Does higher growth ensure lower poverty rates?

“In the past 8 years our economy has grown at a record annual rate of 8.2 per cent. We have ensured that poverty has declined much faster, agriculture has grown faster, and rural consumption per person has also grown faster. 

We need to do more, and we will do more. But to achieve inclusiveness we need more growth.”

-          Prime Minister of India, Address to the Nation

Addressing the nation with a televised speech, the Prime Minister, Dr. Manmohan Singh, made these remarks in September 2012. These remarks are important in context of our analysis – does growth necessarily lead to inclusivity? Or can there be growth without a commensurate reduction in poverty?

While India is an emerging economy in the world today, and has shown impressive growth rates in the past decade, poverty remains a key concern. As per the Tendulkar Committee estimates for 2009-10, poverty was at around 30%. While this is an improvement over the 37% figures just five years before in 2004-05, it is still a high figure. The silver lining, nevertheless, is that it is during this period, India also witnessed robust economic growth of 8.7%, in comparison with 6% in the five years before.

Since this is a positive trend, we take a deeper look at the figures at the state-wise level to see how far it this correlation is validated at a state level. We consider two sets of numbers – the 2004-05 and 2009-10 poverty figures, and the 5 year compounded annual growth rate (CAGR) for India’s economic growth corresponding to the two years. We find that a spurt in growth between 2004-05 and 2009-10 across states and union territories (UTs) is indeed associated with a sharper lowering in poverty rates. However, if we consider only 2009-10 data, the fastest growing states do not necessarily have the lowest poverty rates.

Faster growth associated with sharper decline in poverty

For India as a whole, poverty fell by exactly 7.4 percentage points in 2009-10 from 2004-05, while growth accelerated by 2.7 percentage points. In the state-wise analysis, we look at the top 10 states and UTs with a decline in poverty rate in excess of the all India average. Seven of these, have also shown a higher than all India average increase in GDP. While smaller states like Sikkim and Goa show an impressive decline in poverty rates, as well as above average GDP growth rate (see table), larger states like Uttarakhand, Maharashtra, Madhya Pradesh and Tamil Nadu are not far behind either. Madhya Pradesh, for instance, has seen the sharpest acceleration in GDP growth among these 7 states (of over 6 percentage points) and a decline in poverty rate by almost 12 percentage points. A similar case is seen in Uttarakhand as well.

However, it does need to be noted, that a decline in poverty rate does not necessarily correlate with sharper GDP growth. The most obvious example of this is Tripura (see table), which has shown the highest decline in poverty rate over the half decade between 2004-05 and 2009-10. Even though it has shown an over 22 per cent decline poverty, Tripura’s GDP growth rate has barely moved. With the two remaining outliers – Orissa and Himachal Pradesh – here too GDP growth has improved, but at a somewhat sluggish rate.

While these trends indicate the correlation between poverty rates and GDP on the whole – the real proof of the trend lies when we look at poverty trends from the opposite direction. If we consider states that have seen an increase in poverty over the period – states like Delhi, Manipur, Mizoram, Meghalaya and Nagaland – three of these states have a lower than average India change in GDP growth. Of these, Delhi is probably not even a valid case, since increase in poverty is likely explained in part by a high degree of migration to the city-state, which essentially leaves us with the four North-Eastern states. Of these, Nagaland, which has seen the sharpest increase in poverty rate by over 12 percentage points, has actually seen a deceleration in GDP growth by 1.6 percentage points as well (see table). And the only exception is Mizoram, which has seen a 3.8 percentage point increase in GDP growth rate, but clearly, the fruits of the growth have not been shared by all as seen from the increase in poverty rate.

States with highest decline in poverty by  (2004-05 to 2009-10)
	Change in poverty (percentage point)	GDP (percentage point)
Tripura	-22.6	-0.1
Orissa	-20.2	2.5
Sikkim	-17.8	12.7
Goa	-16.2	3.7
Uttarakhand	-14.7	5.8
Maharashtra	-13.7	4.9
Himachal Pradesh	-13.4	1.9
Puducherry	-13.0	6.1
Madhya Pradesh	-11.9	6.3
Tamil Nadu	-12.3	5.4
India	-7.4	2.7
Sources: Planning Commission, CSO, Orbis Economics Estimates

States with increase in poverty (2009-10 less 2004-05)
	Change in poverty (percentage point)	GDP (percentage point)
Nagaland	12.1	-1.6
Manipur	9.2	1.8
Mizoram	5.7	3.8
Assam	3.5	0.9
Delhi	1.2	4.9
Meghalaya	1.0	1.9
Sources: Planning Commission, CSO, Orbis Economics Estimates

High growth and poverty

The correlation between poverty and GDP growth is not quite so obvious if we look at numbers only for 2009-10. Of the top 10 states and UTs with the lowest poverty rates, only half have higher than India average GDP growth of 8.7 per cent. And even these five have more UTs than states (see table), with Delhi being a special state. This then suggests that high growth does not necessarily mean low poverty.

However, there is some case to suggest that high poverty rates do go hand in hand with below average growth. If we turn the data around and analyse the eight states with higher than average India poverty rates – Bihar, Chhattisgarh, Manipur, Jharkhand, Assam, Uttar Pradesh, Orissa and Madhya Pradesh, we find that only one of them – Orissa – has growth equal to all India average, while the rest lie under that growth rate.

While it is debatable whether we should strictly consider the 8.7 per cent mark as the dividing line for GDP growth when states like Bihar, Chhattisgarh and Madhya Pradesh have in fact shown robust growth of over 8 per cent over the period, it does provide a framework for analysis. In fact, it also goes on to providing further evidence that even with high growth (higher or lower than India average not withstanding), poverty does not magically disappear. Moreover, large state economies like Maharashtra, Gujarat and Andhra Pradesh all have poverty rates in excess of 20%.

Poverty and GDP across states in 2009-10
	Poverty (%)	GDP (%, yoy)
A&N Islands	0.4	12.1
Puducherry	1.2	10.7
Goa	8.7	8.6
Chandigarh	9.2	10.1
Jammu and Kashmir	9.4	5.8
Himachal Pradesh	9.5	8.3
Kerala	12.0	8.2
Sikkim	13.1	20.4
Delhi	14.2	11.5
Punjab	15.9	7.4
Meghalaya	17.1	7.9
Tamil Nadu	17.1	10.0
Tripura	17.4	8.0
Uttarakhand	18.0	15.4
Haryana	20.1	9.8
Nagaland	20.9	7.7
Andhra Pradesh	21.1	9.1
Mizoram	21.1	9.6
Gujarat	23.0	10.2
Karnataka	23.6	8.2
Maharashtra	24.5	9.9
Rajasthan	24.8	7.6
Arunachal Pradesh	25.9	8.6
West Bengal	26.7	6.9
India	29.8	8.7
Madhya Pradesh	36.7	8.3
Orissa	37.0	8.7
Uttar Pradesh	37.7	7.1
Assam	37.9	5.3
Jharkhand	39.1	5.3
Manipur	47.1	5.7
Chhattisgarh	48.7	8.3
Bihar	53.5	8.0
Sources: Planning Commission, CSO, Orbis Economics Estimates
Note: Lakshadweeep, Dadra and Nagar Haveli and Daman and Diu are not part of the analysis due to non-availability of data

Conclusion

It does seem, therefore that while a pickup in GDP growth can in fact reflect in sharper declines in poverty, high growth by itself does not ensure that poverty will be low. On the other hand, sluggish increases in growth in GDP are correlated with increases in poverty rates. And slower than average growth rates are also seen in high poverty rates. While robustness in GDP growth (both in change and absolute levels) might be largely a necessary condition for improving poverty in India, they are hardly sufficient. 

A version of this story first appeared on IndiaSpend