Indian Poverty and Inequality – A Paradoxical Result

 Indian Poverty and Inequality – A Paradoxical Result

Prof. Sukhdeo Thorat and Prof. Amaresh Dubey  have released a research paper from the Jawarharlal Nehru University,NewDelhi where they showed that in rural areas,decline in Indian poverty accelerated from 2.2% between 1993-94 and 2004-05 to 4.4% in the period 2004-05 to 2009-10.For the same period,poverty reduction in urban areas rose from 1.9% to 3.9%.During 1993-94 – 2009-10, Indian poverty reduction rate was found as 2.5% .On the other hand,the inequality rose marginally in both rural and urban areas in 2009-10 compared to 1993-94 and 2004-05 respectively.This result is , however, contradictory.At the same time,they claimed that inclusive growth and poverty alleviation strategy were successful enough including the reduction of sc/st  poverty ratio in the respective periods.

	Average Annual rate of decline in poverty (%) 1994-2004	Average Annual rate of decline in poverty (%) 2005-2010	Average Annual rate of decline in poverty (%) 1994-2010
Rural	2.2	4.4	2.5
Urban	1.9	3.9	2.3
Total	2.1	4.3	2.5

                                              Inequality of income (Gini Co-efficient)

	1993-94	2004-05	2009-10
Rural	0.30	0.30	0.31
Urban	0.36	0.38	0.40
Total	0.35	0.35	0.37

In South Asia and South East Asia , poverty ratios are declining whereas inequality are rising with the increasing growth rate.In some of the middle and high income economies, the same trends were observed. But,if growth –poverty nexus is valid, then inequality should remained the same. So, poverty may stimulates inequality if growth remains the same or declines. If poverty declines with the increase in growth rate then inequality should reduce through redistribution effects. Since, inequality rose, then we may infer that redistribution of income went against the poor and favoured the rich.This paradoxical results have been happening in recent years. Therefore, policy makers have lot of works to do in the process of income distribution for preparing pro-poor growth policy.

Exchange rate behavior of Great Britain during 1960-2010

The official exchange rate of U.K. with respect to US dollar during last 40 years behaves more or less like other countries of EU and Asia because it shows volatility. If we use co-efficient of variation as the very simple measure of volatility , then we got the value of 22.16% which is too high. In the Fig-1, the volatility of the exchange rate is given.

                                             Fig-1, Official exchange rate of UK per US dollar

In contrast to the behavior of the official exchange rate of UK per US dollar, the nature of the REER of UK during 1975-2009 is plotted below.

                                           Fig-2, REER of UK

This REER (2005=100) is found as cyclical having co-efficient of variation is 9.6572% ie less volatile than the level series data. It is linearly estimated as,

REER = 80.8878+0.4293 T+U

               (31.994)*(3.539)*

R²=0.275 , F= 12.53 (significant) and   * = significant at 10% level.

On the other hand, the linear estimated equation of the level series of exchange rate is given below.

EX.RATE =0.38009+0.005913t +u

                   (16.69)*(7.759)*

R²=0.551 , F=60.21(sig) , where * = significant at 10% level.      

The REER  is positively skewed (value = 0.13007) but the level series is negatively skewed(value = -0.0843).

The long run trend of the curve is estimated in the linear form is shown in the figure-3, and the nature of the actual exchange rate curve is also shown and it is cyclically upward.

                       Fig-3 , Estimated series of exchange rate 

The exchange rate shows auto-correlation and partial auto-correlation problems.In the Table-1,the correlogram of auto-correlation and partial auto-correlation are given along with the values of auto-correlation and partial auto-correlation along showing Q statistic and probabilities for significance.

Table-1

Correlogram of exchange rate series

Date: 10/02/11   Time: 16:21
Sample: 1960 2010
Included observations: 51
Autocorrelation	Partial Correlation		AC	PAC	Q-Stat	Prob
. |*******|	. |*******|	1	0.892	0.892	43.055	0.000
. |****** |	***| .     |	2	0.730	-0.327	72.446	0.000
. |*****  |	. |*.     |	3	0.593	0.112	92.250	0.000
. |****   |	. |*.     |	4	0.512	0.133	107.35	0.000
. |****   |	. | .     |	5	0.470	0.036	120.33	0.000
. |****   |	. |*.     |	6	0.472	0.195	133.69	0.000
. |****   |	. |*.     |	7	0.494	0.068	148.66	0.000
. |****   |	.*| .     |	8	0.484	-0.120	163.40	0.000
. |***    |	.*| .     |	9	0.417	-0.142	174.58	0.000
. |**     |	.*| .     |	10	0.311	-0.104	180.95	0.000
. |**     |	. | .     |	11	0.216	0.018	184.11	0.000
. |*.     |	. | .     |	12	0.149	-0.036	185.65	0.000
. |*.     |	.*| .     |	13	0.091	-0.138	186.24	0.000
. | .     |	. | .     |	14	0.050	-0.020	186.42	0.000
. | .     |	. | .     |	15	0.036	0.047	186.52	0.000
. | .     |	. | .     |	16	0.025	-0.039	186.57	0.000
. | .     |	. | .     |	17	-0.009	-0.036	186.58	0.000
.*| .     |	**| .     |	18	-0.088	-0.196	187.21	0.000
.*| .     |	. | .     |	19	-0.168	0.003	189.60	0.000
**| .     |	.*| .     |	20	-0.250	-0.149	195.06	0.000
***| .     |	.*| .     |	21	-0.329	-0.111	204.79	0.000
***| .     |	. |*.     |	22	-0.367	0.114	217.34	0.000
***| .     |	. |*.     |	23	-0.338	0.124	228.38	0.000
**| .     |	. | .     |	24	-0.276	0.044	235.99	0.000

The exchange rate of UK from 1960 to 2010 does not face unit root because from the unit root test we found the value of Augmented Dicky Fuller (ADF)which is -3.2857 and found  significant at 10% level.

The estimated unit root test is,

X _t-1 = 0.1006 – 0.2489 + 0.4794 ∆X _t-1+u

              (3.24)*  (-3.2857)*   (3.665)*

  R²= 0.2969, ( moderately  low), F= 6.334(insignificant),   where * = significant at 10% level.

But, the exchange rate series has no common variance and therefore, the Auto Regressive Common homoscedasticity test appeared to be significant where  Observed R2= 24.041(low but significant) ,F=44.456(sig) in which the estimated values are:

Constant              0.001929 (t= 1.41 , insignificant)

Residual               0.6932 (t= 6.66,significant)

Moreover, the series contains  heteroskedasticity  where the value of log likelihood ratio was found as 24.53(significant) from the Ramsey Reset Test.

So, we have to face numerous exchange  rate  policies for stabilization. The falling REER is the condition for net gain in terms of trade and positive current account balance. The stability of exchange rate with inflation targeting policy is crucial and to be adjusted with LIBOR and interest rate of EU for good behavior of exchange rate of the economy. Any interest rate differential is to managed by monetary policy.