International Journal of Social Economics

Public expenditure, economic growth and poverty alleviation

Ritwik Sasmal Joydeb Sasmal
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IJSE
43,6
Public expenditure, economic
growth and poverty alleviation
Ritwik Sasmal
604 Department of Economics, University of Konstanz, Konstanz, Germany, and
Joydeb Sasmal
Received 11 August 2014 Department of Economics with Rural Development, Vidyasagar University,
Revised 5 January 2015
23 February 2015
Midnapore, India
13 March 2015
Accepted 15 March 2015
Abstract
Purpose The purpose of this paper is to examine the impact of public expenditure on economic
growth and poverty alleviation in developing countries like India. If poverty and inequality are high,
the government may resort to distributive policies at the cost of long-term growth. The distributive
policies and poverty alleviation measures fail to achieve success due to lack of good governance, lack of
proper targeting and problems in the implementation of such schemes. On the other hand, if the nature
Int J of Social Economics 2016.43:604-618.

of public expenditure is such that it enhances per capita income, it will help reduce poverty.
Design/methodology/approach After analytical digression and construction of hypotheses panel
regression has been done using state-level data in the Indian context to empirically verify the above
propositions. Both Fixed effects and Random effects models have been used for this purpose.
Findings The results show that in states where ratio of public expenditure on the development of
infrastructure such as road, irrigation, power, transport and communication is higher, per capita
income is also higher and incidence of poverty is lower indicating that economic growth is important
for poverty alleviation and development of infrastructure is necessary for growth.
Originality/value This study demonstrates how public policy and public finance can be used as
instruments for removal of poverty.
Keywords Productivity, Poverty alleviation, Distributive politics, Infrastructure development,
Public expenditure, Social sector
Paper type Research paper

Introduction
Poverty is one of the major problems in the developing countries like India although it
is declining over time due to economic growth and as result of various poverty
alleviation measures. In 1950s and 1960s, poverty in India was very acute and around
60 percent of the population were poor during that time (Datt, 1998). Poverty of the
country has been estimated by different scholars at different points of time. Since there
are methodological differences the estimates of poverty at different points of time may
not be fully comparable. Nevertheless, poverty has declined over time with economic
growth. According to the Tendulkar methodology, poverty in India in 1993-1994 was
45.3 percent (Ahluwalia, 2011) and it has come down to 21.92 percent in 2011-2012
(Government of India, 2013). The incidence of poverty differs between urban and rural
areas and across states within the country. Poverty is higher in rural areas as compared
to urban areas of India. In 1993-1994, rural poverty in the country was 36.66 percent

International Journal of Social
Economics
Vol. 43 No. 6, 2016
pp. 604-618
Emerald Group Publishing Limited
0306-8293
DOI 10.1108/IJSE-08-2014-0161
The earlier draft of this paper was presented at 49th Annual Conference of The Indian
Econometric Society at Patna University, India. The authors are indebted to the participants of
the Conference for their valuable comments on this paper. The authors are also indebted to
the anonymous referees for valuable comments on this paper. The authors are benefitted from
the help of R.N. Bhattacharya, Sugata Marjit, Debasis Mondal and Pinaki Das.
 whereas in urban areas, it was 30.51 percent (Datt, 1998). In 2011-2012, these figures Economic
have declined to 25.70 and 13.70 percent, respectively (Government of India, 2013). growth and
The incidence of poverty also varies across states in the country. In the year 2004-2005
poverty was higher in the states like Bihar (54.4 percent), Orissa (57.2 percent), Madhya
poverty
Pradesh (48.6 percent) and Uttar Pradesh (40.9 percent) and it was much less in the states alleviation
like Jammu and Kashmir (13.2 percent), Kerala (19.7 percent), Punjab (20.9 percent) and
Himachal Pradesh (22.9 percent) (Ahluwalia, 2011). Now, it needs to be investigated how 605
economic growth has helped reduction of poverty in the states of India.
The concept of poverty has been defined in various ways. Sen (1981) has examined
the concept and measurement of poverty from alternative angles. He states that the
specification of certain consumption norms or of a poverty line may do part of the job.
The poor are those whose consumption standards fall short of the norms or whose
incomes lie below that line. In the definition of poverty based on biological approach,
total earnings are insufficient to obtain the necessities for the maintenance of bare
physical efficiency. However, the biological approach, like almost every procedure in
the subsistence-level definition of poverty has been challenged. Side by side, in many
cases in the analysis of poverty, the concept of relative deprivation has been fruitfully
used. The view that poverty is a value judgment has recently been presented
Int J of Social Economics 2016.43:604-618.

forcefully by many authors. The entitlement approach to starvation and famine

proposed by Sen (1981) concentrates on the ability of people to command food through
the legal means available in the society. Although the head-count measure of poverty
defined as the ratio of the number of poor to total population has some drawbacks it is
taken as a widely used measure of poverty. Another measure that has had a fair
amount of currency is the poverty gap and is defined as the aggregate short-fall of
income of all the poor from the specified poverty line (Sen, 1981).
Srinivasan (2007), while making comments on some of the poverty alleviation
policies in India, has pointed out the major methodological issues of poverty
measurement. There is a huge debate on the measurement of poverty in India and
elsewhere. Jones and Sen (2001) have explained the difference between the estimates of
calorie-based poverty and the official poverty line in the Indian context. Ravallion
(2008) has put forth his observation on the estimate of poverty in India in a global
perspective. Using the National Sample Survey data for 2004-2005, and based on the
international poverty line of 1.25 US Dollar per person per day, the study has estimated
that 42 percent of the population of India are poor. Chatterjee (2012) has put emphasis
on the measurement of poverty in a multi-dimensional framework. He is of the view
that no single definition of poverty is applicable to all societies and regions at all times
because poverty is a complex phenomenon with multiple dimensions. The present
study has the limitation that it is based on the estimates of poverty which are not
measured on the basis of any single methodology.
There are various reasons behind the incidence and persistence of poverty. Economic
growth, distribution of income, growth of social capital, social sector development,
infrastructure, productivity and direct measures for poverty alleviation are important
among them. The two main approaches to poverty alleviation are trickle down effect of
economic growth and direct attack on poverty. In the former, the benefits of economic
growth trickle down to the poor and poverty declines. In the second approach,
distributive and welfare measures are undertaken by the government to help the poor
directly. Collier (1998) has explained the role of social capital in economic growth and
poverty alleviation. The role of social capital has been viewed from an economic
perspective in this study. Social capital is created from social networks and social
 IJSE interactions which generate externalities. It is economically beneficial because social
43,6 interactions facilitate transmission of knowledge about technology and markets and
thereby reduce market failures and free-riding problems. It helps collective actions,
reduces transaction costs and enhances trust in the society by reducing the opportunistic
behavior of the individual. The study states that social capital is social if it is a social
interaction that has the effect of generating an externality. However, for social capital to
606 be meaningfully capital its economic effects must have some persistence. Social
interaction can have persistent effects even if it is not itself persistent if it induces
investment in physical capital. Social interaction is a flow that generates stocks of inputs
like trust, knowledge and norms into the production system. Social capital helps better
functioning of the market as well as of the government. Copying and pooling of
knowledge improve allocative decisions of the agents. Social interaction produces
coordinated actions in various ways. The coordinated actions again help production by
reducing opportunism and transaction costs, improving the management of common
pool resources, enabling the provision of public goods and generating economies of scale.
So far as externality is concerned, government is an important solution to the
problem of free-riding. It can achieve collective action through taxation, enable delivery
of public goods, manage common pool resources and generate knowledge externalities
Int J of Social Economics 2016.43:604-618.

through education, extension and training. However, some of these effects are better
achieved by civil society than government. The collective action of civil society
improves the efficiency of public expenditure. The analysis of Collier (1998) shows that
there should be a significant effect of interactions between public expenditure and the
capacity of civil society to organize collective actions. So far as the effect of social
capital on poverty is concerned it is argued that growth will reduce poverty. The poor
has a lower opportunity cost of time and a lower stock of physical and financial capital.
Since social interaction is time intensive and social capital can often substitute for
private physical capital, the poor may choose to rely more on social capital. Here also,
generation of knowledge externalities and reduction of opportunism and greater
amount of trust may help growth as well as reduction of poverty.
Wallis et al. (2004) have examined the link between social capital and economic
performance. They note that World Bank acknowledges social capital as a useful tool for
poverty reduction. Social capital has the features of social organization such as trust,
norms, values, attitudes, solidarity, cooperation and networks that can improve the
efficiency of society by facilitating coordinated actions. A stable and effective
institutional environment may reinforce the cohesiveness of civil society. Social capital is
important for better economic outcome. In addition to physical and human capitals, social
capital has a direct productivity effect in production process. Social capital may have an
indirect effect via human capital accumulation through greater investment in public
education system, greater community participation in the management of schools and
greater access to informal credit for the poor. The study further mentions that social
capital may facilitate the management of common property, and provision of public
goods, increase investment and reduce social costs of crime, corruption and other
non-cooperative conduct. So far as effectiveness of governance is concerned the paper
notes that institutions of local governance play important role in the development of
complementarities between governmental and civil social capital. The institutions of local
governance may affect not just the overall level of public participation in policy making
but also the distribution of opportunities among different social groups.
Adjasi and Osei (2007) have examined the nature and correlates of poverty in Ghana.
The study has run an ordinary least squares and a probit regression to determine the
 correlates of poverty. The major findings are: first, a household is less likely to be poor if Economic
the head of the family is educated and the household is urban based; second, households growth and
with heads employed in the clerical, sales and services and agricultural sectors are more
likely to be poor compared with those employed in the administrative and managerial
poverty
sectors; third, larger households and female headed households are poor; and fourth, alleviation
owning or operating a business as well as benefitting from remittances from abroad
improve the welfare status of households. The authors have suggested that specific 607
anti-poverty programs need to be well targeted, implemented and monitored at poverty
prone areas and groups. Upkere and Slabbert (2009) have shown that increase in
inequality and poverty can be attributed to globalization. The analysis shows that
unemployment is a cause of growing inequality and poverty and unemployment can be
attributed to the global logic of competitive profit-making management techniques of
outsourcing, downsizing and widespread automation. The work has expressed the view
that globalization has provided an opportunity for labor exploitation and shown that the
rate of global poverty has increased owing to global inequality.
In the discussion of public expenditure, economic growth and poverty alleviation
corruption has great relevance. The impact of corruption on income inequality and
poverty has been examined by Gupta et al. (2002). The study finds that corruption
Int J of Social Economics 2016.43:604-618.

reduces economic growth and increases poverty. It states that government officials
may use their authority for private gain in designing and implementing public policies
and corruption distorts the governments role in resource allocation. Corruption
affects not only macro variables like investment, growth, foreign investment but also
income distribution. It reduces the social services available to the poor. The empirical
literature has overlooked the distributional consequences of corruption although rich
or well-connected people typically use bribes to be the first in line for a rationed
government good or service. The impact of corruption on income distribution is also a
function of the governments involvement in allocating and financing scarce goods and
services. The analysis shows that corruption can affect income inequality and poverty
through various channels like overall growth, biased tax system, poor targeting of
social programs and education and human capital formation. Corruption can also affect
poverty by siphoning of funds from poverty alleviation programs. The literature
suggests that corruption slows down reduction of poverty by reducing growth and
increasing inequality. In a related study, Mauro (1995) has shown a negative impact of
corruption on investment and economic growth.
Ahmad et al. (2012) have explained how corruption hinders economic growth. They
also suggest that corruption may counteract government failure and promote economic
growth in some cases. Corruption can affect resource allocation in two ways: it can
change private investors assessment of the relative merits of various investments; and
corruption can result in misallocation of resources. The paper has cited the empirical
literature of negative correlation between the level of corruption and economic growth.
It has shown that weak institutions, political instability and inefficient bureaucracy are
detrimental to economic growth. The relationship between corruption and economic
growth has been tested using panel data from 71 countries. The exercise has tested the
hypothesis that in case of non-linear specification a moderate level of corruption
positively affects real GDP while a high level of corruption is detrimental to growth.
The other hypothesis it has tested is that better institutional quality tends to be positively
related to economic growth. Both hypotheses have been accepted. Corruption modifies
government goals and diverts resources from public purposes to private ones.
Furthermore, government corruption may also discourage private investment by raising
 IJSE the cost of public administration. However, if the government has produced a package of
43,6 pervasive and inefficient regulations, then corruption may help circumvent these
regulations at a low cost.
A number of welfare and distributive measures have been taken both at the national
and state levels in India and huge funds are being spent by the government every year
for reduction of poverty. The volume and nature of public spending are different in
608 different states. The effectiveness of government expenditure in enhancing
productivity and reducing poverty largely depends on where the money is spent and
how efficiently the funds are utilized. The literature on public expenditure and
economic growth suggests that if inequality in the society is high, there will be demand
for larger government and greater redistribution and higher distributive spending will
adversely affect economic growth (Meltzer and Richard, 1981; Alesina and Rodrik,
1994; Persson and Tabellini, 1994). Imposition of higher taxes for raising funds for
distributive purposes may create disincentives to investment for capital accumulation
and human skill formation. Thus growth may be slowed down by redistributive
policies and slow growth will have its adverse effect on poverty. The size and
composition of public expenditure are therefore important for economic growth and
poverty alleviation. The common wisdom suggests that if public fund is used for
Int J of Social Economics 2016.43:604-618.

infrastructure development and human capital formation it enhances productivity and

accelerates growth. But the government, specially in low income democracy, may not
be guided by the objective of maximization of growth and public spending may be
designed toward distributive policies (Sasmal, 2011). There is a debate on which
component of the public expenditures is more productive and helpful for economic
growth. Devarajan et al. (1996) have shown that revenue expenditure of the government
is more productive than capital expenditure. The revenue expenditure mainly includes
public expenditures on distributive heads. Barro (1991), Chen (2006) and Marjit et al.
(2013) have found opposite results and shown that investment for capital formation and
infrastructure development are more helpful for economic growth.
To explore the effectiveness of public expenditure in promoting economic growth
and poverty alleviation the findings of some other studies may be instructive. Fan et al.
(2000a, b) have shown that government spending on rural roads, irrigation, soil and
water conservation raises productivity and wage level in the agricultural sector and
thereby reduces rural poverty. Shariff et al. (2002) have examined the trend in public
expenditure on social sector development and programs for poverty alleviation and
found that the proportion of spending on such heads has increased over time. With
respect to the poverty alleviation efforts of panchayats (local government) in West
Bengal, the study of Bardhan and Mookherjee (2004) shows that the average levels of
poverty alleviation efforts are high and such efforts work better when land is
distributed more equally and the poor gets more education. After making an
assessment of the effectiveness of poverty alleviation programs in a household-level
investigation in rural India, Banik and Bhaumik (2008) have found that structural
bottlenecks, asymmetric information and rent seeking behavior prevent programs from
reaching the target groups. Their studies emphasizes on improved governance for
proper implementation of such programs. So, it is clear that distributive and welfare
measures for poverty alleviation could not be successful in many cases due to
governance failure. In this context, it is strongly felt that economic growth is necessary
and important for reduction of poverty. The distributive measures may offer some
temporary and partial relief to the poor but long lasting solution to this problem can be
achieved only if the productivity and income of the poor are increased and for that
 matter, investment for higher productivity and economic growth are very crucial. Economic
However, redistributive policies can be helpful for productivity growth if they can growth and
enhance human capital (Banerjee and Newman, 1993; Galor and Zeira, 1993).
In this study, because of paucity of data, we could not incorporate social capital and
poverty
corruption explicitly. However, the objective of this paper is to examine the effect of alleviation
economic growth on poverty alleviation and evaluate which component of government
expenditure is helpful for economic growth and reduction of poverty. The study not 609
only examines the relationship between economic growth and poverty alleviation but
also investigates how these two are related to the nature of public spending. Some
states in India give priority to capital formation and infrastructure development while
others give importance to social sector development or distributive schemes.
This paper argues that economic growth and increase in per capita income can act as
a driving force for poverty alleviation. Again the nature and composition of public
expenditure can significantly affect both economic growth and poverty alleviation. This
study plans to examine the effect of revenue expenditure (re), capital expenditure (ce),
expenditure on infrastructure development (inf) and expenditure on health, education
and other social sector development (ss) on economic growth and poverty alleviation in
the Indian states. The revenue expenditure includes wages and salaries, pension, subsidy
Int J of Social Economics 2016.43:604-618.

and allowances and interest payment on public debt. The capital expenditure, on the
other hand, basically means investment for long-term growth. The development of
infrastructure includes irrigation, power, roads, transport and communication. The social
sector development includes health, education, social security, nutrition, sanitation, etc.
It needs to be mentioned that revenue expenditure includes both developmental and
non-developmental components whereas capital expenditure includes mainly
developmental heads. The basic hypotheses of this study are:
(1) public expenditure for development of infrastructure is important for economic
growth and poverty alleviation;
(2) economic growth is very important for reduction of poverty; and
(3) expenditure for social sector development may be helpful for economic growth.

Data and methodology

This study has empirically verified how the reduction of poverty is related to the nature
of public expenditure and growth of per capita income in the Indian states. We have
used the panel regression technique using data on per capita net state domestic product
(pcnsdp) at constant prices, capital expenditure (ce), revenue expenditure (re),
expenditure on infrastructure (inf) expenditure on social services (ss) and poverty ratio
for major states of India for the period from 1990-1991 to 2009-2010. The sources
of data are: Handbook of Statistics on State Government Finances, The Reserve Bank of
India; working paper by Datt (1998); and Ahluwalia (2011). The data on poverty have
been taken for the years 1993-1994, 2004-2005 and 2009-2010. The data on pcnsdp
have been taken for the years 1993-1994, 1998-1999, 2004-2005 and 2009-2010. Four waves
of panel data on expenditure shares of the states on various heads have been taken
with a lag of four years. To avoid the problem of endogeneity in panel regression,
shares of public expenditures have been taken in lags. Another reason for taking lag is
that the effects of public expenditure on growth and poverty alleviation are realized
only after a time gap. Apart from public expenditure, there are many other factors that
influence economic growth and poverty alleviation. But due to non-availability of
 IJSE necessary data, they could not be incorporated as controlling factors in the regression
43,6 analysis. Following Wooldridge (2009) both Fixed effects and Random effects models
have been estimated in panel regression. The models are as follows:
The equation for the Fixed effects model is:
Y it b0 bX it ui eit (1)
610 where, Yit is the dependent variable with value of the i th individual observed in time t,
i 1, 2, , n; Xit is the i th independent variable (IV) observed in time t; is
the coefficient for IV; ui is the unobserved individual heterogeneity of i th entity of the
dependent variable; it is the error term of the ith entity in time t. In Fixed effects model:
E X it ; ui a 0
that is, Xit and ui are correlated. The Random effects model is:
Y it b0 bX it ui eit (2)
where, Yit, Xit, ui, it and are the same as above. But here, E(Xit, ui) 0.
Int J of Social Economics 2016.43:604-618.

That means, Xit and ui are uncorrelated.

The Hausman test has been used to examine the appropriateness of the regression
model. F-statistic has been used to check the overall significance of the panel regression.

Analysis and discussion

Table I gives per capita net state domestic product (pcnsdp) at constant prices
(1993-1994) for the major states of India over time. The per capita income is highest in Goa
and Maharashtra followed by Gujarat, Punjab and Tamil Nadu. In four southern states,

States 1980-1981 1990-1991 2000-2001 2009-2010

Andhra Pradesh 4,581 6,839 10,195 17,418

Arunachal Pradesh 4,068 7,016 9,153 13,405
Assam 4,635 5,573 5,943 8,279
Bihar 2,732 3,567 3,831 5,525
Goa 9,466 14,697 25,710 31,003
Gujarat 6,440 8,768 12,489 25,225
Haryana 7,489 11,088 13,898 24,148
Jammu and Kashmir 6,233 6,261 7,385 9,747
Karnataka 4,940 6,626 11,854 19,709
Kerala 5,715 6,878 10,714 18,822
Madhya Pradesh 5,092 6,360 7,195 10,758
Maharashtra 7,102 10,135 14,233 28,154
Manipur 4,410 5,390 7,097 9,390
Meghalaya 5,580 7,105 9,476 15,288
Orissa 4,169 4,384 5,549 9,710
Punjab 8,441 11,749 15,071 21,363
Table I. Rajasthan 4,253 6,758 8,175 12,566
Per capita net state Tamil Nadu 5,273 7,874 12,994 21,478
domestic product at Tripura 4,000 5,024 9,397 15,447
constant prices Uttar Pradesh 3,981 5,137 5,575 7,695
(1993-1994) West Bengal 5,219 6,306 9,796 16,400
in Rupees Source: Handbook of Statistics on State Government Finances, RBI (several issues)
 Tamil Nadu, Karnataka, Kerala and Andhra Pradesh pcnsdp is higher than many other Economic
states. In last three decades, these states have performed very well in terms of increase growth and
of per capita income due to high rate of economic growth. The states like Bihar,
Uttar Pradesh, Assam and Orissa could not do well in this respect although Rajasthan
poverty
has performed better. It needs to be checked whether per capita income in the states are alleviation
related to the nature of public spending and increase in per capita income has resulted
in reduction of poverty. 611
The poverty ratios of the states have been presented in Table II. According to the
estimates for the year 2004-2005 based on Tendulkar methodology, poverty is very
high in the states like Bihar, Orissa, Madhya Pradesh and Uttar Pradesh. There has
been impressive reduction of poverty in states like Kerala, Rajasthan, Punjab, Jammu
and Kashmir and Tamil Nadu. Maharashtra, a rich state of the country, could not do
well in poverty reduction. In Madhya Pradesh reduction of poverty is not significant.
The study has the limitation that the same methodology could not be used for
measuring poverty at different points of time. Since different methodologies have been
used for estimating poverty in different time period, poverty measures are not fully
comparable. But due to non-availability of perfect data, the existing estimates have
been taken as approximate measures in this study. It is to be noted that in states like
Int J of Social Economics 2016.43:604-618.

Assam, Bihar, Madhya Pradesh, Orissa and Uttar Pradesh where per capita income is
low, the incidence of poverty is high giving an indication that growth is important for
reduction of poverty.
Table III shows the percentage share of public expenditure of the states on various
heads. It reveals that expenditure on social services (ESS) is more than 50 percent of
total expenditure on an average for most of the states and the percentage has not
changed much over the period from 1990-1991 to 2005-2006. But the share of capital
expenditure (CE) and the ratio of expenditure on infrastructure (EINF) have increased
over the years. In states like Gujarat, Andhra Pradesh, Punjab, Haryana, Maharashtra
which have performed better in increasing per capita income and reducing poverty, the
share of expenditure on infrastructure is higher. It establishes that development of

States 1993-1994a 2004-2005a 2009-2010b 2011-2012c

Andhra Pradesh 44.6 29.9 20 9.20

Assam 51.8 34.4 39.2 31.98
Bihar 60.5 54.4 54.8 33.74
Gujarat 37.8 31.8 26.6 16.63
Jammu and Kashmir 26.3 13.2 12.8 10.35
Karnataka 49.5 33.4 26.5 20.21
Kerala 31.3 19.7 11.3 7.05
Madhya Pradesh 44.6 48.6 40.5 31.65
Maharashtra 47.9 38.1 26.4 17.35
Orissa 59.1 57.2 46.4 32.59
Punjab 22.4 20.9 19.3 8.26
Rajasthan 38.3 34.4 29.4 14.71
Tamil Nadu 44.6 28.9 18.3 11.28
Uttar Pradesh 48.4 40.9 40.5 29.43 Table II.
West Bengal 39.4 34.3 32.5 19.98 Poverty ratio
Notes: aTendulkar Methodology (Ahluwalia, 2011); bRavi Methodology (Ahluwalia, 2011); cPlanning (H-C) in Indian
Commission, Government of India, 2013 states over time
 IJSE 1990-1991 2005-2006
43,6 States CE EINFa ESS CE EINFa ESS

Andhra Pradesh 0.10 0.13 0.49 0.26 0.43 0.44

Arunachal Pradesh 0.36 0.10 0.33 0.26 0.41 0.15
Assam 0.15 0.10 0.51 0.14 0.22 0.54
Bihar 0.15 0.12 0.54 0.17 0.17 0.63
612 Goa 0.31 0.19 0.40 0.25 0.28 0.43
Gujarat 0.11 0.15 0.46 0.34 0.40 0.41
Haryana 0.20 0.27 0.45 0.16 0.30 0.47
Jammu and Kashmir 0.38 0.09 0.44 0.33 0.37 0.41
Karnataka 0.12 0.29 0.46 0.14 0.20 0.48
Kerala 0.12 0.06 0.64 0.07 0.15 0.57
Madhya Pradesh 0.17 0.21 0.48 0.35 0.43 0.39
Maharashtra 0.13 0.24 0.44 0.25 0.29 0.53
Manipur 0.33 0.10 0.43 0.24 0.17 0.47
Meghalaya 0.24 0.10 0.47 0.19 0.19 0.51
Orissa 0.26 0.27 0.43 0.12 0.16 0.62
Punjab 0.11 0.21 0.49 0.16 0.36 0.40
Rajasthan 0.17 0.20 0.57 0.24 0.27 0.57
Int J of Social Economics 2016.43:604-618.

Tamil Nadu 0.04 0.09 0.59 0.18 0.19 0.59

Table III. Tripura 0.19 0.10 0.51 0.34 0.11 0.53
Ratio of various Uttar Pradesh 0.15 0.20 0.48 0.26 0.28 0.52
components of public West Bengal 0.09 0.15 0.61 0.10 0.17 0.62
expenditure in total Notes: CE, capital expenditure; EINF, expenditure on infrastructure; ESS, expenditure on social
expenditure of services. aShare in total developmental expenditure
the government Source: Compiled from Handbook of Statistics on State Government Finances, RBI (Several issues)

infrastructure is important for rapid economic growth and reduction of poverty. Here
infrastructure includes Irrigation, Power, Transport and Communication. The ESS
covers a wide variety of heads like health, education, family welfare, sanitation,
nutrition and welfare schemes.
The results in Table IV show that there is positive relationship between inf
and pcnsdp and it is statistically significant. Similar relationship also exists between
pcnsdp and ss. That means, expenditures on infrastructure and social services both
increase per capita income although the effect of infrastructure is much stronger.
It establishes that development of infrastructure is very important for economic growth
and increase of per capita income. The effects of re and ce on state per capita income
have been found to be insignificant. Actually they have been taken in regression in
aggregate form which includes many non-productive and non-developmental
components. If we could take them in more disaggregated form, some components
might have emerged as growth promoting factors. Anyway, the results suggest that
the nature of public expenditure is important for economic growth.
The results in Table V strongly establishes our hypothesis that growth is necessary
for poverty alleviation. The regression coefficient is negative and it is statistically
significant implying that increase in per capita income reduces poverty. Both R2 and F
statistic are very high. The results are consistent with the figures in Tables I and II
which show that in the states where per capita income is higher, poverty ratio is
lower. It confirms the importance of economic growth in the reduction of poverty.
The policy implication of this result is that economic growth can act as a driving force
 Exp. variable Coefficients t P >|t| R2 Prob>F F (21, 62) test
Economic
that all u_i=0 growth and
Fixed effects within regression poverty
Constant 53,608.38 0.26 0.794 0.14 0.000 3.71 alleviation
re 61,373.95 0.30 0.766
ce 41,167.80 0.20 0.841
inf 38,984.71 3.00* 0.004 613
ss 19,126.50 1.96* 0.054
Exp. variable Coefficients Z R2 Wald 2(1) Prob>2
Random effects GLS regression
Constant 69,864.52 0.34 0.12 21.90
re 71,146.62 0.36 0.0002
ce 60,467.58 0.30 Table IV.
inf 44,735.49 4.53* Panel regression of
ss 13,317.22 1.48 per capita net state
Exp. variable Coefficients Difference 2 (1) Prob>2 domestic product (at
FE RE constant prices),
pcnsdp on share of
Hausman test
Int J of Social Economics 2016.43:604-618.

revenue expenditure
re 61,373.95 74,146.62 12,772.67 57.01 0.000 (re), capital
ce 41,167.80 60,467.58 19,299.78 expenditure (ce),
inf 38,984.71 44,735.49 5,750.77 expenditure on
ss 19,126.50 13,317.22 5,809.28 infrastructure (inf)
Notes: dependent variable = pcnsdp; explanatory variable = re, ce, inf, ss; number of groups and expenditure on
(state) = 22; number of observations = 88; time period (T ) = 4. *Significant at 5 percent level and social services (ss) in
Hausman test accepts FE model total expenditure

Exp. variable Coefficients t p>|t| R2 F (1, 29) F (14, 29) test

Prob>F that all u_i=0
Fixed effects (within) GLS regression
Constant 52.57631 25.49* 0.000 0.71 73.49 13.98
pcnsdp 0.001475 8.57* 0.000 0.000
Exp. variable Coefficients Z R2 Wald (1) 2

Prob>2
Random effects GLS regression
Constant 52.47071 16.83* 0.71 80.87 0.000
pcnsdp 0.0014657 8.99* 0.000 0.000
Exp. variable Coefficients Difference 2 (1) Prob>2
(bB)
FE (b) RE (B) Table V.
Hausman test 0.03 Panel regression of
pcnsdp 0.001475 0.0014657 9.29e06 0.86 poverty on
Notes: Dependent variable = poverty ratio (H-C ); explanatory variable = pcnsdp; number of Groups per capita net
(state) = 15; number of observations = 45; time period (T ) = 3. *Significant at 5 percent level (Hausman state domestic
test accepts Random effect model) product (pcnsdp)
 IJSE in reducing poverty. It is also clear from the econometric analysis that the nature of
43,6 public expenditure is important for both economic growth and poverty alleviation.
The latest development in Indian states reveals that in rapidly growing states like
Gujarat, Maharashtra, Tamil Nadu, Andhra Pradesh, Kerala and Punjab where poverty
has declined significantly, per capita income is very high compared to the states like
Assam, Bihar, Orissa, Madhya Pradesh and Uttar Pradesh where poverty is still very
614 high (see Table II). According to the Economic Survey 2014-2015, Government of India,
per capita net state domestic product (at current prices, 2004-2005 series) in Gujarat,
Maharashtra, Tamil Nadu, Andhra Pradesh, Kerala and Punjab in 2012-2013 are
Rupees 96,976, 103,991, 98,628, 78,958, 88,527 and 84,526, respectively against Rupees
40,475, 27,202, 49,241, 44,989 and 33,616, respectively in Assam, Bihar, Orissa,
Madhya Pradesh and Uttar Pradesh. It clearly demonstrates that economic growth and
increase in per capita income have significant impact on poverty reduction. It may be
further argued that public investment in the development of infrastructure has an
important role in enhancing per capita income and reduction of poverty. The budgetary
allocations for the development of infrastructure remained very high in Gujarat,
Maharashtra, Tamil Nadu and Andhra Pradesh in 2009-2010 and they were 31, 32, 17
and 44 percent, respectively in total development expenditure of the above states.
Int J of Social Economics 2016.43:604-618.

In further reference, it may be mentioned here that to fulfill the target growth rate
of GDP at 8-8.5 percent in the country Union Budget 2015-2016 of the Government of
India has allocated additional Rupees 70,000 crore over the previous year for
investment in infrastructure. This also strengthens our conclusion that growth is very
important for reduction of poverty and for economic growth public investment for
infrastructure has a big role.
In Table V, the regression accepts the Random effects model. That means, state-
specific random factors are not correlated with the explanatory variable pcnsdp.
To explain this result and to get an idea whether there is any spill-over effect of
neighborhood states on poverty or cross-sectional dependence among the states with
respect to poverty, we have regressed poverty (POVT) on pcnsdp and state dummies in
a panel format using the equation:

POV Tit a0 a1 S1 a2 S2 ::::::::::::::::: a14 S14 b pcnsdpit U it

where S1, S2, , S14 are state dummies of 14 states (except West Bengal) representing
the state-specific random factors not included in the regression and s are individual
effects of the state dummies. The results presented in Table VI show that state
dummies are significant for the states like Bihar (S3), Gujarat (S4), Jammu and Kashmir
(S5), Karnataka (S6), Kerala (S7), Madhya Pradesh (S8), Maharashtra (S9) and Orissa
(S10). Interestingly, while the coefficients for the states like Jammu and Kashmir and
Kerala are negative, for other states the coefficients are positive. This may be explained
by the fact that Kerala is the number one state in literacy and human capital formation
in the country and Jammu and Kashmir is a highly subsidized state. So, the state-
specific factors reduce poverty. On the other hand, Bihar, Orissa and Madhya Pradesh
are very backward states in many respects. So, here state-specific factors increase
poverty. Gujarat, Maharashtra and Karnataka are rapidly growing states and higher
per capita income reduces poverty in these states. But there may be some state-specific
factors which actually increase poverty. It may be noted here that R2 has improved
after the inclusion of state dummies in the regression implying that poverty is better
explained if the state dummies are included in addition to pcnsdp. Therefore the
 Coefficients t-statistic p-value
Economic
growth and
Intercept 50.489 16.014 0.000 poverty
S1 1.704 0.568 0.574
S2 0.951 0.289 0.774 alleviation
S3 12.156 3.256 0.003
S4 7.152 2.001 0.055
S5 21.049 5.957 0.000 615
S6 6.362 1.831 0.077
S7 9.949 2.868 0.008
S8 6.683 1.898 0.068
S9 15.657 4.252 0.000
S10 14.478 4.060 0.000
S11 4.575 1.285 0.209
S12 2.362 0.676 0.504
S13 3.006 0.574 0.570 Table VI.
S14 2.091 0.579 0.567 Least squares state
pcnsdp 0.001 8.538 0.000 dummy variables
Notes: R2 0.923; Adj. R2 0.883; F 23.199 (0.000); D-W 2.295; number of observations 45 estimation of poverty
Int J of Social Economics 2016.43:604-618.

acceptance of Random effects model in Table V is explained by the argument that if the
state-specific factors were included in the regression as additional controls, it is very
likely that the Fixed effects model would be accepted and in that case, state-specific
random factors will be related with the explanatory variable pcsndp.
The regression in Table VII captures the direct effect of various components of
public expenditure on poverty reduction in the states of India. Only the expenditure on
infrastructure is found to have negative and significant effect on poverty. This is
consistent with the figures in Table III. It is now clear that expenditure for development
of infrastructure is important for both economic growth and poverty alleviation. On the
other hand, the effect of government spending for social services on poverty is found to
be insignificant in Table VII. The ESS can reduce poverty only if the schemes are
properly implemented and the benefits of welfare programs reach the target groups.
But for successful implementation of social welfare schemes, good governance,
effective administration and proper targeting are needed. Unfortunately, these are
lacking in many cases. Another point to note here is that the effect of social sector
development on poverty is realized only in the long-run. Since we have taken data on
poverty for a short span of time, possibly, the effect of public expenditure for social
services on poverty might not has been reflected in the results. The results would have
been different, if time span was increased. The policy implication of these results is that
measures for promoting economic growth will be more effective in poverty alleviation
than the distributive measures for the poor.

Summary and conclusions

This paper has established that economic growth has significant impact on poverty
alleviation and public expenditure for the development of infrastructure has important role
in economic growth and poverty alleviation. The results of panel regression based on state-
level data in the Indian context show that poverty is negatively associated with per capita
net state domestic product (pcnsdp) and the relationship is statistically significant.
It suggests that economic growth can act as a driving force in poverty alleviation.
 IJSE Exp. variable Coefficients t p>|t| R2 F (1, 44) F (14, 44) test
43,6 Prob>F that all u_i=0
Fixed effects within regression
Constant 199.7477 0.44 0.664 0.13 0.0012 3.97
re 129.0865 0.29 0.778
ce 153.6118 0.34 0.736
616 inf 74.8709 1.81* 0.082
ss 38.7330 0.98 0.335
Exp. variable Coefficients Z R2 Wald 2(1)
Prob>2
Random effects GLS regression
Constant 287.0534 0.64 0.12 9.98
re 222.3286 0.49
ce 238.7398 0.53
inf 90.6358 2.64*
ss 26.6456 0.80
Exp. variable Coefficients Difference 2 (1) Prob>2
Table VII. FE RE
Int J of Social Economics 2016.43:604-618.

Panel regression of
poverty on the share Hausman test
of revenue re 129.0865 222.3286 93.2420 26.52 0.000
expenditure (re), ce 153.6118 238.7398 85.1279
capital expenditure inf 74.8709 90.6358 15.7649
(ce), expenditure on ss 38.7330 26.6456 12.0874
infrastructure (inf) Notes: Dependent variable = poverty; explanatory variable = re, ce, inf, ss; number of groups
and expenditure on (state) = 15; number of observations = 45; time period (T ) = 3. *Significant at 5 percent level and
social services (ss) Hausman test accepts FE

In the states like Gujarat, Maharashtra, Tamil Nadu, Andhra Pradesh, Kerala and Punjab
in India where poverty has declined significantly in the recent years, per capita income is
very high and it strengthens our conclusion that economic growth has significant impact
on poverty alleviation. The public expenditure on infrastructure has been found to have
positive impact on per capita income and negative impact on poverty implying that
development of infrastructure is important for both economic growth and reduction of
poverty. In 2015-2016 Union Budget, the government of India has laid high priority on
infrastructure to reach the target rate of high GDP growth. It is also found that in some
states of India like Gujarat, Maharashtra, Tamil Nadu, etc. where per capita income is
high and poverty has declined significantly, a big share of annual budget has been
allocated on the development of infrastructure. This reinforces our finding that public
expenditure for infrastructure has a big role in economic growth and poverty alleviation.
ESS like health, education, family welfare and social security is also helpful for economic
growth but the effect of infrastructure on growth is much stronger. Thus the policy
implication of this study is that economic growth is very important for poverty
alleviation and for economic growth and poverty alleviation greater share of public
expenditure needs to be spent on the development of infrastructure. The study has,
however, the limitation that it is based on the estimates of poverty not measured by any
single methodology at different points of time. So, the measures of poverty over time are
not fully comparable. Another limitation is that the factors other than per capita income
could not be incorporated as controls for explaining poverty in the states of India.
 Similarly in explaining the growth of per capita income, there are many other Economic
determining factors in addition to public expenditure on infrastructure. But due to growth and
non-availability of suitable data, they could not be included in the regression analysis of
the present study. So, further research may be pursued in these directions, to have a more
poverty
comprehensive study. alleviation

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Corresponding author
Joydeb Sasmal can be contacted at: joydebsasmal@yahoo.co.in

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