A Critical Evaluation of Economic
Growth and its Influence on Poverty
Reduction in India
Name STUDENT ID#:
Word Count: 3,292
AAF045-6 Business Economics
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TABLE OF CONTENTS
TABLE OF CONTENTS............................................................................................................................ 2
1
Introduction .................................................................................................................................. 3
2
Literature Review.......................................................................................................................... 4
2.1 Economic Growth .................................................................................................................. 4
2.2 Macroeconomic Policies to achieve Economic Growth ........................................................ 4
2.2.1 Macroeconomic policies and Economic Growth in India .................................................... 5
2.3 Poverty .................................................................................................................................... 6
2.4 Economic Growth and Poverty Reduction in India ............................................................... 8
3
Analysis and Discussion ................................................................................................................ 9
3.1 Overview ............................................................................................................................... 9
3.2 Demand-Side Policies for Economic Growth and Poverty Reduction................................... 9
3.3 Supply-Side Policies for Economic Growth and Poverty Reduction ..................................... 9
4
Conclusion .................................................................................................................................. 11
5
References .................................................................................................................................. 12
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1 Introduction
Macroeconomic policy encompasses the holistic operation of an economy, with a view to
providing a stable environment which encourages strong and sustainable economic growth. The
creation of employment, wealth and improved living standards depend heavily on this growth to
positively impact a country’s economic performance (Dolamore, 2014).
One important factor influencing poverty is economic growth and macroeconomic stability is
critical for ensuring high and sustainable rates of growth. Any poverty reduction strategy should
include macroeconomic stability as a key component however, this alone does not guarantee a
high economic growth rate (Ames, 2001). Increased job creation with a corresponding increase in
real wages can be linked to higher growth, which also leads to an increase in real government
revenue and expenditure per capita. This has a positive effect in expenditure on the social sectors
of an economy such as education, health and welfare which contributes to pro-poor growth and
poverty reduction (Agrawal, 2015).
Effective reduction of economic poverty requires addressing both the pace and pattern of growth
with regards to its equity, composition, and sustainability (2001 DAC Guidelines on Poverty
Reduction). Rapid and sustainable pro-poor growth is crucial to reducing poverty. To achieve this
goal, good governance, prudent macroeconomic management, competitive markets, a vibrant
private sector, efficient institutions, and sustainable use of natural resources are fundamental.
Equitable participation by the poor in generating and benefiting from growth is required to making
growth pro-poor (OECD, 2001).
Poverty has many dimensions, and its reduction is important generally to economies because if
left unabated, it can lead to several challenges to productivity such as unemployment, social
exclusion, and high vulnerability of certain population to disasters and diseases (UN, 2018).
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2 Literature Review
2.1 Economic Growth
Economic growth is the process by which a nation’s wealth increases over time (Cornwall, 2022).
Classical economists, (Smith, Malthus and Ricardo) believed economic growth could be achieved
through the increase in the supply of labour available for production through the growth of
population (Harris, 2007). Neo classical growth theory focuses on supply side factors such as
labour productivity, the size of the workforce and factor inputs (Masoud, 2013). The rate of
economic growth in endogenous growth theory is influenced by human capital and rate of
technological innovation (Bhaduri, 2005) and Keynesians believe that, because prices are
somewhat rigid, fluctuations in any component of spending—consumption, investment, or
government expenditures cause output to change (Jahan, 2014).
The economic well-being of a country’s residents is determined by measuring economic activity.
Measures of macroeconomic performance include economic indicators such as the gross domestic
product [GDP], consumption, investment, and international trade. Stability economic indicators
include central government budgets, prices, the money supply, and the balance of payments
(World Bank, 2022).
Regulatory reform, privatization, civil service reform, improved governance, trade liberalization,
and banking sector reform are key structural measures upon which sustained high rates of growth
depend (IMF, 2001).
2.2 Macroeconomic Policies to Achieve Economic Growth
Demand-side policies attempt to influence the level of aggregate demand in an economy by
controlling its taxation or spending (Fiscal Policy) or by influencing the demand for money through
the rate of interest and the supply of money (Monetary Policy). Supply side policies aim to shift
the aggregate supply curve to the right and this generates economic growth in order to achieve
the four main macroeconomic objectives of an economy - economic growth, unemployment
reduction, reduced inflation and improved trade and balance of payments. (Mankiw, Taylor and
Ashwin, 2013).
India needs to follow policies conducive to sustaining high rates of growth to reduce poverty due
to the importance of growth. The creation of a stable macroeconomic environment, good
infrastructure, well-functioning education and health services for the poor, inclusive financial
systems and good governance should be considered (Agrawal, 2015).
A country’s poverty reduction strategies must be financed in a sustainable, non-inflationary
manner via the government’s budget to safeguard macroeconomic stability (Ames, 2001).
Coordinated supply side and demand management measures are required including fiscal
consolidation and appropriate monetary policy combined with active measures to loosen supply
constraints (Chandrasekhar, 2006). Labour and land factor market reforms are essential to
ensuring the economy is flexible when facing escalating demand resulting from growing incomes.
India is noteworthy in the low share of its manufacturing sector regarding both value added and
employment, despite this impeding the pace of rural-urban transformation. To promote growth in
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the manufacturing sector, a combination of a realistic exchange rate policy and policies promoting
labour flexibility and skill development need to be adopted (Kapur, 2014).
2.2.1 Macroeconomic policies and Economic Growth in India
Changes to India’s economic policies which were implemented throughout the last four decades
are largely responsible for the economy’s vibrant growth. India’s macroeconomic performance
during this 40-year period is presented in Figure 1 (ADBI, 2020).
Figure 1: Source – (ADB Institute Working Paper Series, 2020)
The quinquennial growth rate of GDP from 2005 to 2010 was 6.92% which represented a phase in
the history of the Indian economy where annual year-on-year growth rates close to 8% were
consistently recorded for approximately eight years, from the fiscal year (FY) 2003‒04 to FY2010‒
11, excluding FY2008‒09. During the period 2015‒2019, the introduction of Goods and Service
Tax in 2017 and demonetization in 2016 produced declines in both the saving rate to 29.71% and
the private investment rate to 27.76%. On the fiscal side, India’s policy adopted a traditional
stance of maintaining a low fiscal deficit, which recorded its lowest level of 3.60% from 2015 to
2020 (Figure 1) (ADBI, 2020).
India efficiently guided its monetary policy devices to contain inflation at an average of 6.41%
between 1995 and 2015. In the first quarter of FY2020‒2021 the year-on-year growth of GDP
declined by 23.9% due to the impact of the Covid-19 externality (Yoshino 2020). However, a
growth rate of 19.5% is estimated for India's gross domestic product (GDP) at current prices in
2021-22, estimated at US$ 2.96 trillion versus US$ 2.48 trillion in 2020-21 (IBEF 2022).
It is expected that India's GDP will grow at a strong rate of 7.4% in FY2022–23, the highest among
major nations (IMF 2022). Strong performance of a few high-frequency indicators over the first
four months of FY 2022–23 supports the IMF's prediction. While the Manufacturing Purchasing
Managers’ Index manufacturing index reached an eight-month high in July 2022 with significant
increases in the growth of new businesses and output, the index of industrial production and its
eight core industries indicate a strengthening of industrial activity. A significant growth engine
emerged from the release of suppressed demand, the ease of mobility restrictions, and almost
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universal vaccine coverage which have helped the services sector recover from the negative
impact by the COVID-19 pandemic (IBEF 2022).
2.3 Poverty
Poverty has been defined as “an unacceptable deprivation in human well-being that can comprise
both physiological and social deprivation” (World Bank, 2000). There are three categories of
material needs, which is the focus of the economic aspect of poverty. A condition which is
consistent among countries and over time is referred to as “absolute poverty”. Living on less than
US $1.25 per day per person is defined by the World Bank as extreme poverty whereas moderate
poverty is when one can survive by meeting the basic need for the minimum standard of wellbeing but cannot meet the other aspects of life adequately. Relative poverty is considered in a
social context and is a measure of economic distance between two individuals in a chosen domain,
which is indicative of inequalities instead of material deprivation or hardship. (UN, 2017)
A low level of economic activity consisting of two levels: supply level and demand level
demonstrates the vicious circle of poverty theory. “Low income-low savings-low capital formationlow productivity-low output-low income” shows the supply level progress whereas the demand
level progress can be demonstrated by “low income-low purchasing power-low attractiveness of
investment-low output-low income” (Li, 2015). A set of self-reinforcing mechanisms whereby
countries start poor and remain poor, where poverty begets poverty, so that current poverty is
itself a direct cause of poverty in the future illustrates the poverty trap (Kraay, 2014).
Figure 2 – Share of India’s population living in poverty at $1.90 per day (2011 PPP) (1977-2011)
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Figure 3 – Share of India’s population living in poverty at $1.90 per day (2011 PPP) (2019 vs
2021)
Approximately 300 million persons who are poor (the largest in the world) and live in rural areas
reside in India which has 18.3% of the world's population (Figure 4) (World Bank, 2020).
Eradicating extreme poverty and increasing the rate of poverty reduction by 2030 and will
therefore be a formidable task given the likely trend in India’s population growth (ADB, 2017).
Figure 4: Population Trend between India and the World (1980-2027)
Source: IMF Data Mapper: World Economic Outlook (April 2022)
India is ranked 130th among 188 countries which is an improvement from 135th position in 2014
based on UNDP’s 2015 Human Development Index. This is due to a rise in life expectancy and per
capita income, which remains low when in compared to its peers. Chronic malnutrition remains
prevalent however, widespread famines are uncommon. Circa 20% of all maternal deaths
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worldwide still occur in India despite maternal mortality being reduced by 33% over 10 years.
About 50 per 1,000 live births for India result in infant (under 5) mortalities and more than 50% of
the population are still deprived of access to safe water and sanitary facilities (ADB, 2017).
2.4 Economic Growth and Poverty Reduction in India
Efficient utilisation of resources by impoverished communities is important to increase incomes and
output allowing them to break free of the poverty trap and provide for their basic needs. Stimulating
inclusive economic growth is a critical enabler in achieving this goal however, for economic growth to
be effective in reducing poverty, it needs to be both inclusive and to occur at a rate that is higher than
the rate of population growth. (Ayoo, 2022). Deaton and Drèze (2002), Bhagwati (2001) and Datt
and Ravallion (2002) also support the important role of economic growth in poverty reduction in
their research and publications.
Raising the productivity of a typical person in a poor or developing country must be a key feature
in macroeconomic policies leading to growth and consistent improvements in poverty reduction,
as this is a main source of national income growth (Pritchett 2020).
It is imperative that India needs rapid, inclusive growth to reduce poverty and create sufficient
employment to sustain income increases for its population, housing in excess of one billion people
and one-third of the world’s poor (World Bank, 2018).
Inclusive growth refers to growth with equity in opportunities. It is focused on creating those
equitable opportunities and ensuring that they are accessible to all members of a society to
participate in and contribute to, the growth process on an equal footing despite their individual
circumstances or situation (ADB, 2007). ‘Bad’ inequalities which include an outcome of distortions,
geographical, social, human resource, economic, institutional, and political and all addressed by
inclusive growth. Inclusive growth also addresses ‘Good’ inequalities, which arise from innovation,
entrepreneurship, hard work and related market incentive systems (ADB, 2007). India’s Twelfth
Five Year development plan (2012 – 2017 centred around two main objectives: economic growth
which was faster and sustainable and making growth more inclusive (DFID, 2008). This followed
the progress made from its Eleventh Five Year Plan (2007-2012) and reaffirmed the commitment
by the Indian Government to improve the economic conditions of the country’s people through
inclusive growth (Government of India, 2007.)
To experience the true impact of increased growth on poverty reduction, there is considerable
dependency on the levels of inequality and the pattern of growth, despite economic growth being
a powerful tool for poverty reduction (ADB, 2011). The Indian economy has undergone significant
structural changes thanks to its rapid growth in recent years. Inclusive growth has therefore
become a major economic policy priority, and this was evidenced in both the Eleventh and Twelfth
Five Year Plans (2007-2017) which focused on Inclusive Growth and Faster, More Inclusive and
Sustainable Growth respectively (Government of India, 2007 and 2012).
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2 Analysis and Discussion
3.1 Overview
Following a contraction of 6.6 percent in FY21, India’s economy expanded by 8.3 percent in FY22
(IMF, 2022). Sehrawat & Giri (2016) noted in their research on financial development and poverty
reduction that there was a positive impact of financial development on poverty reduction in India
in both the short-run and in the long-run.
It has also been analytically examined that inequality is positively correlated with increases in
economic growth and financial growth is predisposed towards more affluent people, underlining
that growth and financial development plays a delicate role in the reduction of poverty (Alam,
2021). This follows the ground-breaking work of Nurske (1953) that presented the ‘Vicious Circle
of Poverty,’ which implies that poverty in itself is a cause of poverty and supports the view that
economic growth increases inequality.
3.2 Demand-Side Policies for Economic Growth and Poverty Reduction
The most recent data for India indicates that on the demand side, the release of pent-up demand
post Covid externalities supported private consumption and increased government capital
spending contributed to investment. In FY22 there was a negative contribution from trade due to
a higher increase in imports than exports (World Bank, 2022).
Throughout the past twenty years, India has achieved considerable yet incomplete progress in
reducing poverty, demonstrating sustained high growth in addition to a higher elasticity of poverty
reduction to growth. Utilising the international poverty line of $1.90 per person per day (in 2011
purchasing power parity, PPP), India was successful in reducing the portion of the population living
in poverty by more than half (46% in 1993 to 21% in 2011). On this basis, India was able to lift
more than 160 million people out of poverty, a figure surpassed only by China. Continued poverty
reduction trends estimated in more recent years suggest that India is well on track to eliminate
extreme poverty (i.e., below 3% of the population) by 2030 (World Bank, 2022).
3.3 Supply-Side Policies for Economic Growth and Poverty Reduction
With consumption and investments contributing 70% to the country’s economic activity, India is
predominantly a domestic demand-driven economy (IBEF, 2022).
From the supply perspective, mining and manufacturing sectors gained from the global rally in
commodity prices and healthy external demand. The services sector expanded but remained
below the pre-pandemic Covid level externality due to slower recovery in contact-intensive
segments. Attributable to cost-push pressures from higher commodity prices and supply
disruptions, headline inflation measured above the midpoint of the tolerance range (2-6%) at 5.5%
in FY22. The current account balance was in a reasonable deficit of 0.2% in Q1-Q2 FY22 as import
growth outpaced export growth, notwithstanding the optimistic exports of computer and
professional services. Furthermore, strong foreign investment inflows and RBI intervention in the
foreign exchange market, caused a high accrual of foreign exchange reserves of USD 622 billion by
mid-March 2022. After peaking at 13.3% in FY21, the general government fiscal deficit declined to
10.9% in FY22 propelled by stronger growth in revenue vis-à-vis expenditure. Subsequently, public
debt declined to 86.9% of GDP in FY22 from 88.6% in FY21 (Figure 5) (World Bank 2022).
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Figure 5 – Real GDP Growth and Contributions to Real GDP
Supply side policies which included the shifting to market determined exchange rates and
liberalisation of current account transactions led to India’s foreign exchange reserves reflecting
US$ 572.71 billion as at July 2022 (IBEF, 2022). Trade liberalisation, involving shifts from
quantitative restrictions to tariffs and typically sharp reductions in the average rate of tariff
protection, as well as withdrawal of export subsidies led to India’s merchandise exports standing
at US$ 676.2 billion in FY22. Rationalisation and reduction of direct and indirect tax rates, which
became associated with declining tax-GDP ratios resulted in the gross GST revenue collection
recording US$ 18.1 billion as of June 2022. Very substantial reduction in direct state control in
terms of administered prices and regulation of economic activity resulted in CPI inflation stood at
7.01% in June 2022 compared to 7.04% in May 2022 (IBEF, 2022).
On the demand side, adoption of a significant degree of capital account liberalisation, including
easing of the criteria for Foreign Direct Investment, allowances for non-residents to hold domestic
financial assets, easier access to foreign commercial borrowing by domestic firms, and flexibility
for domestic residents to hold foreign assets impacted Foreign Portfolio Investment outflows
which stood at US$ 28.65 billion at July 2022. (IBEF, 2022).
These policies and programmes had a positive impact on real GDP growth at 8.7% in FY 2021-22
which is 1.5% higher than the real GDP in FY 2019-20 (IBEF, 2022).
There is compelling evidence that rapid and sustained growth is the most important way to reduce
poverty (DFID, 2008). On average, a 1% increase in per capita income reduced poverty by 1.7%
(World Bank, 2005). India has seen significant falls in poverty since the 1980s, rates that
accelerated into the 2000s. This has been strongly related to India’s growth record over this period
(Bhanumurthy, 2004) similar to China, where evidence shows that rapid economic growth
between 1985 and 2001 was instrumental to them lifting over 450 million people out of poverty
since 1979 (Lin, 2003).
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3 Conclusion
Overall, the research concluded that India’s real GDP growth in FY 2021-22 stood at 8.7% and
these figures are linked to stronger growth impetus, indicating higher economic demand. India has
appeared as the fastest-growing major economy in the world and is expected to be one of the top
three economic powers globally over the next 10-15 years (IBEF 2022).
India must continue to prioritise lowering inequality while also launching growth-oriented policies
to boost the economy (World Bank, 2007). Whilst supply side policies does have disadvantages
and limitations, these policies are sustainable and are not inflationary as opposed to demand side
policies. Whilst it is clear from the research that macroeconomic policies influence and contribute
to the attainment of economic growth, what is also apparent is growth alone is not sufficient to
achieve the goal of complete poverty reduction (DFID ,2008). Rapid and sustained reduction of
economic poverty requires pro-poor growth (OECD 2007).
Growth that leaves distribution untouched will have a lesser impact on poverty reduction than
growth combined with liberal distributional changes. Thus, policies that improve the distribution
of income and assets within a society, like pro-poor public expenditure and measures to increase
the poor’s ease of access to financial markets, will constitute vital components of a country’s
poverty reduction strategy (IMF, 2001). India’s future approach must therefore consider both the
supply and demand sides and continue to use Monetary, Fiscal and Supply Side policies to
synergistically impact the economy.
Economic growth has a much larger impact on alleviating poverty and due to its stage of
development, it is imperative that India continues to focus on economic growth to lift people out
of poverty. There is a prospect for India to continue infrastructural development and village-level
assets which remain key to enhancing the opportunities and productivity of casual labour, higher
real wages and employment diversification. There remains a need to support sustainable wage
rises and employment security. A policy to support wages and employee rights of casual labourers
is key to reducing chronic poverty in both urban and rural areas, as casual labourers are the largest
single group of the chronically poor (Economic Survey, 2021).
Finally, increased support in accessing health care and food for the chronically poor is imperative.
Affordable health and nutrition are crucial both in preventing descent into poverty and enabling
poor people to make use of economic opportunities and break poverty cycles (CPRC India, 2007).
Ultimately, the biggest determinants of growth and poverty reduction in a country will be its
leadership, policies and institutions (DFID, 2008).
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