Urbanization and Urban Growth in India Has Helped Reduce Poverty, although Inequality Is on the Rise

India’s structural transformation — from rural to urban and from agriculture to the non-farm sector – has contributed to  the country’s declining poverty rate over the past 30 years, according to a new book by Peter Lanjouw, Rinku Murgai and colleagues at the World Bank.

The traditional engine of aggregate poverty reduction, agriculture, has lost some of its potency: in recent years poverty rates continued to fall while agricultural growth slowed. Since the 1990s, the authors say, urban growth has become a new, and important, driver of poverty reduction. An overwhelming majority of the urban poor live in small and medium-sized towns (rather than large cities) and it is these towns that appear to be most effective in reducing rural poverty because they stimulate rural non-farm diversification.

The expansion of the non-farm sector has driven down poverty not only through job creation and higher wages, but also by pushing up agricultural wages. One caveat: higher inequality seems to be accompanying India’s accelerating economic growth and the highly-visible transformation in its major cities. This raises concerns that significant segments of the population haven’t benefited from India’s economic growth. Indeed, in the face of dramatic economic growth, inequalities along historical lines of caste, tribe and gender have persisted – and even widened in some places.