India has made encouraging progress by halving its official poverty rate, from 45 percent of the population in 1994 to 22 percent in 2012. This is an achievement to be celebrated—yet it also gives the nation an opportunity to set higher aspirations. While the official poverty line counts only those living in the most abject conditions, even a cursory scan of India’s human-development indicators suggests more widespread deprivation. Above and beyond the goal of eradicating extreme poverty, India can address these issues and create a new national vision for helping more than half a billion people attain a more economically empowered life.
To realize this vision, policy makers need a more comprehensive benchmark to measure gaps that must be closed and inform the allocation of resources. To this end, the Empowerment Line has been created by think-tanks,which is an analytical framework that determines the level of consumption required to fulfill eight basic needs—food, energy, housing, drinking water, sanitation, health care, education, and social security—at a level sufficient to achieve a decent standard of living rather than bare subsistence.
In applying this metric to India, it is found that in 2012, 56 percent of the population lacked the means to meet essential needs. By this measure, some 680 million Indians experienced deprivation, more than 2.5 times the population of 270 million below the official poverty line. Hundreds of millions have exited extreme poverty but continue to struggle for a modicum of dignity, comfort, and security. The Empowerment Gap, or the additional consumption required to bring these 680 million people to the level of the Empowerment Line, is seven times higher than the cost of eliminating poverty as defined by the official poverty line (exhibit).
The Empowerment Line is a measure of individual consumption, yet the ability or willingness to spend is not wholly sufficient, in itself, to guarantee a decent life. Households also need access to basic services, such as health clinics and schools, at a community level, as well as electricity, drinking water, and improved sanitation within their homes. Our research finds that Indian households, on average, lack access to 46 percent of the basic services they need, and it identifies wide geographic disparities in the availability of social infrastructure.
Job creation and productivity gains have historically been the most powerful forces for improving living standards—and India is in need of deep reforms that can encourage businesses to invest, scale up, and hire. If India’s recent weak economic performance continues and no major reforms are undertaken, we project that in 2022 more than one-third of the population will remain below the Empowerment Line and that 12 percent will remain trapped in extreme poverty.
The research outlines a more ambitious yet economically sound path of inclusive reforms, which could lift 580 million people above the Empowerment Line by 2022, while virtually eliminating extreme poverty. It involves four key priorities:
- Accelerating job creation. India needs to add 115 million new nonfarm jobs over the next decade to accommodate a growing population and reduce agriculture’s overall share in employment. The manufacturing and construction sectors, along with labor-intensive services, can form the backbone of this effort. To support job creation, policy makers can focus on reducing the administrative burden on businesses, accelerating infrastructure projects, making the labor market more flexible, removing market distortions, and expanding vocational training for the poor and uneducated.
- Raising farm productivity. Increasing investment in agricultural infrastructure and implementing reforms to improve market access, rationalize price supports, expand the adoption of new technologies, and streamline agricultural administration and extension services can help to achieve annual yield growth of 5.5 percent. This would bring India’s yields into line with those in other emerging Asian countries by 2022.
- Increasing public spending on basic services. To fill the most critical gaps, public spending on basic services would need to grow in real terms by about 6.7 percent annually through 2022. The fiscal resources will be available if India can achieve faster GDP growth. The share allocated to health care, water, and sanitation, however, needs to double.
- Making basic services more effective. We estimate that half of India’s current public spending on basic services does not translate into improved outcomes for the poor. By 2022, however, that spending can become 50 percent more effective if the nation as a whole matches the standards already set by the best-performing states. Some of the most promising strategies include forming partnerships with the private and social sectors, mobilizing community participation, and using technology to streamline and monitor operations.
Put together, these forces would set off a virtuous cycle generating more revenue, thus enabling India to meet its fiscal-deficit targets even as it ploughs additional funding into social infrastructure and achieves nearly universal coverage for the basics of health care, water, sanitation, and energy.
The Empowerment Line begins with the premise that every household in India should be able to attain a fundamental sense of economic security, opportunity, and dignity. This new benchmark reveals the dimensions of today’s problem and provides a framework for designing interventions that could deliver a better quality of life for the majority of India’s citizens.
Receive Daily Updates
Recent Posts
Steve Ovett, the famous British middle-distance athlete, won the 800-metres gold medal at the Moscow Olympics of 1980. Just a few days later, he was about to win a 5,000-metres race at London’s Crystal Palace. Known for his burst of acceleration on the home stretch, he had supreme confidence in his ability to out-sprint rivals. With the final 100 metres remaining,
[wptelegram-join-channel link=”https://t.me/s/upsctree” text=”Join @upsctree on Telegram”]Ovett waved to the crowd and raised a hand in triumph. But he had celebrated a bit too early. At the finishing line, Ireland’s John Treacy edged past Ovett. For those few moments, Ovett had lost his sense of reality and ignored the possibility of a negative event.
This analogy works well for the India story and our policy failures , including during the ongoing covid pandemic. While we have never been as well prepared or had significant successes in terms of growth stability as Ovett did in his illustrious running career, we tend to celebrate too early. Indeed, we have done so many times before.
It is as if we’re convinced that India is destined for greater heights, come what may, and so we never run through the finish line. Do we and our policymakers suffer from a collective optimism bias, which, as the Nobel Prize winner Daniel Kahneman once wrote, “may well be the most significant of the cognitive biases”? The optimism bias arises from mistaken beliefs which form expectations that are better than the reality. It makes us underestimate chances of a negative outcome and ignore warnings repeatedly.
The Indian economy had a dream run for five years from 2003-04 to 2007-08, with an average annual growth rate of around 9%. Many believed that India was on its way to clocking consistent double-digit growth and comparisons with China were rife. It was conveniently overlooked that this output expansion had come mainly came from a few sectors: automobiles, telecom and business services.
Indians were made to believe that we could sprint without high-quality education, healthcare, infrastructure or banking sectors, which form the backbone of any stable economy. The plan was to build them as we went along, but then in the euphoria of short-term success, it got lost.
India’s exports of goods grew from $20 billion in 1990-91 to over $310 billion in 2019-20. Looking at these absolute figures it would seem as if India has arrived on the world stage. However, India’s share of global trade has moved up only marginally. Even now, the country accounts for less than 2% of the world’s goods exports.
More importantly, hidden behind this performance was the role played by one sector that should have never made it to India’s list of exports—refined petroleum. The share of refined petroleum exports in India’s goods exports increased from 1.4% in 1996-97 to over 18% in 2011-12.
An import-intensive sector with low labour intensity, exports of refined petroleum zoomed because of the then policy regime of a retail price ceiling on petroleum products in the domestic market. While we have done well in the export of services, our share is still less than 4% of world exports.
India seemed to emerge from the 2008 global financial crisis relatively unscathed. But, a temporary demand push had played a role in the revival—the incomes of many households, both rural and urban, had shot up. Fiscal stimulus to the rural economy and implementation of the Sixth Pay Commission scales had led to the salaries of around 20% of organized-sector employees jumping up. We celebrated, but once again, neither did we resolve the crisis brewing elsewhere in India’s banking sector, nor did we improve our capacity for healthcare or quality education.
Employment saw little economy-wide growth in our boom years. Manufacturing jobs, if anything, shrank. But we continued to celebrate. Youth flocked to low-productivity service-sector jobs, such as those in hotels and restaurants, security and other services. The dependence on such jobs on one hand and high-skilled services on the other was bound to make Indian society more unequal.
And then, there is agriculture, an elephant in the room. If and when farm-sector reforms get implemented, celebrations would once again be premature. The vast majority of India’s farmers have small plots of land, and though these farms are at least as productive as larger ones, net absolute incomes from small plots can only be meagre.
A further rise in farm productivity and consequent increase in supply, if not matched by a demand rise, especially with access to export markets, would result in downward pressure on market prices for farm produce and a further decline in the net incomes of small farmers.
We should learn from what John Treacy did right. He didn’t give up, and pushed for the finish line like it was his only chance at winning. Treacy had years of long-distance practice. The same goes for our economy. A long grind is required to build up its base before we can win and celebrate. And Ovett did not blame anyone for his loss. We play the blame game. Everyone else, right from China and the US to ‘greedy corporates’, seems to be responsible for our failures.
We have lowered absolute poverty levels and had technology-based successes like Aadhaar and digital access to public services. But there are no short cuts to good quality and adequate healthcare and education services. We must remain optimistic but stay firmly away from the optimism bias.
In the end, it is not about how we start, but how we finish. The disastrous second wave of covid and our inability to manage it is a ghastly reminder of this fact.