The key to poverty alleviation lies with employment generation in Rural India
Date : 18/05/2024
“Industrialization and tertiarization in rural areas will generate a high productive employment which will lift a majority of families from poverty.”
Lockdown, which left millions of workers unemployed, cited its anniversary recently in the month of March in India. Eventually and unfortunately, this period coincides with the start of the second wave of virus outbreak. Since the lockdown, economic activities came to standstill and so did the income of millions. Pandemic has also pushed India’s aspirational $5 trillion GDP dream and left it for merely surviving and recovering (Soni and Bala Subrahmanya, 2020c). The pandemic and its aftermath shuttered many labour-intensive industries and pushed many labourers and their dependents below poverty line. The exodus of migrant labourers through uncommon means is a known story. Government aid, inoculation drives and policy stimuli certainly endeavored to extend helping hands; yet, damages on jobs, income and social equality are irreversible. Economists and multilateral agencies expressed their grave concerns on rising poverty and inequality in the near future in India (Gopalan and Misra, 2020). It becomes vital to study the factors that can help alleviate the poverty in India, especially in the current scenario surrounded by recession and uncertainty.
Poverty and inequality are however not new issues in our country. Rather, they have been daunting co-traveler with our economic growth journey and started turning more severe due to pandemic and uncertainty in the economy. In an international level also, the World Bank’s Millennium Development Goal put the ‘poverty eradication’ objective on priority (The World Bank, 2015). Eradication of poverty lifts the living standard of life of individuals in terms of education, health and social status, and thereby brings equality in the society. Poverty has a direct link with employment which is a derivative of productive sectors. Given the heterogeneity and quasi-federal system in India, different states have varying structures of productive sectors and hence employment structures. The poverty level in different states is also significantly different from one another. However, the common objective of all states is ‘poverty alleviation’ that in turn helps the economy eradicate poverty and bring equality in the country.
Data and sources
In this direction, 23 major states with seasoned historical data 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 fathom the relationship between poverty reduction and associated macroeconomic factors, empirically. The latest state-wise two period (2004-05 and 2011-12) data on poverty were sourced from Reserve Bank of India’s ‘Handbook of Statistics on Indian States’.
The latest state-wise poverty data is available only as of 2011-12. It is this reason due to which the present analysis is limited to the period of 2011-12. The penultimate period of poverty data availability is 2004-05. Consideration of these periods provides a reliable conclusion based on analysis of a long period and seasoned database. All the macroeconomic variables including state-wise sectoral growth and unemployment are considered for this period to maintain consistency in the analysis.
Analyses and results
Overall, with increasing levels of industrialization, tertiarization and, thereby income, Indian states managed to reduce poverty in this span of seven years. Goa, Andhra Pradesh, Himachal Pradesh, Tripura and Uttarakhand witnessed the highest poverty reduction of more than 65%. In contrast, Assam, Jharkhand and Chhattisgarh barely lifted their people from poverty with less than 20% reduction in poverty. So, what are the factors affecting these states performing differently in poverty alleviation? These factors are analyzed empirically using state level data.
In India, the poverty ratio had declined from 37% in 2004-05 to 22% in 2011-12. Historically, rural India witnessed a higher poverty ratio (26%) as compared to urban India (14%) and dominates the poverty issue in the nation. It alludes us to analyze the factors of poverty alleviation differently for rural and urban India.
Role of rural and urban unemployment in poverty alleviation
While analyzing the rationale for this heterogeneity across states through the lens of rural and urban unemployment rate, an interesting finding emerged. Poverty reduction rate in a state is found to be significantly negatively correlated with growth in rural unemployment, but not associated with urban unemployment growth.[i] This implies that the states with higher reduction in rural unemployment (Goa, Himachal Pradesh, Tripura, Kerala and Punjab) excelled in poverty reduction (Figure 1). However, exceptions to this are Uttarakhand, Andhra Pradesh, Tamil Nadu, and Madhya Pradesh. 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) witnessed slender poverty alleviation. This concludes that rural employment in the states holds the key to poverty alleviation. Andhra Pradesh, Uttarakhand, and Tamil Nadu are exceptions to this generalized finding. These states, despite witnessing a high growth in rural unemployment, managed to reduce poverty significantly. In these states, a high growth in rural unemployment is compensated by relatively less growth or even de-growth in urban unemployment that contributed to income generation and poverty reduction. In other words, Andhra Pradesh, Uttarakhand, and Tamil Nadu are exceptional states, where poverty alleviation is driven by the urban employment not by the rural employment, like other India states.
Figure 1: Poverty reduction versus rural unemployment growth
India, where more than 65% of the population live 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 than urban India. However, this objective must not be substituted by migration and urbanization that is unsustainable in the long run. The major source of income in rural areas is believed to germinate from agriculture and allied services. This leads to the subsequent question: Is agriculture a major contributor in poverty alleviation as compared to the other productive sectors – industry and services?
Role of productive sectors in poverty alleviation
Further, the association of poverty reductions with growth of productive sectors – agriculture, industry and services – in different states is diagnosed. As expected, the correlation between poverty reduction and growth rates of all the productive sectors are discovered to be statistically significant with varying magnitude and direction. The productive sectors, with their varying productivity, generate employment as well as income which helps people lift from poverty level.
Figure 2: Poverty reduction versus sectoral growth
Interestingly, growth in agriculture is not sufficient to absorb the increasing job requirement in rural India, and hence is alone not capable of poverty reduction. The states with higher growth in the agriculture sector (Jharkhand and Chhattisgarh), exhibited lowest gain in poverty reduction (Figure 2). Notably, these states could not thrive in a higher growth of industry and services sectors. In contrast, the states with lowest growth in agriculture but highest growth in industry and services (Goa, Andhra Pradesh, 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 the 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 given by Nobel laureate and American economist Simon Kuznets (Kuznets, 1955). According to this 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 lower to higher productive sectors yielding an overall productivity and income gain in the economy. India, being a developing economy, treaded this path of structural change, however, by-passing industrialization, as substantiated by economic literature (Ray and Kar, 2020; Soni and Bala Subrahmanya, 2020b).
At present, even if industrialization is promoted with the primary objective of poverty reduction, India may not gain much in employment and poverty reduction. This is due to the capital intensification facilitated by higher fixed capital investment in industries making them capital intensive (Soni and Bala Subrahmanya, 2020a). Collectively, this issue of disproportionate growth in employment as compared to output growth is termed as ‘jobless growth’ in industries (Bala Subrahmanya, 2014). 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 present study: the top six states in poverty reduction – Goa, Andhra Pradesh, Himachal Pradesh, Uttarakhand, Tripura, and Kerala – are the ones with highest growth and share of services in state GDP.
Conclusion
State-wise poverty reduction is quite heterogeneous due to differences in employment scenarios and sectoral growth of states. While some of the states outperformed the others in poverty alleviation, others are still struggling to lift their people from the poverty line. It is important to understand the factors impacting poverty reduction in the states of India from the historical evidence. In terms of employment, it is rural employment that drives the 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.
Migration of workers from rural to urban India is neither a solution of poverty alleviation nor should be welcomed as evident from the recent agony of migrant workers during the pandemic. The key of poverty alleviation lies with employment generation in rural India that houses two-third of India’s population. More than agriculture, industry and services sector development -industrialization and tertiarization - must be promoted in rural India. This needs infrastructure development for industry and services sectors in rural areas which seem to be a farfetched dream. Yet, a political will and long-term strategy could pave the way for stopping undesired migration and sustainable employment generation through higher productive sectors in rural India. The current wave of privatization 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.
In the long run, as rural India comes closer to the mainstream, its participation and inclusion in higher productive sectors will be instrumental to poverty eradication and income equality in India.
References
Bala Subrahmanya, M. H. (2014) ‘Why Does India’s Economic Growth Process Falter?’, Economic & Political Weekly, XLIX(8), pp. 20–22.
Gopalan, H. S. and Misra, A. (2020) ‘COVID-19 pandemic and challenges for socio-economic issues, healthcare and national programs in India’, Diabetes & Metabolic Syndrome: Clinical Research & Reviews. Elsevier.
Kuznets, S. (1955) ‘Economic growth and income inequality’, The American Economic Review, 45, pp. 1–28.
Ray, S. and Kar, S. (2020) Kuznets’ tension in India. 2020/24.
Soni, S. and Bala Subrahmanya, M. H. (2020a) ‘Empirical Study of Industrial Classification, Structure, and Factor Intensity: An Enquiry into Dwindling Labor Intensity in a Labor-Surplus Economy’, Emerging Economy Studies, 6(2), pp. 201–213. doi: 10.1177/2394901520977428.
Soni, S. and Bala Subrahmanya, M. H. (2020b) ‘Growth and Structural Change in the Indian Economy’, Economic and Political Weekly, 55(26–27), pp. 65–70.
Soni, S. and Bala Subrahmanya, M. H. (2020c) ‘India’s Sectoral Growth Patterns and US $ 5 Trillion Trajectory: An Empirical Investigation on Macroeconomic Impact of COVID-19’, The Indian Economic Journal, (Special Issue COVID-19). doi: 10.1177/0019466220968064.
The World Bank (2015) ‘Millennium Development Goals’, in.
[i] All the correlations mentioned in this article are computed using Pearson correlation coefficients for linear association and statistically tested for their significance using t-test with 95% confidence level.
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