Reducing Poverty and Inequality in India: Has Liberalization Helped?

Abstract

Abstract This is the first of five country case studies on income inequality, and looks at the case of India. Discusses the differences between the approach taken to liberalization in India (the Delhi Consensus) and the standard approach (the Washington Consensus); the Delhi Consensus has emphasized the slow liberalization of trade and very gradual privatization, and has avoided capital account liberalization. This prudent approach has sidestepped major shocks, and the changes in inequality consequent upon these reforms have been relatively modest, although rural inequality has risen at a slower pace than have urban and overall inequality. The rise in inequality is attributed to three factors: a shift in earnings from labour to capital income; the rapid growth of the services sector, particularly the FIRE sector (banking, financial institutions, insurance, and real estate), with a consequent explosion in demand for skilled workers; and a drop in the rate of labour absorption during the reform period, associated with an increase in regional inequality, especially in the incidence of rural poverty. The chapter has five sections: Introduction: Salient Economic Performance Aspects and Recent Policy Reforms—an outline of the economic performance of the Indian economy since the 1950s, with a brief overview of the economic reforms initiated; Trends in Inequality and Poverty in India—an analysis trends in aggregate inequality and poverty, with suggested explanations; Poverty and Inequality at the State Level—an outline of the major characteristics of poverty and inequality at the level of individual Indian states; and Tentative Conclusions.

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