Linkages between government spending, growth, and poverty in rural India

This research report on India addresses an important policy issue faced by policymakers in many developing countries: how to allocate public funds more efficiently in order to achieve both growth and poverty-reduction goals in rural areas. This research is particularly important at a time when many developing countries are undergoing substantial budget cuts as part of macroeconomic reforms and adjustment. The econometric model employed in this research includes a broad range of government expenditure items. It traces their effects on productivity growth and poverty alleviation and ranks them, exploring the potential trade-offs and complementarities of the two goals. Of the various investments weighed, the report finds that investments in rural roads and agricultural research and development have the greatest impact, while government spending specifically targeted to poverty reduction such as rural development and employment programs have only modest effects. In the light of these results, many developing countries may want to take a second look at their policies for poverty reduction and growth. This report is the first of several planned at IFPRI under a new program of work on public investment policies for agriculture and rural areas. Similar work is already ongoing in China and is planned for Africa. Related studies will also examine ways to improve efficiency in the supply of public goods for rural areas, both in terms of improving performance and reducing unit costs within public institutions, and in clarifying the appropriate roles of the public, private, and civil society sectors. Work is also planned on issues related to the financing of public investments in rural areas.