Snakes & Ladders: India's Path Out Of Poverty

Prime Minister Narendra Modi hoisted the flag and waited to deliver his customary address to the nation. When the National Flag Guard began marching out from the open courtyard of the main gate of the Red Fort, a military brass band played Saare Jahan Se Accha. To its irresistible beats, Modi tapped on the slanted top of the lectern. Then, in his address, he laid out a grand vision.

By 2047, he said, India will become a developed country, and he brought attention to the impact of his economic policies. “13.5 crore [135 million] of my fellow poor brothers and sisters have broken free from the chains of poverty and entered the new middle class. There can be no greater satisfaction in life than this,” he said. In January 2024, this number was upgraded: 250 million Indians lifted out of poverty since 2015.

Previously, from 2005 through 2015, about 271 million Indians had escaped poverty. This year, when former prime minister Manmohan Singh retired from the Rajya Sabha, Congress president Mallikarjun Kharge credited Singh for the feat. “Thanks to your policies, India was able to lift 27 crore people, the highest number of poor people, out of poverty,” Kharge wrote in a letter to Singh.

The numbers laid out by Kharge and Modi relied on the Multidimensional Poverty Index, a measure of poverty which factors in a variety of deprivations in monetary poverty, education and social infrastructure services. The index is jointly developed by the United Nations Development Programme and Oxford Poverty & Human Development Initiative.

Yet, neither statistic covered the life and times of Avadhesh Mondal, a hard-working daily-wage migrant labourer from West Bengal, who, for years, toiled at New Delhi’s construction sites to keep his family of three out of poverty. Though the growth in his wages stagnated over time, Mondal continued to provide a small income to his family until one day in 2022, when a persistent episode of coughing, fever and intense fatigue pushed him out of the workforce. “It was TB [tuberculosis],” Mondal said. His little savings were exhausted on medical expenses and his cash flow dried up, pushing his family into poverty and debt.

Even as the government reported that millions of Indians have escaped poverty, the case of the Mondals might make them appear as an exception to the theories of poverty alleviation—one of those rare, one-off cases, in a developing, fast-growing economy. Hardly so.

A recent study led by Sonalde Desai, a sociologist and professor at University of Maryland, College Park, and National Council of Applied Economic Research (NCAER), challenges the notion that the relationship between people and poverty in India is linear even as the economy has grown rapidly over the last two decades. As opposed to millions of people escaping--or being lifted out of--chronic poverty over time, the study finds that people move in and out of poverty depending on life’s circumstances such as natural disasters, illness and other financial shocks.

This phenomenon is called transient poverty, and it is difficult to measure because of lack of real-time data on households. Desai, who spearheaded a team of economists, relied on the India Human Development Survey (IHDS), which is unique in the way it has collected data. The same set of households--over 41,000--were surveyed in three waves in 2004-05, 2011-12 and 2022-24. This helped provide a more granular and clearer picture of the social and economic transformations taking place in the country since India began its rapid economic ascent in the early 2000s.

Between 2011-12 and 2022-24, according to the study, while 18.1% of households moved out of poverty, 5.3% fell back into it. The households that fell back into poverty were non-poor before, now becoming the newly poor in a fast-growing economy, and experiencing the torments of poverty for the first time. “The change between the two sets of transitions is that the overall poverty level in 2022-24 is substantially lower, and the newly poor form a more significant part of all poor households, about 62%,” the study noted. “With a decline in chronic poverty, transient poverty begins to dominate.”

“There are various fronts that push people into poverty. How do we address it? This is probably where we need to go,” Desai told IndiaSpend. In the study, Desai found that economic growth and poverty decline “create a dynamic climate that requires nimble social protection programs”, those that are more fine-tuned to target accidents of life than accidents of birth.

“For each country, as it evolves, it needs to start rejiggering things,” Desai said. “What we have recognised is that poverty is declining, which is a good thing. We now target over 60% of the households [to provide free food]. The problem that we face--and this is a genuine problem, not the government's fault--is you can either give a little bit to everyone or a lot to some. Our concept, historically, has been to identify the poor and target them, and to let people who got out of poverty survive on their own. The problem is our identification of the poor happens every 10, sometime every 15 years. And the country's economy is so dynamic that there are people moving out of poverty and people falling back into poverty.”

Desai said that efficient and on-demand targeting of the poor is a huge challenge owing to gaps in data and the complex functioning of modern economies.

“Every time we see dissonance between who we think is deserving of the safety net and who is getting the benefits--if there is discrepancy, we blame it on political economy or elite capture. It could be so. But it is also the fact that a household's lifecycle changes over time, tremendously. I don't think it is possible to target people in a sensible way that can continue forever…because so much changes over time…This is a good time to think about this issue because when there is an emergency there is no time to do anything.”

The precarity of life

“Zindagi me sab badal gaya uske baad (Everything in my life changed after that).”

Thus lamented Bachnu Kumar, a young man who had to forego his education to become the family’s breadwinner. In September 2022, a phone call broke the news--his father, 55, a farm labourer in Bihar’s Madhepura district, had passed away after a cardiac arrest. “Father left my mother and myself some debt,” he said, recalling how his father had delayed seeking medical help for lack of cash reserves. Kumar’s family, hovering on the edge of poverty for years, tipped into it.

“So many people live very risky lives. Which is why I keep harping on the phenomenon of falling into poverty because in India, it is big; and until we control it, we can't control overall poverty," Anirudh Krishna, professor of public policy at Duke University, who has researched poverty in developing countries and advised governments, told IndiaSpend. "The single biggest source of volatility in people's lives is widespread informality [in the workforce].”

Even as Indians are escaping poverty, according to Desai, they get placed on “a precarious perch where a single accident, natural disaster, or epidemic could push them back into poverty.”

Both Desai and Krishna singled out healthcare-related financial shocks as the top reason behind transient poverty in India. In 2011-12, out-of-pocket expenditure (OOPE) on health drove 55 million Indians into poverty--more than the population of South Korea (51.1 million)--as IndiaSpend reported in July 2018. Some 38 million Indians were impoverished by expenditure on medicines alone.

“One of the volatilities comes out of healthcare incidents. India has one of the highest out-of-pocket expenditure (OOPE) ratios [according to the World Health Organisation (WHO)],” said Krishna. This is a measure of how much people spend their own money, as a percentage of total health expenditure. “If you are not covered by health insurance, you pay with your own money. This ratio varies from lows of 3-5% in the Nordic countries to about 8-9% in Colombia and Cuba, for instance. For the United States, it is about 14-15%. For India, it is 50%. This means that every time I have a health incident, I need to raise a lot of money: either by taking on debt or by selling assets. And this is a sure-shot way into poverty for [low-income households],” Krishna said. In March 2023, IndiaSpend explained how families pay for healthcare by taking on debt or resorting to distress sales.

"There are certain parts of India where there aren't doctors, where there aren't medical facilities,” Krishna said. This year, the government spent only about 1.2% of GDP on healthcare, according to The Lancet. While the Economic Survey for 2022-23 shows that government health expenditure rose to 2.1% of GDP, this figure includes spending in water, sanitation and hygiene (WASH) and disaster management, IndiaSpend reported in April 2024.

Back in September 2018, prime minister Narendra Modi launched the Ayushman Bharat Pradhan Mantri Jan Arogya Yojana (PM-JAY), a tax-payer funded national public health insurance scheme, which covered about 40% of the country’s poor and vulnerable population, and paid for specialist treatments and hospitalisation for up to Rs 5 lakh.

One month after the launch, speaking at a health conference in Goa, the then-CEO of PM-JAY, Indu Bhushan, said that it was a puzzle that health expenses were pushing people into poverty even as the government worked to pull people out of it. “About six crore [60 million] fall into poverty every year because of catastrophic healthcare expenses. I was astounded by the number. Six crore people means 7,000 people every hour,” Bhushan said.

But after more than five years, the flagship health scheme faces challenges with its design, putting a question mark over whether it could shield tens of millions of poor households from financial ruin. Not only does it target and enroll people based on the outdated Socio Economic and Caste Census of 2011, thus excluding deserving beneficiaries, but its use is uneven across states. Additionally, states with high poverty incidences such as Uttar Pradesh and Bihar have yielded lower claim volumes.

Consider a study conducted in Chhattisgarh in 2020, which found that the scheme did not nullify the financial risks associated with health shocks. “Enrollment under PMJAY or other PFHI [Publicly Funded Health Insurance] schemes did not increase utilisation of hospital-care in Chhattisgarh,” researchers found. Nor did OOPE and incidence of ‘Catastrophic Health Expenditure’ decrease with such enrollment, the study, which relied on three repeated cross-sectional data analysis, found. And in 2023, The Comptroller and Auditor General of India found instances of misuse of funds, lack of regulatory oversight and irregularities in hospital management and quality of healthcare offered.

IndiaSpend reached out to L.S. Changsan, the Chief Executive Officer of the National Health Authority, for clarification on the challenges facing Ayushman Bharat and whether it is equipped to counter transient poverty. We will update the story when we receive a response.

“Ayushman Bharat could work against transient poverty,” Desai said. “But is [the policy] fully thought out? It is not clear to me. This is because the idea of transient poverty has not yet been accepted [among government policymakers].”

Himanshu (he uses one name), an assistant professor at the Jawaharlal Nehru University in New Delhi, said that even though capitalism creates winners and losers, it is the government’s responsibility to provide basic infrastructure [of opportunities to its poor] irrespective of the demand.

“Even when growth remains high, governments should not abandon or loosen social protection policies. Universal healthcare is still a luxury in our country and a function of how much money one has,” Himanshu said.

Can economic growth guarantee poverty reduction?

In 2018, the World Bank and the World Trade Organisation published a joint report, wherein they called on more developing countries to trade more freely. “Sustained economic growth is the most powerful tool for poverty alleviation,” the report said, and cited evidence from the last 30 years: trade and globalisation spurred growth and pulled hundreds of millions of people from poverty, largely in China and India. “Trade has made a critical contribution to poverty reduction to date.”

Yet, this year, Nobel Prize-winning economist Angus Deaton called into question the linkages between trade and poverty reduction. Deaton, writing in the International Monetary Fund’s Finance & Development magazine, noted that he is skeptical of the claim “that globalization was responsible for the vast reduction in global poverty over the past 30 years”, and that “the reduction in poverty in India had little to do with world trade.”

In the 2000s, while an economic boom swept across emerging markets, Krishna, of Duke University, conducted a study of 35,000 households on four continents for over six years, and published his findings in a book, One Illness Away: Why People Become Poor and How They Escape Poverty. Krishna found that among some other factors, illness-related healthcare expenses was the leading cause behind households’ descents into poverty.

As governments focused on raising people out of poverty, they were "blindsided to the parallel flows leading into poverty,” Krishna wrote. “Progress against poverty is marginal and becomes compromised: what is reduced with the help of policy gets restored as a result of events.”

IndiaSpend reached out to V. Anantha Nageshwaran, the Chief Economic Advisor to the government, for comment. Additionally, we asked whether there is acceptance of transient poverty among top economic and socio-economic policymakers in the government. We will update the story when we receive a response.

“Suppose you have a growth rate of 9%. The point is not the growth rate, the point is the process by which that particular rate of growth was produced,” Krishna told IndiaSpend. Even a process that doubles the income of the rich while the rest stagnate can lead to 9% growth, but that growth does nothing to reduce poverty, he explained. “There is no study that has proved the causal link between economic growth and poverty reduction.”

Desai said that even though there is a connection between sustained economic growth and poverty reduction, it could also be that poverty rises during eras of sustained economic growth. “And this is the key that we have to think about. Individual emergencies or aerial emergencies are unpredictable and not associated with government actions or economic transformation,” she said.

China, for instance, has witnessed sustained high economic growth in the past 40 years, and has pulled 800 million people out of poverty, according to the World Bank, which uses the $1.90 per day poverty line. Yet, research indicates that even as growth rocketed in China, people continued to move in and out of poverty.

In 2017, Patrick S. Ward, then a research fellow at the International Food Policy Research Institute in Washington D.C., analysed a balanced panel of households in rural China from 1991 through 2006, and found that even though there were widespread reductions in chronic poverty, transient poverty persisted in China.

“Why have policies and reforms not been more successful in insulating households from the sort of shocks that can tip them into spells of poverty?” Ward asked in his paper. “Despite the relatively long time period covered by our panel, this answer remains elusive.”

‘Million dollar question’

One way, according to economists IndiaSpend interviewed, is to shield people against unforeseen and high healthcare expenses. To do so, governments the world over either provide quality affordable public healthcare or contract the private sector for these services and pay for it through health insurance schemes such as Ayushman Bharat.

When the programme was launched in 2018, Bhushan had made the government’s intent clear: healthcare costs should not financially destroy families. But evidence for such financial vaccination is mixed. A study in Chhattisgarh in 2024 found that enrollment under the scheme was not associated with reduced out-of-pocket expenditure or catastrophic health expenditure, even as the government reported a national decline of 21% in OOPE.

“We have a very large population. We need to get healthcare to them,” Radhika Jain, an assistant professor of health economics at University College, London, told IndiaSpend. “Part of the reason we went down the health insurance route is because it was so difficult to reform the public sector. For decades, we have been saying that let's do public provision and we haven't been able to do it very well. It’s a million dollar question,” Jain said, referring to the policy dilemma between public provision of quality healthcare and health insurance.

India’s budget for healthcare in recent years shows a shift in India's health policy from one based on universal healthcare focusing on strengthening the public health sector to providing insurance and contracting healthcare to the private sector, IndiaSpend reported in April 2024.

“My big insight, the thing that I keep banging on about, is that contracting the private sector [to provide healthcare] is extremely challenging,” Jain said. “Countries such as the United States have long histories of implementing insurance, long histories of working with the private sector, long histories of lots of data. And it is still difficult [for them] to contract the private sector in a way that keeps up the incentives to do things but doesn't get them overpaid and doesn't encourage them to do things that aren't necessary.”

“Even low income households in India, part of the reason they go into poverty is because...the public system is there but they choose not to go to it. They choose to pay for private care in private hospitals and they fall into poverty because of it,” she said.

Half of households (51%) in India went to private facilities for healthcare, with 80% citing at least one quality concern, IndiaSpend reported in September 2018.

Even as more Indians are getting care, Jain said that not all of this care is free. Her research showed that there are substantial out-of-pocket charges incurred by patients even under government insurance programmes, while private hospitals filed claims for higher-reimbursed services than those they actually provided.

“There is not much oversight of what hospitals are doing with patients,” she said. “Part of the reason hospitals are charging patients is because the reimbursement rates set by the government are quite low. But setting reimbursement rates, even in countries like the US, is very, very complicated. It is very difficult to set the incentives perfectly right…how hospitals are paid and how much they are paid is going to affect both the quality of healthcare and out-of-pocket expenditures.”

Only about 11% of total claims filed under Ayushman Bharat were at public sector hospitals, according to a government-funded study, which also found that Jharkhand, one of the poorest states, accounted for about 89% of claims paid under the scheme at private hospitals.

“I think it is very clear that Ayushman Bharat has not nullified the financial risks, but [as] to the extent that it has reduced it, it remains kind of unclear,” Jain said. “[And] given our institutional capacity, I think contracting the private sector is extremely difficult.”

When asked for a solution, a way forward for policy, Jain had a clear response: “One good, well-functioning public hospital in every district, equipped and able to provide all hospital services, including complex care, diagnostics, and medicines…We only have about 740 odd districts.”

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