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Growth, Urbanisation, and Poverty Reduction in India

Despite a few issues in inequality, the process of urbanisation has been clearly important in poverty reduction in urban and rural India post 1991 reforms

In light of a new and more comprehensive data-set, spanning 60 years with 20 years of post-liberalisation data, Gaurav Datt, Martin Ravallion, and Rinku Murgai revisit the important linkages between growth, urbanisation, and poverty reduction in India in their NBER working paper.

Broadly, there has been a downward trend in poverty measures since 1970, which has accelerated post-1991, when India undertook liberalising reforms. An interesting finding of the paper is that declines in rural poverty has been greater than the decline in urban poverty, which has led to a convergence in the poverty rates in the two areas. Part of this is explained by a significant decline in rural poverty and increase in real wages and part of it is explained by a sharp urbanisation of poverty in urban areas: from about one in eight of the poor living in urban areas in the early 1950s to about one in three in 2012.

There's a decrease in absolute poverty levels in both urban and rural areas in India.

There’s a decrease in absolute poverty levels in both urban and rural areas in India and a convergence between the two numbers.

The evidence also bears out what is common knowledge today – that much of the growth and consequently, poverty reduction, has come from growth in the tertiary sector and to a much lesser extent, the secondary sector. There has also been significant increase in inequality in the urban areas and a decrease in inequality in the rural areas.

There has been an increase in urban inequality and decrease in rural inequality

There has been an increase in urban inequality and decrease in rural inequality post 1991 reforms. Source: Growth, Urbanisation, and Poverty, NBER working paper. 

While rural growth was the most important contributor to poverty reduction pre-1991, it has been replaced by urban growth after the reforms. A more important finding is that urbanisation has impacted poverty reduction not just in urban areas but also in rural areas. This phenomenon of inter-regional effects of economic growth is applicable to the post-reform period only. Before 1991, urban growth had no effect on rural poverty.

The authors have also shown that the classic Kuznets process has not had significant impact in the poverty reduction in India. As per Kuznets process, the growth in poor countries leads to increase in inequality in the beginning, which eventually declines as rural poverty measures exceed urban measures. However the low impact of Kuznets process in India signifies that the difference between rural and urban poverty rates is small.

It was also found that there are strong inter-sectoral linkages post-1991. Growth in one sector has had a positive impact on the other sectors. It is also quite interesting to note that the secondary sector which had minimal impact pre-1991 has contributed to poverty reduction in the latter period, along with the primary and tertiary sectors. The role of the tertiary sector, however, remains the most important, with its contribution to poverty reduction as high as 60%.

There has also been significant changes in growth elasticity (responsiveness of poverty reduction to economic growth) in the three sector between the two periods. The tertiary sector has the highest (absolute) growth elasticity for both periods, implying that poverty reduction is highest in response to growth in the tertiary sector. The elasticity for the primary sector has been decreasing since 1991, reflecting its lower share of national income. The most important change has been in the secondary sector, which has changed signs from negative to positive since 1991.

Apart from decrease in poverty levels, India’s labour markets are also undergoing structural changes. According to the authors, there has been a tightening of rural casual labor markets, with rising real wage rates, and also a narrowing of the urban-rural wage gap. The three main factors explaining such a change are: reduction in the supply of unskilled labour due to the expansion of schooling, decline in female labor- force participation rates, and the construction boom across India. This mismatch between lower supply of unskilled labor and rising demand for that labor has increased the casual wages and thereby reduced the urban-rural wage gap.

If the urbanisation process in India is seen as both urban economic growth and increase in urban population, its contribution to poverty reduction in post reform India is clearly significant.

Anupam Manur and Devika Kher are Policy Analysts at the Takshashila Institution and they tweet at @anupammanur and @devikakher respectively.

 

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Encapsulating the Smart Cities Mission statement

The Smart Cities Mission Statement provides a base for an autonomous and an independent city.

The Mission Statement and Guidelines on Smart Cities released by the Ministry of Urban Development attempts to modify the governance structure and finances such that the cities become autonomous and self reliant entities. Setting up of Special Purpose Vehicles (SPVs), devolution of authorities and opening up the options for raising finance are basic steps made in this direction. The Mission statement also emphasises on replication of the learning from the smart cities and on increasing citizen involvement.

The Mission Statement and Guideline gives a comprehensive outlook into the objectives and the focus areas of the Smart City Mission launched a month ago on July 25 by Prime Minister Narendra Modi. The Prime Minister claimed that a selection of cities on competitive parameters will end the top-down approach, and lead to people-centric urban development.

The Smart Cities Mission is a centrally sponsored scheme as per which Rs. 48,000 crore will be provided to 98 local bodies selected after a rigorous process. The purpose of this mission is “to improve the quality of life of people by enabling local area development and harnessing technology”. As per the guideline, the definition of smart city varies “depending on the level of development, willingness to change and reform, resources and aspirations of the city residents”. There are four pillars of comprehensive development identified to develop the urban eco-system- institutional, physical, social and economic infrastructure.

The Mission will be using the compact city concept which is called ‘the compact area’ in the document. Compact city refers to sustainable urban forms which include characteristics like high residential density, mixed land use, redevelopment of central areas and has facilities including hospitals, parks etc. Keeping in line with the compact city approach, the strategy of the smart cities Mission is classified into three components plus an additional feature. The three component are city improvement (retrofitting), city renewal (redevelopment), and city extension (greenfield development). The added feature is a Pan-city initiative which is to be applied to larger part of the city.

The first component of area-based development is retrofitting. Retrofitting is short term strategy. It focuses on improving the infrastructure levels and using smart applications while keeping the existing structures intact. Redevelopment, the second component, includes replacement of the existing built-up environment with an enhanced infrastructure using mixed land use and increased density. The examples provided are redevelopment of East Kidwai Nagar in New Delhi and the Saifee Burhani Upliftment Project in Mumbai. The third component, greenfield development refers to the development of a previously vacant area with more than 250 acres. It’s objective is to address the the needs of the expanding population. Finally, the Pan-city development aims to use technology and data to work on existing city infrastructure. To implement these strategies, a SPV is to be created under the Smart Cities Mission.

The vehicle for autonomy

The primary objective of the SPV is to ensure operational independence, and autonomy in decision making and Mission implementation at the city level. As per the guidelines, “the SPV will plan, appraise, approve, release funds, implement, manage, operate, monitor and evaluate the Smart City development projects”. The SPV is to be set-up as a limited company where private institutions are allowed to take equity on the SPV, as long as, the state/UT and the ULB have the majority shareholding.

The SPV is to be headed by a full time Chief Executive Officer (CEO) and have state/UT, central and ULB representatives on the board. The CEO of the SPV is going to be appointed based on the approval of MoUD, the chairperson by the state government and the director by the centre. The rights and obligations of the municipal council with respect to the Smart City project have been delegated to them. The board of directors have been given the approval or decision making powers available to Municipal Administration. The Chief Executive Officer of the SPV is provided the decision making powers available to the ULB under the municipal act/ Government rules. In addition to the SPV, a State Level High Powered Steering Committee (HPSC) for Smart Cities is to be set-up for the matters that require the approval of the State Government.

To level with the authority provided, the Mission has also assigned conditions for the SPVs to avail the government funds. The conditions ensure that State government and the ULBs have made adequate contribution and the funds are devolved based on the performance.

Moreover, the government funds and the matching contribution by the States/ULBs is going to be provided only for part of the project. The balance is to be mobilised from charges and fees, the resources transferred as per the fourteenth finance comMission, finance mechanisms like municipal bonds, and borrowings from financial institutions. The SPVs can also use the central government schemes and funds like the National Investment and Infrastructure Fund.

Devika Kher is a Research Associate at Takshashila Institution. Her twitter handle is @DevikaKher.

Adhip Amin is a Research Associate at Takshashila Institution. His twitter handle is @AdhipAmin1.

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