Growth. Employment and Poverty Reduction:
The Post Reform Indian Experience
Himanshu and Abhijit Sen
The Indian Economy grew at more than 5% per year for the last 25 years (19802005). It rose in the early 1980s because of improved efficiency of capital use
and again after 2001, because of higher investment. Liberalisation in 1991 was
a less significant break for either investment or efficiency of capital use.
2.00
inves tm ent rate
GDP growth 5 years
2003-04
0.10
1999-00
3.00
1995-96
0.15
1991-92
4.00
1987-88
0.20
1983-84
5.00
1979-80
0.25
1975-76
6.00
1971-72
0.30
1967-68
7.00
1963-64
0.35
1959-60
8.00
1955-56
0.40
The 1990s was a period of very slow growth of non-farm
employment. Agriculture grew quite fast till mid-1990s, but has
become stagnant since then. However, non-farm employment
growth has picked up from late 1990s onwards.
470
220
450
200
180
430
160
410
140
390
120
Agricultural GDP per capita
2003-04
2001-02
1999-00
1997-98
1995-96
1993-94
1991-92
1989-90
80
1987-88
350
1985-86
100
1983-84
370
Non-farm Employment (in millions)
The share of profits in Net Value Added in organised
manufacturing increased slightly in the early 1990s, and
almost doubled during 1999-05.
60.0
50.0
40.0
30.0
20.0
10.0
Wages/NVA
Profits/NVA
2004-05
2003-04
2002-03
2001-02
2000-01
1999-00
1998-99
1997-98
1996-97
1995-96
1994-95
1993-94
1992-93
1991-92
1990-91
1989-90
1988-89
1987-88
1986-87
1985-86
1984-85
1983-84
1982-83
1981-82
0.0
Nominal wages of workers grew slowly, and real wages declined after mid1990s in both rural and urban areas. But managerial emoluments increased
much faster after reforms. This gap has increased very sharply after 1999.
w orker w ages/day
managerial emoluments/day
525.0
450.0
375.0
300.0
225.0
150.0
75.0
2003-04
2001-02
1999-00
1997-98
1995-96
1993-94
1991-92
1989-90
1987-88
1985-86
1983-84
1981-82
0.0
Distribution of national income by factor shares over the 1990s:
Only the private non farm sector has increased its share, mainly
organised sector surpluses. Shares of both agriculture and the public
sector have declined.
6%
3%
11%
5% 4%
16%
19%
16%
13%
5%
6%
nonag wages
10%
8%5%8%
25% 21%
7%
10% 5%
ag-wages
self-emp agri
16%
self-emp nonagri
private salaries
private surplus
26%
govt salaries
26%
29%
govt surplus
Innermost circle (1993-94), middle circle (1999-00) and outer circle (2004-05)
But employment shares show no growth in private organised
employment and a sharp decline in agricultural wage
employment. The real expansion was in self-employment.
2% 4%
20%
2%5%
20%
18%
5%
2%
16%
nonag wages
26%
self-emp agri
13%
38%
35%
ag-wages
25%
15%
18%
self-emp nonagri
private salaries
govt salaries
36%
Innermost circle (1993-94), middle circle (1999-00) and outer circle (2004-05)
Monthly incomes of cultivators have declined in the latest period. All
other workers’ incomes have increased, especially in the organised
sector.
18000
15000
12000
1993-94
9000
1999-00
2004-05
6000
3000
govt
salaries
private
salaries
self-emp
nonagri
self-emp
agri
nonag
wages
ag-wages
0
The gap between organised sector salaries and selfemployed/wages started at the end of 1990s and has been
growing thereafter. Real incomes of self-employed in
agriculture have declined since the onset of agrarian crisis after
1997-98
Indices of per worker income (1999-00 series)
480.0
ag-wages
nonag
wages
430.0
380.0
self-emp
agri
330.0
self-emp
nonagri
280.0
230.0
private
salaries
180.0
130.0
2004-05
2003-04
2002-03
2001-02
2000-01
1999-00
1998-99
1997-98
1996-97
1995-96
1994-95
1993-94
80.0
govt
salaries
Consumption inequality has increased quite sharply after the early
1990s. This has happened in both rural and urban areas but more in
urban areas.
Rural Gini
32
Urban Gini
29.5
31
28.5
30
40
37.5
39
36.5
38
35.5
37
34.5
36
33.5
35
32.5
34
31.5
33
30.5
27.5
29
26.5
28
25.5
1977-78
1983
1987-88 1993-94 1999-00 2004-05
URP
MRP
1977-78
1983
1987-88 1993-94 1999-00 2004-05
URP
MRP
However, despite inequality increase and agrarian stagnation, the
period after 1999 has seen significant poverty reduction, and this is
much more in rural areas than in urban.
Urban poverty HCR
Rural Poverty HCR
50
45
45
40
40
35
35
30
30
25
25
20
20
1983
1987-88
CES-URP
1993-94
CES-MRP
1999-00
EUS-MRP
2004-05
1983
1987-88
CES-URP
1993-94
CES-MRP
1999-00
EUS-MRP
2004-05
The major reason for higher poverty reduction in the period 1999-05 was
the sharp decline in inflation particularly of food prices. But this was also
the source of distress among farmers.
Growth rate of consumer prices by groups
9
8
7
6
5
4
3
2
1
0
Food
Non-food
Total
Rural
Urban
1993-94 to 1999-00
Rural
Urban
1999-00 to 2004-05
The other reason for poverty decline is because demographic changes
permit higher worker participation rates. Per capita consumption
expenditure of workers has grown much less than average
consumption expenditure in the more recent period.
Grow th Rate of Per Worker and Per Capita Consumption Expenditure in nominal prices
(Rural)
10.00
8.50
7.00
5.50
4.00
2.50
1993-94 to 1999-00
Monthly Per Worker Consumption Expenditure
1999-00 to 2004-05
Monthly Per Capita Consumption Expenditure
Total
Others
Cultivators
Non-farm
labour
Farm
Labour
Self-emp
Non-farm
Total
Others
Cultivators
Non-farm
labour
Farm
Labour
Self-emp
Non-farm
1.00
Why did poverty reduce faster during 1999-05?

The two obvious things are:
lower inflation, particularly food prices
 and higher worker participation rates
However, wages per worker have grown
much less during this period and this
has increased profits and allowed more
private investment.
The Indian economy has become more
Lewisian
Income distribution has worsened but
poverty has declined

But is it sustainable?



After 2004-05, consumer price inflation is again
on the rise, led primarily by increase in food
prices. This can not be solved without faster
growth in agriculture.
There are limits to what the non-farm sector can
absorb without driving down wages further
Most of the self-employed are in informal sector in
low productivity sectors and any further increases
in these sectors do not appear sustainable.