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It is well recognized that sustained and equitable economic growth inevitably

leads to poverty reduction. However, the impact of growth on poverty

reduction can be lessened if the growth is accompanied by rising inequalities.

In addition, substantial segments of the population may benefi t less from

growth, and may need targeted assistance. During the 1980s and 1990s, India

saw the highest GDP growth rates in the fi ve decades since Independence. At

the same time, poverty rates have declined steadily from a peak of more than

60 per cent in the late 1960s to approximately half that in 1999. Substantial

controversy has surrounded the latest estimates of poverty in India, but

there is little doubt poverty declined in the 1990s, perhaps to roughly 30 per

cent. Using this estimate, poverty incidence as measured by the headcount

ratio declined by six to seven percentage points during the 1990s and by

the same amount in the 1980s. The average GDP growth rate during the

1980s and 1990s was 5.7 per cent and 5.8 per cent respectively, placing India

amongst some of the fastest-growing economies over these 20 years, though

inequality as measured by the Gini coeffi cient worsened from 0.29 to 0.38

in the 1990s (UNDP/ESCAP 2003). This clearly exemplifi es the correlation

between economic growth and poverty reduction.

However, during the 1970s, with substantially lower growth rates, poverty

declined equally sharply, from 56 per cent in 1970 to 43 per cent by 1983,

with the largest decline occurring between 1978–83. This decline in poverty

incidence coincides with the populist approach initiated by the Prime Minister

at that time, Mrs Indira Gandhi, which included policies like nationalization

of the banking sector and adoption of the slogan ‘Garibi Hatao’ (or

Eliminate Poverty). Many of the targeting programs in existence today were

initiated in the fi rst part of the 1970s. It is arguable that these schemes have

continued to date, albeit with mergers, restructuring and reincarnations, due

to their political utility to the government. Successive different governments

at the center have not only continued with these interventions but have

added to them, leading to proliferation and multiplicity. Although several

other factors could contribute to the popularity of these schemes, this also

suggests the schemes are having an impact on the ground. However, two

important questions in this context are, are these expenditures sustainable

and how effective are these programs?

In terms of fi nancial sustainability, it is useful to distinguish the narrowly

targeted programs and other CSS schemes of the government from the more

broadly targeted expenditures due to subsidies. While the total size of the

CSS is roughly Rs 350 billion, aggregate central budgetary subsidies are in

the range of Rs 850 billion. This latter fi gure amounted to 4.6 per cent of

GDP and 53 per cent of net receipts of the government. When expenditure

on subsidies by state governments is also included, the picture is far worse.

Aggregate budgetary subsidies of central and state governments combined

were almost 13.5 per cent of GDP in 1998–99. Some components of this

aggregate, particularly the food subsidy, have been rising sharply in recent

years. At the same time, budget defi cits of the central government have

ranged between 5 and 6 per cent of GDP through much of the 1990s,

and in 2002 the total defi cit of central and state governments combined

exceeded 10 per cent of GDP. In this context, the large expenditures on

subsidies are unlikely to be sustainable in the long run. Moreover, they will

also tend to squeeze out expenditures in other areas, including narrowly

defi ned targeting programs. Several recommendations have been made to

streamline and reduce expenditures on subsidies, though the process will

obviously face political constraints.

Among the targeting programs, the self-employment schemes (IRDP

in the past and SGSY now) have had a credit component combined with

a subsidy. The implementation of these schemes has involved bank loans,

but repayment rates have been quite low. For example, almost 71 per cent

of all bank accounts in the Indian banking system are Small Borrower

Accounts, defi ned as accounts with credit outstanding of less than Rs

25 000. IRDP loans accounted for slightly more than one-third of all such

accounts in the commercial banking sector. Low repayment rates on these

accounts have contributed to a worsening position of banks in terms of

non-performing assets. For the public banks, gross non-performing assets

were 6 per cent of assets and 2.9 per cent net of provisions in 2000. For

the Regional Rural Banks, catering specifi cally to rural areas, the fi gures

were much worse with non-performing assets being 23.2 per cent of assets

in 2000. The higher level of non-performing assets in the latter refl ects the

poor performance of priority credits (including the IRDP and SGSY),

which have non-performing assets of 35 per cent, much higher than on

non-priority loans. Only about half of the small accounts in total were

classifi ed as standard assets by banks, with the rest being sub-standard,

doubtful or loss assets. Provisioning for non-performing assets may add

between one and two percentage points to the cost of credit in India (Long

and Srivastava, 2002).