Industrialisation and tertiarisation in rural areas will generate high, productive employment which will lift a majority of families from poverty
The Coronavirus-induced lockdown, which left millions of workers unemployed, recently had its anniversary on March 25. Unfortunately, this coincides with the start of the second wave of the outbreak of the deadly virus. During the lockdown, economic activities came to a standstill and so did the income of millions. The pandemic has pushed millions of labourers and their families deep into poverty. Many labour-intensive industries were shut down during lockdown and even afterwards. The mass exodus of migrant workers from cities and industrial towns on foot and by other means reminds us of the pain that they and their family members have gone through. The Government aid, inoculation drives and policy stimuli certainly endeavoured to extend a helping hand; yet the damages to jobs, income and social equality are irreversible. Economists and multilateral agencies have expressed grave concerns on the rising levels of poverty and inequality. In the current scenario dominated by recession and uncertainty, it becomes vital to study the factors that can help alleviate poverty in India.
However, poverty and inequality are not new issues in our country. Rather, they have been the co-travellers with the journey of our economic growth and have started turning more severe recently due to the pandemic and subsequent uncertainty that looms large on the economy. At the international level also, the World Bank’s Millennium Development Goals put the objective of ‘poverty eradication’ on priority. Eradication of poverty lifts the living standard of individuals in terms of education, health and social status, thus bringing equality in the society. Poverty is directly linked to employment which is a derivative of productive sectors which differ in States. Thus, the poverty levels in various States are also significantly different from one another. However, the common objective of all the States is ‘poverty alleviation’.
The historical data from as many as 23 States were studied in terms of poverty reduction and associated factors. including unemployment and growth of productive sectors — agriculture, industry and services. An attempt was made to empirically fathom the relationship between poverty reduction and associated macro-economic factors. The latest State-wise data on poverty for 2004-05 and 2011-12 were sourced from the Reserve Bank of India’s ‘Handbook of Statistics on Indian States’. With the increasing levels of industrialisation, the States have managed to reduce poverty levels in a span of seven years. Goa, Andhra Pradesh, Himachal Pradesh, Tripura and Uttarakhand witnessed highest poverty reduction of more than 65 per cent. In contrast, Assam, Jharkhand and Chhattisgarh barely lifted their people from poverty, with less than 20 per cent reduction in it. The poverty ratio had declined from 37 per cent in 2004-05 to 22 per cent in 2011-12. Historically, rural areas witnessed a higher poverty ratio (26 per cent) as compared to urban (14 per cent).
Poverty reduction rate in States is found to be negatively correlated with growth in the rural unemployment in a significant manner, but was found not associated with the urban unemployment growth. This implies that the States with higher reduction in rural unemployment (Goa, Himachal Pradesh, Tripura, Kerala and Punjab) excelled in poverty reduction. However, Uttarakhand, Andhra Pradesh, Tamil Nadu and Madhya Pradesh are exceptions to this. These States, despite exhibiting a higher growth in rural unemployment, managed to gain higher in poverty alleviation. In contrast, the States that exhibited a high growth in rural unemployment (Assam, Jharkhand and Chhattisgarh) had to pay the cost of slender poverty alleviation. It concludes that the rural employment in the States holds the key to eradication of poverty.
India, where more than 65 per cent of population lives in villages, cannot afford to ignore the role of rural employment and income generation. To alleviate poverty, employment generation in rural areas is more important than that in urban India. This aligns with the fact that rural India exhibits more poverty ratio than urban areas. The major source of income in rural areas is believed to be agriculture and the allied services.
Further, the association of poverty reductions with growth of productive sectors — agriculture, industry and services — in different States is analysed. As expected, the correlation between poverty reduction and the growth rates of all productive sectors is significant with varying magnitudes and directions. The productive sectors, with their varying productivities, serve employment as well as generate income which helps people lift from poverty. Interestingly, growth in agriculture is not sufficient to absorb the increasing job requirements in rural India and hence is alone not capable of poverty reduction. The States with a higher growth in the agriculture sector (Jharkhand and Chhattisgarh), exhibited lowest gains in poverty reduction. Notably, these States could not thrive in a higher growth of industry and services sectors. In contrast, the States with the lowest growth in agriculture but highest growth in industry and services (Goa, Andhra Pradesh and Himachal Pradesh) outperformed the other States in attaining the poverty alleviation objective. In other words, it is not agriculture but industry and services sector that buttress poverty alleviation across States in India. Between industry and services, services turned out to be more influential in poverty reduction.
This finding echoes the theory of economic growth and structural change presented by Nobel laureate and American economist Simon Kuznets. According to the theory, a developing economy shifts from agriculture (primary) to industry (secondary) and then to services (tertiary) sector — a process of ‘structural change’. In this process, employment shifts from the lower to higher productive sector, yielding an overall productivity and income gain in the economy. India, being a developing economy, treaded this path of structural change, however, bypassing industrialisation and tertiarisation.
At present, even if industrialisation is promoted with the primary objective of poverty reduction, India may not gain much in terms of employment. This is due to the capital intensification facilitated by higher fixed-capital investment in industries, making them capital intensive. Collectively, this issue of disproportionate growth in employment as compared to output growth is termed as ‘jobless growth’ in industries. In contrast, the services sector, being more productive and labour-intensive as compared to agriculture and industry, guarantees a higher level of income and contributes significantly in poverty eradication. This is substantiated by the findings of the instant study: The top six States in poverty reduction — Goa, Andhra Pradesh, Himachal Pradesh, Uttarakhand, Tripura and Kerala — are the ones with the highest growth and share of services in State GDP.
Conclusion: State-wise poverty reduction is quite heterogeneous due to differences in the employment scenario and sectoral growth of States. While some States outperformed the others in poverty alleviation, others are still struggling to lift their people up from poverty line. It is important to understand the factors impacting poverty reduction in the States of India from historical evidences. In terms of employment, it is the rural employment that drives poverty alleviation. Whereas, in terms of productive sectors, it is the services sector that is the major source of employment generation and hence poverty reduction.
The key of poverty alleviation lies with employment generation in the rural India that houses two-third of India’s population. More than agriculture, industry and services sectors development— industrialisation and tertiarisation— must be promoted in rural India. The current wave of privatisation and production-linked incentive schemes must consider the inclusion of rural areas. At the same time, skill development in rural areas is the need of the hour to enable the rural population to join the workforce in higher productive sectors.
Swapnil is senior research scholar at IISc, Bengaluru, and Majumder is an independent researcher. The views expressed are personal.