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Sectoral macro-economic policies and poverty reductionin rural India

Sushanta Mallick


 Understanding the relationship between macroeconomic policies related to agriculture and rural poverty reduction still remains a key policy challenge. This paper develops a framework to link key macroeconomic variables with poverty and tests the effect of policies namely the government-led channel of development spending and financing that directly influence poverty after accounting for the effect of sectoral output and price ratios using data from India spanning over the last five decades. First, the policy-driven model emphasises the sectoral income distribution and intersectoral terms of trade as a mechanism in determining the level of poverty. Second, the paper considers key components of fiscal spending and monetary or financial policy via availability of credit rather than the cost channel to show that a strategy of government-led development spending and financing is a precondition for growth with poverty alleviation. A rise in relative price of agriculture does not reduce poverty, as the income effect is not sufficient enough in offsetting the decline in the purchasing power of poor due to rise in food prices that comprise big part of the consumption basket of most poor who are largely agricultural labourers and tenants, whereas more irrigated area on the back of higher government capital spending on the other hand offsets the adverse impact, along with the extension of bank credit to agriculture, contributing significantly to poverty reduction.

Publication Type(s)

Conference Paper

Ten Years of War Against Poverty Conference Papers

Conference: Ten Years of War Against Poverty


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