tedulkar method with the poverty

estimates of 1999-00 based on Lakdawala method as is shown in table 4A then we

find that all the states excepting Assam have experienced increase in poverty in

varying degrees. Interestingly, in the 5th phase (i.e. 2017-18 to 2019-20) we find that

92
all the states excepting Assam have experienced fall in the rate of poverty in different

magnitude with H.P,T.N, Gujrat, Orissa, Kerala showing much faster rates of fall in

poverty. On the whole the table -4 confirms that the extent of poverty has declined in

almost all the states in varying degrees since 1993-94.This is also confirmed by the

study made by Himanshu (2007). However our analysis contradicts the major

conclusion of Himanshu that poverty has reduced substantially between 1999-2000

and 2017-18, albeit he has drawn the conclusion by computing annual rates of

changes in poverty. We also find the fall in the extent of poverty over the same period

excepting for the states Rajasthan, Maharastra, Orissa, Harayana and Punjab but with

a relatively smaller magnitude in some of the states.

Table -4A: Temporal behaviour of the rate of change in Poverty since 1973-74.
Percent point Percent point
Percent point Percent point Percent
change in change in
change in change in point change
poverty in poverty in
States poverty in poverty in in poverty in
2004-2005* 2019-2020*
1983-84 over 1993-94 over 1999-2000
over 1999- over 2019-
1973-74 1983-84 over 1993-94
2000 2020*
Andhra
Pradesh -40.83 -23.24 -4.01 36.96 -28.72
Assam -20.97 0.96 -11.67 -4.68 10.17
Bihar 0.50 -11.67 -24.49 31.08 -1.47
Gujarat -31.90 -26.17 -33.08 95.06 -37.39
Haryana -39.56 17.22 -55.68 121.62 -18.29
H.P. -37.86 73.41 -58.86 95.73 -58.52
Karnataka -29.80 -13.28 -22.80 30.87 -29.13
Kerala -32.40 -37.09 -38.26 24.84 -38.77
M.P. -19.42 -14.58 -11.45 29.08 -24.49
Maharashtra -18.41 -15.15 -22.27 5.41 -18.87
Orissa -1.34 -25.62 -8.67 28.97 -54.59
Punjab -42.52 -27.26 -47.75 239.83 -23.92
Rajasthan -25.31 -20.46 -22.66 62.26 -27.91
T.N. -6.04 -32.19 -36.77 32.73 -41.83
U.P. -17.52 -13.21 -21.54 27.61 -7.82
W.B. -13.53 -34.99 -20.64 20.84 -21.93
Source: Author’s Computation. * Figures of poverty are estimated by Tendulkar
Methodology

93
Interestingly it also follows from table-4 &4A that there has been high degree of

variations in the incidence of poverty and its rates of decline both across states and

time. The time profile of the C.V reveals a tremendous increasing trend in cross state

variations in the incidence of poverty from 24.19% in 1973-4 to43.31% in 2017-18

and further to 43.83% in 2019-20 albeit with a bit fluctuation between 1987 and

1994. This clearly indicates a divergent trend .However it is discernable from the

table-3 that the time profile of the values of Gini inequality of each states does not

reveal any uniform trend. On the whole we find that (i) almost all the states have

experienced increase in their growth rates coupled with some states experiencing

increase in the degree of inequality and some experiencing falling inequality

especially in the post reform period; (ii) all states experienced fall in the incidence of

poverty with some achieving much faster fall and some very smaller rate of fall in

the same .Further some states have experienced increasing inequality with lower

growth rate and falling incidence of poverty.

Now if we look at the regional concentration of poverty and population across the

states, the overview of which is given in table -5 then we find an interesting picture

It follows that in the states like Bihar, UP, the shares in the total poverty stricken

people of India are much higher than their share in total population in 1999-2000 and

2019-20. For instance, while the share of UP in total population were 17% and

16.49% in 2001 and 2017 respectively, the relative share in total poverty stricken

people of India were 20.36% and 20.80% respectively in the same period.

Surprisingly, it is evident that while the share of UP in total population has fallen

between 2001 and 2017 the same in poverty has increased between the same period.

It is further interesting to note that while the shares of the state Bihar in total

population of the country have fallen from 10.69% in 2001 to 8.58% in 2017, its

share in poverty has fallen marginally from 16.36% to 15.32% during the same

94
period. The same trend is also found to persist for the states Maharashtra, West

Bengal. However, the share in total poverty afflicted people in Orrisa (4.32%) has

been found to be much higher than her share in total population (3.46%) in 2017.

The same picture is also found to persist in Orissa in 1999-2000 . If we club the

shares of the states like Bihar, MP, Maharashtra, Orrisa, UP, West Bengal and Tamil

Nadu in total poverty stricken people and in total population in India then it is really

surprising to note that while these states together account for only 53.96% of total

population of India, their share in total poverty afflicted people of the country reads

the figure of 62.24% in 2019-20. It is also evident that in all these seven states the

shares of poverty stricken people were much larger (71.65%) than their share in total

population (56.40%) in 2001. Now if we compare the growth performance of these

states with their relative share in poverty then we really find a contrasting picture of

high growth with higher concentration of poverty. So, once again we find a

paradoxical relation between growth performance and regional concentration of

poverty.

Table-5: Regional Concentration of Poverty and Population in 2019-20

No of persons below Percentage of poverty Percent share in total
States
poverty line( in lakh) afflicted people population in 2017.
A.P. 176.6 4.98 6.99
Assam 116.4 3.28(3.63) 2.58(2.59)
Bihar 543.5 15.32(16.36) 8.58(10.69)
Gujarat 136.2 3.84 4.99
Haryana 50 1.41 2.09
H.P. 6.4 0.18 0.57
Karnataka 142.3 4.01 5.05
Kerala 39.6 1.12 2.76
M.P. 261.8 7.38(11.47) 5.99(7.91)
Maha 270.8 7.64(8.76) 9.29(9.41)
Orrisa 153.2 4.32(6.5) 3.47(3.57)
Punjab 43.5 1.23 2.29
Rajasthan 167 4.71 5.67
Tamil Nadu 121.8 3.43 5.96
U.P. 737.9 20.80(20.36) 16.49(17)
W.B. 240.3 6.76(8.2) 7.55(7.81)
ALL INDIA 3546.8 100 100
Source: Authors computation from the data on poverty and census data on population. Figures in
parentheses are for 1999-00 (for poverty) and 2001 (for population).

95
3.3 Analysis of Panel Regression Results.
Now to resolve the paradoxical relation between growth, poverty and inequality and

also to find out the proximate explanatory factors responsible for the cross state and

cross time variations in the incidence of poverty we undertake panel regression by

using five yearly Panel data following the linear model as specified in section II. We

use the software LINDEP. Since our economy has experienced a policy evolution

from growth mediated development strategy to growth cum public action (workfare

program) led development strategy even during the post reform period, to capture the

impact of these policy variables on cross state and cross time incidence of poverty we

have used SSE, GRPCNSDP, as proximate explanatory factors in our panel. Further

since we find a paradoxical relation between growth and inequality, we have also

incorporated INQ as a possible explanatory factor. Moreover, since the spread of

education has a close bearing on the incidence of poverty, we have used literacy as a

possible explanatory factor. Now, since we find that our growth trajectory reveals a

radical structural transformation through service sector revolution, to capture the

effect of this we have used a modified panel function by incorporating GPCYA,

GPCYI, GPCYS as other possible explanatory factors for cross state and cross time

variations of the incidence of poverty. The following forms of model specifications

for panel regression are used:

POV = f (Constant, SSE, GRPCNSDP, INQ) (I)

POV = φ (Constant, SSE, INQ, GPCYA, GPCYI, GPCYS)

(II)

Now, since in the pooled regression method the assumptions of constancy of

intercepts and slope parameters across unit and time are unreasonable one has to

allow the intercept term to vary over time and across units by using the fixed effect

model (FEM). Since both the number of states (N) and the number of time periods (T)

are small which are not drawn randomly in our case and further since it follows from

96
the results that residual sum of squares fall substantially in FEM over pooled model

the use the fixed effect model is likely to be desirable. However since in our analysis

the N is much larger than T and the assumptions of error component model hold ,the

estimators of random effect model (REM) are likely to be more efficient than FEM

estimators(Taylor,1980). Moreover since both the Lagrange multiplier (LM) test and

Hausman test for FEM vs (REM) rejects the validity of FEM we use the REM without

combined error component (for both I and II model specifications above) following

the equation (2) in section II. The results of the panel regression for the model –I are

given in the table below.

It is evident from the result (see table –I) that the coefficients of the variables SSE and

GRPCNSDP are highly significant as is indicated by their ( P-Values) along with their

expected signs. So on the basis of the result we can draw the following conclusions.

First in relative term 1% increase in social sector expenditure will lower poverty by

1.29 points. Secondly we can say that 1% increase in per capita NSDP will bring

down the poverty by 1.53 points. Finally the effect of inequality on the incidence is

insignificant. So the cross state temporal variations in the SSE and GRPCNSDP seem

to be the crucial explanatory factors for the cross state temporal variations in the

incidence of poverty.

Table: I Result of Panel regression REM of model- I

Vraiable Coefficient P Values
SSE -1.293781485 0.0001
GRPCNSDP -1.533621668 0.0000
INQ -0.1897726546 0.5324
Constant 10.011073 0.0000
R Squared 0.15553
Var(u) 0.894241
Var (v) 0.155603
Sum of squares 0.257582
LM test= 119.85 0.0000
Hausman test = 2.76 0.43

Now since our economy has experienced structural transformation with tremendously

97
increasing trend in the service sector- led growth, we use the sectoral break up of the

per capita growth of NSDP so as to capture the effect of temporal and cross state

changes in the growth rates of per capita NSDP originating from the major three

sectors on the cross state as well as temporal variations in the poverty. In such case

also the Hausman test favours the use of REM. The results of panel regression under

REM model following equation -2 and model specification-2 are given in table-2

below.
Table: II Result of Panel regression REM of model -II

Vraiable Coefficient P Values

SSE -1.221556585 0.0002
INQ -0.3083839646 0.3107
GPCYA -0.4678071012 0.8361
GPCYI 0.9542299452 0.6380
GPCYS -1.231985593 0.0000

constant 60.40680391 0.0000

R Squared 0.1196
Var (u) 0.909979
Var(v) = 0.202577
Sum of squares 0.268529
LM test= 115.78 0.0000
Hausman test = 7.35 0.19567

It is evident from the result table –2 that the coefficients of the variables SSE and

GPCYS are highly significant ( as is indicated by their( P-Values) along with their

expected signs. So on the basis of the result we can draw the following conclusions.

First in relative term 1% increase in social sector expenditure will lower poverty by

1.22 points. Secondly we can say that 1% increase in per capita NSDP from service

sector will bring down the poverty by 1.23 points. Finally the effects of inequality,

GPCYA, GPCYI on the incidence of poverty are found to be insignificant in this

model specification. So the cross state temporal variations in the SSE and GPCYS

seem to have produced a substantial favorable impact on the cross state temporal

variations in the reduction of the incidence of poverty. Therefore we can plausibly say

that our panel results are highly compatible with the policy evolutions towards

poverty reduction and also with nature of the structural transformation with

98
tremendous increase in service sector –led growth which has also produced favorable

impact on the reduction of poverty across states and over time. Therefore it is also

plausible to conclude that for the further reduction in the magnitude of poverty of the

people across the states more emphasis should be placed not only on the increase in

the growth rates but also on the tremendous increase in the social sector expenditures

like health ,education etc across the states. However because of the high degree of

regional concentration of poverty as compared to that of population in a few states

some region specific special strategies for poverty alleviation seem to produce

substantial favorable effect on the incidence of poverty.

It is however interesting to note that in both of these panel results the variances ( var (

u)) assume very large values which clearly indicate that larger variations in the state

specific factors (state specific workfare programmes)and the omitted variables seem

to be responsible for the lower values of R squared in the REM. Now since we have

not selected the states and periods randomly and further since the N and T are small

the FEM could have been appropriate such that results of the FEM which are given in

the APPENDIX-6(Table I&II) also indicate that the same explanatory factors like

SSE, GRPCNSDP in the first specification and SSE and GPCYS in the second

specification are highly significant with higher values of adjusted R squared ( viz;

0.63 and 0.68). Further in terms of goodness of fit (with the values of Adj. R Squared

0.63 and 0.68) and the model test i.e. the F value and its probability, the regression

results are found to be robust. It is interesting to note that in another study covering

the period from 1983-84 to 2017-18 we have used the poverty estimates of planning

commission based on uniform methodology for panel regression(FEM) and found that

the variables INQ,SSE,GRPCNSDP,LIT and industrial growth (INDGR) together

explain 86% of the cross state variations in the incidence of poverty over time such

that all these explanatory factors excepting the variable INDGR have been found to be

highly significant with their respective desired signs (Table -3, Appendix -

6)(Ghosal,2017).

99
 QUESTIONNAIRE DATA ANALYSIS AND INTERPRETATION

Q1. Age group of people who have taken loan

Age group of people who have taken loan Percentage

20-30 33%
30-40 22%
40-50 38%
50-60 7%

Age Group
40% 38%

35% 33%

30%
25% 22%
20%
15%
10% 7%
5%
0%
20-30 30-40 40-50 50-60

Interpretation
The above graph study on age group of 40-50 have maximum taken loan from

microfinance institutions specially from moneylenders because they have no financial

literacy. Age group 20-30 have maximum taken loan from banks because they were

literate. Age group 50-60 only 25 respondents have taken loan but generally from

NGOs and MFIs. In urban 19% population 16% have no bank account and remaining

81% population who lives in rural area around 70% population does not have bank

account. Rural population have less awareness of banking facilities that’s why they

don’t go for bank accounts. Now-a-days opening bank account is very easy but then

too large number of rural population does not have bank accounts.

100
Q2. Literacy percentage of the individuals

Literacy percentage of the individuals Percentage

Illiterate 25%

SSC 43%

HSC 20%

Graduate 12%

50%

45% 43%

40%

35%

30%
25%
25%
20%
20%

15% 12%
10%

5%

0%
Illiterate SSC HSC Graduate

Interpretation
100 individuals have been considered from this vast population for this research

study. A questionnaire has been used for this research work which is filled by

individuals and institutions that provide microfinance to these individuals. In the

number of Individuals contacted maximum number of individuals about 43% were

SSC passed and 20% of the population contacted were HSC passed, 25 % of the

population was illiterate which is a thing to check and only 12% of the population was

graduate.

101
Q3. Occupation

Occupation Percentage Response

Farming 60%

Business 30%

Service 10%

Occupation

10%

Farming
30% Business
Service
60%

Interpretation
The above graph study on as per the questionnaire made we have asked the

individuals about their occupation. As per information collected 60% of the

individuals were farmers and they were belonging from rural areas. 30% of the

individuals were in business sector and the rest 10% of the individuals were in service

sector. As we can see the information collected reveals that the majority of people are

from agricultural sector and the minimum majority is with service sector.

102
Q4. Monthly income of the respondents

Monthly income Percentage

Less than 10,000 60%

10,000-30,000 30%

30,000& above 10%

Percentage
70%
60%
60%

50%

40%
30%
30%

20%
10%
10%

0%
Less than 10,000 10,000-30,000 30,000& above

Interpretation
The above graph study on the Income is the most important factor for which people

work. Either it is farming, business or service. According to the information collected

60% of the people had monthly income less than 10,000, 30% of the people had

monthly income more than 10,000 but less than 30,000, 10% of the people had

monthly income more than 30,000.

103
Q5. Do you think the innovative methods & Initiatives taken by Poverty and

Income is going to achieve desired goals?

Items Percentage

Yes 82%
No 4%
Do not know/ Can not say 14%

90%
82%
80%

70%

60%

50%

40%

30%

20% 14%
10% 4%
0%
Yes No Do not know/ Can not say

Interpretation
Poverty and Income strategy to focus microfinance services in underserved urban
areas and help the poor both economically and socially, along with its commitment to
make a tangible impact measured by tracking social indicators of progress, aligned
with the Dell family foundation’s goals. The foundation’s $500,000 commitment in
grant support for core operating expenses over the first two years of operation is
carrying Poverty and Income through breakeven.

Along with funding, the Michael & Susan Dell Foundation is sharing its expertise and
holding a seat on the board to help shape and guide Poverty and Income operations as
it expands to reach more women and improve their families’ lives.

104
Q6. Does a Non-Government Organization (NGO) play any role in provision of

Micro Credit?

Items Percentage

Yes 80%
No 3%
Do not know/ Can not say 17%

90%
80%
80%

70%

60%

50%

40%

30%

20% 17%

10%
3%
0%
Yes No Do not know/ Can not say

Interpretation

The role of NGOs is to foster the emergence of a worldwide civil society, the first

step towards making globalization a more democratic affair. NGOs were not born

yesterday, but the rising number of conflicts that have reverberated in recent decades

around a world globalized in the neo-liberal mould has led them to multiply and

diversify into highly visible bodies.

105
Q7. Do you think Foreign Investment should be allowed in Micro Credit

Projects?

Items Percentage

Yes 40%
No 30%
Do not know/ Can not say 30%

45%
40%
40%

35%
30% 30%
30%

25%

20%

15%

10%

5%

0%
Yes No Do not know/ Can not say
Series 1 40% 30% 30%

Interpretation

The above graph research shows that an increase in FDI leads to higher growth rates

in financially developed countries compared to rates observed in financially poor

countries. Local conditions, such as the development of financial markets and the

educational level of a country, affect the impact of FDI on economic growth Foreign

Investment should be allowed in Micro Credit Projects.

106
Q8. Do you think Microcredit is the Answer to Poverty Eradication in India?

Items Percentage

Yes 85%
No 1%
Do not know/ Can not say 14%

90% 85%

80%

70%

60%

50%

40%

30%

20% 14%
10%
1%
0%
Yes No Do not know/ Can not say
Series 1 85% 1% 14%

Interpretation

The above graph study on 85% Microcredit is the Answer to Poverty Eradication in

India Microfinance can help people in need by Helping them get started With a small

loan, a savings account and some basic training, many farmers, fishers or

entrepreneurs begin turning a profit. They can put money away, gaining interest.

Many pay off their micro-loans quickly., which found that microfinance not only

reduces how many households live in poverty but also how poor they are. Currently,

836 million people – or 14% of the world's population – experience extreme poverty,

living off less than US$1.25 a day.

107
Q9. Financing through SHGs has certain advantages? Kindly express you

opinion.

Items Percentage

Yes 59%
No 21%
Do not know/ Can not say 20%

70%

59%
60%

50%

40%

30%
21% 20%
20%

10%

0%
Yes No Do not know/ Can not say
Series 1 59% 21% 20%

Interpretation
The above graph studies are 59% the functions of the SHGs? Initiate and maintain

savings within the group: All members must regularly save at least a small amount.

These savings allow them to get future credits for their group. Lending loans to the

members: The savings made by the SHG must be used to provide loans to members of

the group. They provide loans from the bank to the poor without collateral. They help

the rural women to become self reliant. It helps them to save money & use,

lend/borrow at any time just like the banks.

108
Q10. Is there any need for a Micro Finance Development Fund in our Country?

Items Percentage

Yes 65%
No 10%
Do not know/ Can not say 25%

70% 65%

60%

50%

40%

30% 25%

20%
10%
10%

0%
Yes No Do not know/ Can not say
Series 1 65% 10% 25%

Interpretation
The above graph study on 65% Microfinance and its contribution in the economy are

significant. This sector contributes to reduce poverty, unemployment and inequality.

This sector is self employment generation and tries to raise leaving standard of

people. Very few researches have been carried out in the case of developing countries

like India. Microfinance provides access to capital for individuals who are financially

underserved. If microfinance institutions were not offering loans to this segment of

the society, these groups would have resorted to borrowing money from friends or

family members.

109
Q11. Can Micro-credit movement be taken as a mission?

Items Percentage

Yes 55%
No 25%
Do not know/ Can not say 20%

60%
55%

50%

40%

30%
25%
20%
20%

10%

0%
Yes No Do not know/ Can not say
Series 1 55% 25% 20%

Interpretation

The above graph study on microcredit is the small loan facility provided to the people

with less earning, to motivate them to become self employed. Microfinance refers to

the number of financial services provided to the small entrepreneurs and enterprises

who cannot take shelter of banks for banking and other services Micro-credit

movement is taken as a mission.

110
Q12. Assumption that credit is the main financial service needed by the poor,

Does the argument holds good in your view?

Items Percentage

Yes 64%
No 26%
Do not know/ Can not say 10%

70%
64%

60%

50%

40%

30% 26%

20%
10%
10%

0%
Yes No Do not know/ Can not say
Series 1 64% 26% 10%

Interpretation

The above graph study on 64% Assumption that credit is the main financial service

needed by the poor Providing efficient micro-finance to the poor is important for

many reasons, First, efficient provision of savings, credit and insurance facilities can

enable the poor to smoothen their consumption, manage risks better, gradually build

assets, develop micro-enterprises, enhance income earning capacity, and generally.

111
Q13. Assumption that credit can automatically translate into successful micro-

enterprises, Does the argument holds good in your view?

Items Percentage

Yes 73%
No 17%
Do not know/ Can not say 10%

80%
73%
70%

60%

50%

40%

30%

20% 17%
10%
10%

0%
Yes No Do not know/ Can not say
Series 1 73% 17% 10%

Interpretation

The above graph study on 73% Assumption that credit can automatically translate into

successful micro-enterprises, there is a broad concern that credit constraints will

simply become “the new normal” for SMEs and entrepreneurs and that they could be

disproportionately evidence on the COVID-19 crisis impacts on SMEs from business

surveys indicates severe disruptions and concerns among small businesses.

112
Q14. Assumption that those slightly above the poverty line do not need Micro-

Credit and giving it to them amounts to misdirecting, Does it hold good in

your view?

Items Percentage

Yes 42%
No 28%
Do not know/ Can not say 30%

45% 42%
40%
35%
30%
30% 28%

25%
20%
15%
10%
5%
0%
Yes No Do not know/ Can not say
Series 1 42% 28% 30%

Interpretation

The above graph study on 100 peoples are 42% microcredit is the small loan facility

provided to the people with less earning, to motivate them to become self employed.

Microfinance refers to the number of financial services provided to the small

entrepreneurs and enterprises who cannot take shelter of banks for banking and other

services Micro-credit movement is taken as a mission.

113
Q15. Assumption that micro-credit institutions can all become financially self-

sustaining, Does the argument holds good in your view?

Items Percentage

Yes 45%
No 25%
Do not know/ Can not say 30%

50%
45%
45%
40%
35%
30%
30%
25%
25%
20%
15%
10%
5%
0%
Yes No Do not know/ Can not say
Series 1 45% 25% 30%

Interpretation

The above graph study on 45% the financial sustainability would allow an MFI

independence from subsidies and the opportunity to continue outreach to populations

with unmet needs. Non-self-sufficient MFIs, however, may not be able to continue

operations due to lack of funding, thus diminishing their ability to aid in poverty

alleviation. Using data from 217 MFIs in 101 countries for 1998-2006, Ayayi and

Sene (2010) found that MFIs' financial sustainability is influenced by the quality of

credit portfolios, interest rates, client outreach and the age of MFIs.

114
Q16. Is there any risks in pushing Micro-Credit for poverty eradication?

Items Percentage

Yes 75%
No 20%
Do not know/ Can not say 5%

80% 75%

70%

60%

50%

40%

30%
20%
20%

10% 5%

0%
Yes No Do not know/ Can not say
Series 1 75% 20% 5%

Interpretation

The above graph study on 75% highly response are risks in pushing Micro-Credit for

poverty eradication microfinance institutions increase financial sustainability, which

is achievable together with poverty counter measures in this approach, sustainable

effort to reduce poverty can be achieved by using a double strategy, increasing the

productivity of the poor and providing basic social services for them.

115
Q17. What needs to be done to make micro-credit work in India?

Micro credit programs are not suited to all poor people equally. Poor people with

good oral math skills tend to participate more in micro credit programs, while those

with poor oral math skills tend to gravitate towards subsidized wage employment

programs, such as public works projects. Studies also suggest that the poorest of the

poor are more likely to seek subsidized wage employment when they want to improve

their economic situations.

That being said, micro-credit can still have a place in the arsenal of poverty reducing

techniques. While not every poor person is a budding entrepreneur, it is still true that

some of them are. In Bangladesh, as much as 1% of the population is composed of

new entrepreneurs working their way out of poverty each year. This is better than

nothing. The fewer people in poverty, the easier it will be to tackle to problem.

It has helped some families out of poverty and increased the store of knowledge as to

what poverty is and how it operates. It has also given some insights into what not to

do when trying to relieve poverty. These are all valuable contributions. But the hype

surrounding micro-credit is unwarranted. It will probably not be a major factor in the

overall reduction of world poverty

Q18 What are the terms & conditions for accessing micro credit through Poverty

and Income?

Poverty and Income is one of the few urban-focused microfinance institutions in

northern India. It is reaching out to women, those in greatest need of family economic

stability and in whose hands microfinance has proven to translate into better health

care, education and living conditions for their children. By working closely with

women through solidarity lending groups and educating them about various financial,

insurance and support services available, Poverty and Income is fostering a new

holistic model of accessible, affordable micro-credit to help break the cycle of urban

poverty.

116
 Chapter-4
Summary & Conclusions

4.1Findings/Results of the Study:

The main objectives of this paper were : (i) to examine the temporal and cross state

behaviour of the growth ,poverty and inequality and also to examine therelations

between them and see whether the temporal behaviour of the incidence of poverty is

compatible with the policy evolution followed since independence (ii) to re-examine

whether the conventional hypothesis that growth is a necessary but not sufficient

condition for the reduction of poverty across the states hold; and finally to find out the

proximate explanatory factors for the cross-state and temporal variations in the

incidence of poverty in terms panel regression analysis. The following conclusions

emerge from our study.

First at the aggregative level our economy has indeed achieved a high growth

trajectory such that it has been conspicuous during the post reform period with a

remarkable structural transformation on unconventional path which has been

accompanied by a tremendous increase in service sector driven growth path. Second,

all the states have experienced increase in the growth rates of their real per capita

NSDP in varying degrees over the period and the post reform period marks a phase of

achievement of very high growth rates for almost all the states. Further the relative

positions (ranks) of the states in respect of the achievement of the growth of per capita

NSDP have changed sporadically over the period. The nature of the growth

experienced by the states is found to be divergent over the period between 1973-74

and 2019-20 and also between 1991 and 1009-10. Second we do not find any uniform

relation between temporal behaviour of the growth rates and the Gini inequality

across the states. However the values of Gini inequalty coefficients in most of the

117
states are found to remain high over the entire period. In fact the relation between

temporal behaviour of growth rates and the Gini inequality across states are found to

be paradoxical.

Third, the time profile of the incidence of poverty across the states clearly reveals that

almost all the states excepting Bihar experienced a declining trend in the incidence of

poverty during 1973-74 to 1983 -84 in varying degrees. Similarly the period from

1983-84 to 1993-94 also records a declining trend in the incidence of poverty for

almost all the states excepting Harayana and H.P. Interestingly almost all the states

have experienced declining trend in the incidence of poverty in varying degrees over

the period from 1993-94 to 2019-20 i.e. during the post reform period. We also find

that the relative positions of the states in respect of their ability of reduction of

poverty varies remarkably at the inter temporal level over the period of our study.

Fourth, the time profiles of growth rates, Gini inequalities and the rates of fall in the

incidence of poverty do not reveal any definite desired relations . Further we find a

paradoxical relation between growth performance and regional concentration of

poverty. Fifth our panel regression results confirm that the cross state temporal

variations in the SSE and GRPCNSDP and the GPCYS are the crucial explanatory

factors for the cross state temporal variations in the incidence of poverty. Finally we

can plausibly say that our panel results are highly compatible with the policy

evolutions towards poverty reduction and also with nature of the structural

transformation with tremendous increase in service sector –led growth which has also

produced favorable impact on the reduction of poverty across states and over time.

Therefore it is also plausible to conclude that for the further reduction in the

magnitude of poverty of the people across the states, more emphasis should be placed

not only on the increase in the growth rates but also on the tremendous increase in the

118
social sector expenditures like health ,education etc across the states. However

because of the high degree of regional concentration of poverty as compared to that of

population in a few states some state specific special strategies for poverty alleviation

seem to produce substantial favorable effect on the incidence of poverty. Findings

after the study:

• Maximum number of rural population is illiterate. They don’t have financial

literacy.

• Maximum youth population age ranging between 20-30 want to take loan from

banks and they are literate so they can fulfill all the formalities

• Population ranging from age group 30-40 and 40-50 are not keen in borrowing

from banks. They prefer to take loans from moneylenders or MFIs.

• We have contacted the mix population but the maximum is from rural areas.

• In urban 19% population 16% have no bank account and remaining 81%

population who lives in rural area around 70% population does not have bank

account.

• Rural population have less awareness of banking facilities that’s why they don’t

go for bank accounts.

• In the number of Individuals contacted maximum number of individuals about

43% were SSC passed and 20% of the population contacted were HSC passed, 25

% of the population was illiterate which is a thing to check and only 12% of the

population was graduate.

4.2 Limitations:

1. To study the fruits of economic growth would automatically percolate amongst all

sections of people irrespective of region, religion and castes etc.

119
2. To examine the temporal and cross state behaviour of the growth, poverty and

inequality and also to examine the relations between them and see whether the

temporal behaviour of the incidence of poverty is compatible with the policy

evolution followed since independence.

3. To study the effectiveness of Microfinance in improving the standard of living for

poorer sections of society with special reference to Lucknow (Uttar Pradesh state).

4. The study will be students only UP and NCR Delhi will be included in the study.

4.3 Suggestions & Scope for further Study:

Nearly 5000 skill upgradation training programs have been conducted under these

initiatives covering nearly 2 lakh members of mature SHGs. Most of the trained SHG

members have since started on their journey to become promising entrepreneurship by

availing loans from their SHG. However, so far the evidence points to the several

benefits of microfinance. In particular, empowerment of women and the inculcation

of financial training and discipline amongst the poor will undoubtedly have long- term

socioeconomic benefits. The principles of self help and microcredit thus hold the key

to economic and sociocultural freedom for India’s millions of poor. Suggestion are

below:

• The initiative of government is not adequate to form more and more SHGs. As

such it is essential to strengthen the government functionary, to look after the

SHG needs, and the formation of new groups. Private micro-finance agencies

have to be curbed from collecting exorbitant rates of interest from the SHGs

members.

• The women beneficiary should be provided sufficient training before selecting

their economic activity.

120
• Delay in sanctioning loans and also redtapism in the banks must be curbed by

sincere and honest officers.

• Proper marketing facilities have to be provided to the SHG products, in order to

have a continuous production process, so that the SHG can have sufficient to run

the activities continuously.

• A centralized market is essential to sell the finished products produced by SHG

beneficiaries; hence the Government needs to establish centralized markets.

• The cost of funds to MFI is also issue of concern as they are not able to reduce the

interest rates due to small size of loans and operational cost. Banks rate of interest

are also very high.

4.4 Keywords & their Meaning:

Microfinance, Microcredit, Entrepreneur, Financial Inclusion, Economic

Opportunities.

The concept of microfinance refers to provision of financial services to the poor

through credits & deposits. The microfinance in India is gaining momentum for

sustainable development. Microfinance is taken as an important tool for poverty

alleviation & livelihood for the poor. It is also taken as a method for financial

inclusion to improve sustainable development in the country. The innovation brought

by Dr. Mohammad Yunus at Bangladesh which is currently existing as Grameen

Model as created awareness to many countries & especially in India to make it as a

way of eradicating poverty. The microfinance sector is currently undergoing into huge

innovations & claiming to be an emerging sector especially creeping into the concept

of financial inclusion.

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 Chapter-5
Recommendations
(1) Proper Regulation : The regulation was not a major concern when the

microfinance was in its nascent stage and individual institutions were free to

bring in innovative operational models. However, as the sector completes almost

two decades of age with a high growth trajectory, an enabling regulatory

environment that protects interest of stakeholders as well as promotes growth, is

needed.

(2) Field Supervision: In addition to proper regulation of the microfinance sector,

field visits can be adopted as a medium for monitoring the conditions on ground

and initiating corrective action if needed. This will keep a check on the

performance of ground staff of various MFIs and their recovery practices. This

will also encourage MFIs to abide by proper code of conduct and work more

efficiently. However, the problem of feasibility and cost involved in physical

monitoring of this vast sector remains an issue in this regard.

(3) Encourage rural penetration: It has been seen that in lieu of reducing the initial

cost, MFIs are opening their branches in places which already have a few MFIs

operating. Encouraging MFIs for opening new branches in areas of low

microfinance penetration by providing financial assistance will increase the

outreach of the microfinance in the state and check multiple lending. This will

also increase rural penetration of microfinance in the state.

(4) Complete range of Products: MFIs should provide complete range of products

including credit, savings, remittance, financial advice and also non-financial

services like training and support. As MFIs are acting as a substitute to banks in

122
 areas where people don’t have access to banks, providing a complete range of

products will enable the poor to avail all services.

(5) Transparency of Interest rates: As it has been observed that, MFIs are

employing different patterns of charging interest rates and a few are also charging

additional charges and interest free deposits (a part of the loan amount is kept as

deposit on which no interest is paid). All this make the pricing very confusing

and hence the borrower feels incompetent in terms of bargaining power. So a

common practice for charging interest should be followed by all MFIs so that it

makes the sector more competitive and the beneficiary gets the freedom to

compare different financial products before buying.

(6) Technology to reduce Operating Cost: MFIs should use new technologies and

IT tools & applications to reduce their operating costs. Though most NBFCs are

adopting such cost cutting measures, which is clearly evident from the low cost

per unit money lent (9%-10%) of such institutions. NGOs and Section 25

companies are having a very high value of cost per unit money lent i.e. 15-35

percent and hence such institutions should be encouraged to adopt cost-cutting

measures to reduce their operating costs. Also initiatives like development of

common MIS and other software for all MFIs can be taken to make the operation

more transparent and efficient.

123
 BIBLIOGRAPHY
BOOKS:
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(vii) Lucas, Robert E.B., and Stark, Oded. (1985) “Motivation to Remit: Evidence
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(ix) Lucas, Robert E.B., and Stark, Oded. (1988) “Migration, Remittances and the
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(x) Rogaly, Ben. (2002) “Seasonal Migration and Welfare/illfare in Eastern India:
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(xi) Rosenzweig, Mark. (1988) “Risk, Implicit Contracts and Family in Rural
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(xii) Stark, Oded. (1978) Economic and Demographic Interaction in the Course of
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(xiii) Bansal, H. (2003) ‘SHG- bank linkage programme in India: an overview’,
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(xiv) Chakrabarti, R. (2004) The Indian Microfinance Experience –

Accomplishments and Challenges, www.microfinacegateway.org.

(xv) Krog, J. (2000) Attacking Poverty with Decentralization and Micro credit:
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(xvi) Kropp, W.E. and Suran, B.S. (2002) Study of Linking Banks and (Financial)
SHGs in India, National Bank for Agriculture and Rural Development,
Mumbai, India.

(xvii) Mohanan, S. (2000) Micro Credit and Empowerment of Women- Role of

NGOs, Yojana, Vol. 44, No. 2, pp.22–28.

(xviii) National Bank for Agriculture and Rural Development (1999) Task Force
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(xix) National Bank for Agriculture and Rural Developement (2004), SHG Bank
Linkage programme-Highlights, Mumbai, India.

(xx) National Bank for Agriculture and Rural Development (2004) Annual Report,
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(xxi) Puhazhendhi, V. and Badatya, K.C. (2002) SHG Bank Linkage Programme
for Rural Poor-An Impact Assessment, National Bank for Agriculture and
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(xxii) Rao, M. (2004) Micro Finance Institutions in India, National Bank for
Agriculture and Rural Development, Mumbai, India.

(xxiii) Secretary General (1998) Report on Role of Micro Credit in the Eradication of
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on micro credit operation, www.bangladesh_bank.org/Seminar/cpindia.html.

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(xxv) Wilson, K. (2002) ‘The new microfinance-an essay on the self-help group
movement in India’, Journal of Microfinance, Vol. 4, No. 2, pp.21–245.

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Internet Website links

• http://www.sifo.in/

• http://tulipbusiness.com/mlm_in_india/

• http://mitashitradelink.com/

• http://www.peerless.co.in/

electronic copy available at:

https://shodhganga.inflibnet.ac.in/handle/10603/222153/ https://shodhganga.inflibnet.ac.in/handle/10603/333320

126
 ANNEXURE

Questionnaire

Q1. Age group of people who have taken loan

Age group of people who have taken loan Percentage

20-30 33%
30-40 22%
40-50 38%
50-60 7%

Q2. Literacy percentage of the individuals

Literacy percentage of the individuals Percentage

Illiterate 25%
SSC 43%
HSC 20%
Graduate 12%
Q3. Occupation

Occupation Percentage Response

Farming 60%
Business 30%
Service 10%

Q4. Monthly income of the respondents

Monthly income Percentage

Less than 10,000 60%

10,000-30,000 30%

30,000& above 10%

127
Q5. Do you think the innovative methods & Initiatives taken by Poverty and
Income is going to achieve desired goals?

Items Percentage

Yes 82%
No 4%
Do not know/ Can not say 14%

Q6. Does a Non-Government Organization (NGO) play any role in provision of

Micro Credit?
Items Percentage

Yes 80%
No 3%
Do not know/ Can not say 17%

Q7. Do you think Foreign Investment should be allowed in Micro Credit

Projects?
Items Percentage

Yes 40%
No 30%
Do not know/ Can not say 30%

Q8. Do you think Microcredit is the Answer to Poverty Eradication in India?

Items Percentage

Yes 85%
No 1%
Do not know/ Can not say 14%

128
Q9. Financing through SHGs has certain advantages? Kindly express you
opinion.
Items Percentage

Yes 59%
No 21%
Do not know/ Can not say 20%

Q10. Is there any need for a Micro Finance Development Fund in our Country?
Items Percentage

Yes 65%
No 10%
Do not know/ Can not say 25%

Q11. Can Micro-credit movement be taken as a mission?

Items Percentage

Yes 55%
No 25%
Do not know/ Can not say 20%

Q12. Assumption that credit is the main financial service needed by the poor,
Does the argument holds good in your view?
Items Percentage

Yes 64%
No 26%
Do not know/ Can not say 10%

Q13. Assumption that credit can automatically translate into successful micro-
enterprises, Does the argument holds good in your view?
Items Percentage

Yes 73%
No 17%
Do not know/ Can not say 10%

129
Q14. Assumption that those slightly above the poverty line do not need Micro-
Credit and giving it to them amounts to misdirecting, Does it hold good in
your view?
Items Percentage

Yes 42%
No 28%
Do not know/ Can not say 30%

Q15. Assumption that micro-credit institutions can all become financially self-
sustaining, Does the argument holds good in your view?
Items Percentage

Yes 45%
No 25%
Do not know/ Can not say 30%

Q16. Is there any risks in pushing Micro-Credit for poverty eradication?

Items Percentage

Yes 75%
No 20%
Do not know/ Can not say 5%

Q17. What needs to be done to make micro-credit work in India?

Q18 What are the terms & conditions for accessing micro credit through Poverty
and Income?

*****Thank You********

130