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Policy reforms, institutions and thepoor in rural IndiaRaghav Gaiha a & Vani Kulkarni ba Faculty of Management Studies , University of Delhi , Indiab Department of Sociology , University of Pennsylvania ,Philadelphia, PA, USAPublished online: 11 Apr 2007.

To cite this article: Raghav Gaiha & Vani Kulkarni (1999) Policy reforms, institutions and thepoor in rural India, Contemporary South Asia, 8:1, 7-28, DOI: 10.1080/09584939908719853

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Contemporary South Asia (1999), 8(1), 7-28

Policy reforms, institutions and thepoor in rural India1

RAGHAV GAIHA & VANI KULKARNI

ABSTRACT Structural adjustment in India was a response to the macro-economic crisis ofearly 1991. Anticipating unfavourable short-term effects of the policy reforms on the poor,outlays on anti-poverty programmes were stepped up, and in 1992, the landmark 73rdConstitutional (Amendment) Act restructured local government councils, or panchayats.Whether this restructuring made any difference through the better design and implementationof anti-poverty programmes is the focus of the present study.

Structural adjustment in India was a response to the macro-economic crisis thaterupted in early 1991.2 The crisis was precipitated by a steep fall in foreignexchange reserves (equal to two weeks' imports), a sharp downgrading of India'scredit rating, and an abrupt termination of foreign private lending. The basicunderlying features of the crisis were high inflation (12% and rising), large fiscaland current account deficits (approximately 10% and 3% of GDP, respectively),and a heavy and growing burden of domestic and foreign debt.3

Of particular concern are the income distribution effects of adjustment.Distinguishing between the short (essentially transitional) and long-run effects,it is argued that the short-run effects were unfavourable. Specifically, theimpoverishment of some sections was not unrelated to the policy reforms (oradjustment policies). In anticipation of such effects, outlays on anti-povertyprogrammes were enhanced. But, given their unsatisfactory targeting, theirimpact on the poor is unlikely to be substantial. The key issue, therefore, iswhether the restructuring of panchayats (elected bodies at the district, block andvillage levels) following the 73rd Constitutional (Amendment) Act, 1992, wouldmake a difference through a better design and implementation of these pro-grammes. The present study addresses this issue.

The scheme is as follows. Following this introduction, the next sectionreviews briefly the nature and rationale of policy reforms, and their macro andsectoral effects in the initial phase. The section following deals with the incomedistributional effects, particularly changes in poverty indices. Since accurate

Correspondence: Raghav Gaiha, Faculty of Management Studies, University of Delhi, India; and Vani Kulkarni,Department of Sociology, University of Pennsylvania, Philadelphia, PA, USA.

0958-4935/99/010007-22 © 1999 Taylor & Francis Ltd

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targeting of anti-poverty programmes could mitigate the (likely) income lossesof some sections of the rural population, a detailed analysis of two majoranti-poverty programmes, viz rural public works (RPW) and Integrated RuralDevelopment Programme (IRDP, a credit subsidy programme for self-employ-ment) is given in the fourth section. Given the key role of Gram (Village)panchayats in implementing them, the fifth section focuses on the salient featuresof the new panchayat system, following the 73rd Constitutional (Amendment)Act. Drawing attention to the 'capture' of panchayats by a few influentialpersons and the large-scale diversion of funds for the anti-poverty programmesin question, the penultimate section explores the complementarity among ruralorganisations/institutions in promoting coalitions of the poor and in empoweringthem to prevent such capture. The final section gives some concluding observa-tions from a broad policy perspective.

Adjustment policies: nature, rationale and effects

The focus of the present analysis is on the initial phase of policy reforms from1991 to 1993. During this phase, specific policy reforms designed to correct themacro imbalances (eg, unsustainable current account deficit) and to enhanceoverall efficiency of production comprised devaluation of the rupee, abolition ofimport licensing with the exception of imports of manufactured consumer goods,(partial) convertibility of the rupee on the current account, reduction in tariffs,excise, limited reforms of direct taxes, abolition of industrial licensing except fora small number of industries, relaxation of restrictions on large industrial housesunder the Monopolies and Restrictive Trade Practices Act, easing of entryrequirements (including equity participation) for direct foreign private invest-ment, allowing private investment in some industries hitherto reserved for publicsector investment, disinvestment in public sector undertakings, and creation of aNational Renewal Fund (NRF) to provide compensation and transitional supportto retrenched employees. Admittedly limited in scope, financial sector reformscomprised setting up of tribunals for recovery of debts due to banks and otherfinancial institutions, enhancing of the capital base of public sector banks, andreducing the statutory liquidity ratio and incremental cash ratio of commercialbanks.

Policy reforms in agriculture were patchy. As part of liberalising domesticmarkets, zonal restrictions on the movement of agricultural commodities wereremoved, the prices of phosphatic and potassic fertilisers were decontrolled andthe subsidy was slashed.4 Also, procurement prices were hiked, canalisation ofagricultural trade flows was abandoned, and quantitative restrictions on agricul-tural imports were removed. Finally, selective liberalisation of agriculturalexports was promoted.

Anticipating unfavourable short term effects of policy reforms on vulnerablesections, allocations for social sectors (eg, health and education) and specialanti-poverty programmes were enhanced.5 Along the lines of the EmploymentGuarantee Scheme (EGS) in Maharashtra but in a diluted form, an Employment

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Assurance Scheme (EAS) was introduced in 1752 'backward' blocks. A schemeto revamp the Public Distribution System (PDS) for food and other essentialcommodities was also launched in these blocks.6

Some success was achieved in stabilising the Indian economy.7 Specifically,fiscal and monetised deficits were reduced. However, as a result, there wascontraction of economic activity, reflected in a negative effect of adjustment onnational income. The effects of trade policy reforms were limited. Imports grewin response to import liberalisation while exchange rate adjustment had no effecton exports. The improvement in the balance of payments was largely a result offoreign capital inflows. At the sectoral level, however, the effects of adjustmentwere either weak or negligible. Agricultural/food production, for example, didnot respond to price incentives and removal of restrictions on domestic trade. Ina large measure, this reflected weak and patchy reforms.

In a supplementary state-level analysis confined to Andhra Pradesh, Maha-rashtra and Karnataka, consumer prices (specifically, the Consumer Price Indexfor Agricultural Labourers, or CPIAL) recorded positive shifts in each state. Assudden spurts in prices aggragavate rural poverty (given a lagged wage re-sponse), it points to an important linkage between policy reforms and poverty.Another important linkage is higher fertiliser prices implying lower fertiliser useand a consequent reduction in food/agricultural output. Although the state-levelanalysis is inconclusive, some corroborative household evidence is cited below.

Policy reforms and poverty

Following policy reforms, various poverty indices rose sharply. The head-countindex (H), poverty gap index (PG) and squared poverty gap index (SPG) rose by19, 26 and 30%, respectively, over the period 1990-1991 to 1992.8 Similarincreases are observed at the state level. In twelve of the fourteen major states,(mean) consumption per capita declined and poverty indices rose. How much ofthe increase was due to policy reforms remains a debatable issue.

A recent assessment of the impact of policy reforms on poverty points out thatthe deterioration in poverty was much sharper in rural areas than in urban areasin the first two years.9 But, after a sharp deterioration there was a reversal in1993-1994. Arguing that poverty outcomes reflect the interaction of structuralfactors and policy reforms, it is emphasised that a key factor was the dip inagricultural harvest in 1991-1992, resulting largely from a decline in foodgrainoutput. This is attributed to a supply shock (viz deficient rainfall in some parts).Its impact was accentuated by devaluation of the rupee. This widened the gapbetween the export parity prices of rice and wheat and their domestic prices,necessitating higher procurement prices. Besides, it was necessary to compensatethe farmers for the withdrawal of the fertiliser subsidy. Anticipating higherprocurement prices, farmers held back stock. Procurement declined. Foodimports were ruled out because of a tight foreign exchange constraint andopposition from the farmers. Thus, an unavoidable sharp price rise occurred,

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resulting in a widespread decline in real daily wages of unskilled agriculturallabourers.10 Arguing that weather-related natural forces combined with limitedmanoeuverability of government action in containing the price rise were largelyresponsible for the sharp deterioration in rural poverty, it is concluded that policyreforms were at best indirectly responsible for it.

As elaborated later, this is a contentious view. Suffice here to note that, whileno one would dispute that poverty outcomes reflect an interplay of structuralfactors and policy reforms, and that their separate effects are hard to disentangle,it is arguable that some specific insights into the effects of policy reforms canbe obtained." Moreover, that supply shocks had a major role is simply asserted.In fact, as elaborated later, part of the reduction in agricultural output—especially foodgrain—was due to the withdrawal of the fertiliser subsidy and thesudden and sharp price rise.12 Some sections of the sample population in threeSouth Indian states thus recorded lower agricultural incomes, despite normalrainfall.

A recent study by G. Datt and M. Ravallion also addresses this issue.13 Aregression model is estimated using state-level data for fourteen major statesfrom nineteen rounds of the National Sample Survey (NSS) spanning 1960-1961(round 16) to 1992 (round 48). The poverty measures (H, PG and SPG) areestimated from grouped distribution of (per capita) expenditure, using a povertyline of Rs. 49 at 1973-1974 prices. The regression model seeks to explainchanges in poverty indices in terms of agricultural output per hectare oragricultural yield (YPH), non-agricultural output per capita (YNA), inflation(INFL), development expenditure per capita (DEVEX), male agricultural wage(WAGE), trend growth rates in the poverty measures, and state-specific effects.The error term is assumed to follow an AR(1) process, with an allowance foruneven spacing of the surveys. The model is estimated using a non-linear leastsquares estimator. The results are summarised in Table 1. In assessing the effectsof policy reforms, the key assumptions are that no structural changes occurredduring the policy reforms and that changes in agricultural yields, the state-specific time trends, and the (large) unexplained component reflect factorsunconnected with adjustment. On these assumptions, an upper bound to theimpact of policy reforms is obtained.

While the direction of change in the poverty indices is correctly predicted, thepredicted changes are substantially smaller. Of the latter, about one-third isattributable to policy reforms. Applying this to the predicted change, it isconcluded that ' . . . the maximum impact... would have entailed increases in therural H, PG and SPG indices of the order of 2, 3 and 4% instead of the actualincreases of 18, 28 and 35% respectively. Thus the vast bulk (about nine-tenths)of the measured deterioration in rural living standards in India during 1992 doesnot appear to be accountable to the reform process which started in mid-1991'.As elaborated below, this assessment is suspect, if not misleading.

The specification used is problematic. Since the variables (eg, inflation,development expenditures) through which the effects are transmitted are them-selves endogenous to policy reforms, these cannot be treated as exogenous.

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Table 1. Actual and predicted poverty measures: all India

46th Round 1990-1991: actual46th Round 1990-1991: predicted48th Round 1992: actual48th Round 1992: predictedShare of predicted change in actualchange (%)Share of predicted change explainedby changes in YNA, DEVEX,INFL, WAGE (%)

H

40.9541.6448.2443.9131.20

38.00

PG

9.9910.1712.7811.1334.30

32.10

SPG

3.493.484.713.93

36.60

28.60

Source: Based on Datt and Ravallion (1997), note 8(b), p. 148.

Indeed, it would be appropriate to employ an extended, structural formspecification in order to illustrate the specific mechanisms through which policyreforms influenced different dimensions of poverty. Another problem is theexclusion of agricultural yield from the sub-set of explanatory variables. Thewithdrawal and (partial) restoration of fertiliser subsidy disrupted agriculturalproduction. A reduction in agricultural yield is thus not ruled out. A thirdproblem is that all of the unexplained component is not unrelated to policyreforms. Devaluation, for example, may raise the share of tradables in agricul-tural and non-agricultural production. In that case, depending on their factorintensities, there may be important employment and wage effects, which are notexplicitly considered. But above all the interpretation of the regression results isfaulty. If the model specification is posited to be appropriate—a fair presump-tion—at least one-third of the actual (as opposed to the predicted) changes in thepoverty indices would be the contribution of policy reforms. Thus, far frombeing negligible, the effects were substantial.

Although the range of poverty indices considered above is informative, theaggregation involved conceals changes in poverty status of poor and non-poorhouseholds. It is, for example, not unlikely that poverty indices register animprovement while subsets get impoverished. To focus on change in povertystatus and associated changes in income, household data for three south Indianstates for 1991-1992 and 1992-1993 are analysed below. (For convenience ofexposition this period is referred to as 1992-93.) The fact that independentlyof changes in poverty indices (viz the head-count ratio and income-povertygap) the extent and severity of impoverishment were non-negligible raises aconcern—primarily because some impoverishment was attributable to policyreforms.

The analysis is based on data collected through household surveys in AndhraPradesh, Karnataka and Maharashtra for 1991-1992 and 1992-1993. In view ofthe cost and time constraints, a sample of 159 households was selected for thesestates.14

Given the concern that adjustment may have adverse effects on smallholders

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Table 2. Change in rural

State/poverty index

Andhra PradeshHead-count ratio (%)Income—poverty gap (%)

MaharashtraHead-count ratio (%)Income—poverty Gap (%)

KarnatakaHead-count ratio (%)Income—poverty gap (%)

poverty, 1992-1993*

1991-1992

58.3567.04

73.0175.77

59.3055.73

1992-1993

43.1550.64

75.2660.98

61.2053.19

Change (%)

- 26.05- 24.46

+ 3.08- 19.52

+ 3.20-4 .56

* These estimates refer to the poor population in each state (ie, the share of the poorpopulation with per capita incomes £Rs . 180 per capita annually at 1960-1961prices).

and labourers, an appropriate sample design was chosen. Each state was dividedinto homogeneous agro-climatic regions. After listing the districts in each region,they were arranged using a (composite) index of development. Three districts(within each state) were then selected through probability proportional to size(PPS) systematic sampling, the size measure being the rural population. Fromeach sample district, two villages were selected with probability proportional tothe rural population. From each village, a total of nine households was selected,four from the category of small and marginal farmers, three from wage earners(both agricultural and non-agricultural) and two from others.15 As the bulk of thesample households (80-90%) in each state reported fair or good rainfall in bothyears, the income distributional outcomes cannot be attributed to unusualweather conditions.

As shown in Table 2, there was a sharp reduction in both the incidence andintensity of poverty in Andhra Pradesh. In contrast, the incidence of poverty roseslightly in both Karnataka and Maharashtra. However, the intensity of povertydiminished in both states, especially in Karnataka. This implies that, while thenumber of the poor rose, many among them earned higher incomes.16 In eachcase, however, the impoverishment was non-negligible, as shown below.

A grouping of households by change of poverty status between 1992 and 1993yields some insights. Table 3 shows that the reduction in the incidence ofpoverty in Andhra Pradesh occurred because the poor who ceased to be poorexceeded the non-poor who became poor. But at the same time a non-negligiblesubset (16.22%) became impoverished.17 The contrast with Karnataka is striking.Few poor ceased to be poor relative to the non-poor who slipped into poverty,resulting in an increase in the incidence of poverty. Also, a much larger subset(30.7%) became impoverished.

The increase in the incidence of poverty in Maharashtra reflected the excessof the non-poor who became poor over the poor who ceased to be poor. The

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Table 3. Change of Poverty Status of Households in Andhra Pradesh, Kamataka andMaharashtra, 1992-1993

Poverty status*

1. Poor who became poorer2. Poor who became non-poor3. Poor who remained poor without

becoming poorer4. Non-poor who became poor5. Non-poor who remained non-poor

AndhraPradesh (%)

13.7317.6423.41

2.4942.73

Kamataka(%)

22.564.94

42.40

8.1421.96

Maharashtra(%)

14.504.35

37.69

6.9736.49

* All column totals add to 100.

extent of impoverishment (about 21.5%) was higher than in Andhra Pradesh butlower than in Kamataka. Even among the poor in Maharashtra, the impoverish-ment was substantially higher than in Andhra Pradesh but slightly lower than inKamataka. In Kamataka, the poorest (their average income being barely 36% ofthe poverty threshold in 1991) became poorer, while in both Andhra Pradesh andMaharashtra the moderately poor suffered income losses. But in each case theincome loss was substantial (ie, ranged from 21 to 25%). The non-poor whobecame poor were (relatively) affluent. Their income losses were far moresubstantial—in Maharashtra, for example, the reduction in (per capita) incomewas about 67%. While the patterns revealed warrant a detailed investigation, itis of some interest that the 'gainers' among the poor (ie, poor who became non-poor and poor who remained poor without becoming poorer) ranged from 40 to47%. An analysis of income switching suggests that much depended on whetherhouseholds could compensate for lower crop incomes and/or wages throughhigher non-agricultural incomes. Not just education, age and land-ownershipmattered but also whether opportunities for income diversification existed.18

Since it is our contention that the effects of policy reforms were mixed, wefocus below on some linkages between the impoverishment and policy reforms.Admittedly, the analysis is neither definitive nor comprehensive. But it doespoint to a few important linkages.

Higher costs of imported inputs following the devaluation and the withdrawalof subsidies resulted in sharp increases in fertiliser prices—25% between1991and 1992 and about 30% between 1992 and 1993. Given that the priceelasticity of demand for fertiliser is 0.307 and the output-fertiliser elasticity is0.12, a 30% higher fertiliser price would result in a reduction in agriculturaloutput of 1.10%. The effect is larger for large landholders (about 2.8%), as theoutput-fertiliser elasticity is much higher (about 0.30 as compared with 0.12 forthe aggregate sample). Presumably this reflects more efficient use of fertilisersby them.19-20

The dampening of agricultural output has two implications, one is loss ofincome and another is reduction of labour use. Since large landholders rely moreon hired workers, a lowering of agricultural output among them implies a

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corresponding reduction in hired labour demand and wages.21 Besides, a lower-ing of agricultural output raises the CPIAL (Food), lowering real wages.Although revamping of the PDS had a dampening effect on this price index, itwas not large enough to offset the effects of contraction of agricultural output,and higher procurement prices.22

Loss of income from cultivation need not necessarily imply impoverishmentif alternative sources of income can be found. However, in some cases, thechoices were constrained partly because a lower agricultural output implied notjust lower employment in agriculture but also in (related) non-farm activities (eg,food processing). Besides, to the extent that agricultural labour markets wereoligopsonistic (monopsonistic with collusion among oligopsonists), the opportu-nities for compensating for the loss of income from cultivation would be furtherrestricted, as both employment and wage rate would be lower (compared withthose in a competitive labour market).23 In general, however, the severity ofimpoverishment was restricted if income diversification opportunities existed.24

Some evidence from Maharashtra illustrates a pattern of income switchingamong the impoverished (there are, of course, variations). Substantial switchingoccurred between crop and non-agricultural incomes. Also, wages and non-agri-cultural incomes compensated for one another to some extent. However, wagesdid not compensate as much for lower crop incomes.25

In sum, the impoverishment and policy reforms were not unrelated. Althougha definitive assessment cannot be given, it is surmised that the overall impact ofpolicy reforms was not insubstantial.26

Targeting of anti-poverty interventions

As a detailed review of the Public Distribution System (PDS) is given elsewhere,we concentrate here on RPW and IRDP.27 But more importantly, as theirimplementation—especially of Jawahar Rozgar Yojana (JRY)—is assigned topanchayats, these two interventions are particularly relevant in the presentcontext.28 The focus here is on their targeting. Although this has some limitationsas a measure of benefits to the poor, some useful insights into the design andimplementation failures are obtained.29 Whether the restructuring of panchayatshas made any difference is examined later. That the concern for the cost-effectiveness of anti-poverty interventions is a legitimate one—more so in thepresent context of a tight budgetary constraint—does not, of course, require anyelaboration. As noted earlier, an initial response to adverse effects of policyreforms on some vulnerable sections was to enhance outlays on anti-povertyinterventions. In particular, outlays on JRY (a special case of rural publicworks), IRDP and PDS were stepped up. However, if these programmes are notwell targeted, the benefits of larger outlays to the poor will be relatively small.It is, therefore, argued below that greater attention must be given to deficienciesin the design and implementation of anti-poverty programmes.

The analysis is based on data collected in the 43rd round of the NationalSample Survey (NSS) for 1987-1988. The poverty threshold is Rs. 97.50 per

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capita per month (at 1987-1988 prices), equivalent to Rs. 15 per capita permonth (at 1960-1961 prices), based on the cost of a nutritionally adequate diet.This poverty threshold has been widely used in the Indian poverty literature.30

RPW participants comprise that subset who participated for at least 60 dayswhile IRDP participants were those who availed of assistance in the five yearspreceding the survey.31

Less than one-third (about 31%) of the total participating households in RPW(at the all-India level) were poor. Thus a very large majority were non-poor.Although the share of poor that participated in RPW was slightly higher thanthat of non-poor (5.13% and 4.13%, respectively), the fact that the participationof the latter was so close in relative terms further corroborates the mistargetingof RPW.32

As poverty and landlessness are closely associated, RPW participants werecross-classified into three land-holding intervals: 0-0.4 ha, 0.41-2 ha and> 2 ha. About 38% of the participating households were nearly landless (ie,belonged to the first interval), and the majority had access to some land. In fact,about 27% of the participants had access to land exceeding 2 ha.33 Also, theproportion of households participating in RPW was highest in this interval(8.16% as against 3.39% in the first and 4.55% in the second interval).34

Members of the Scheduled Castes/Scheduled Tribes (SCs/STs) are among thepoorest. These two groups accounted for less than half of the participants (about42%). But the proportion participating in RPW was higher among them (6.13%as against 3.77% in the rest).

Other measures further corroborate the weak screening mechanism of RPWthrough a work-requirement. The mean expenditure (as a proxy for income) ofa participating household was well above the poverty threshold (Rs. 159 asagainst the cut-off point of Rs. 97.50), implying the presence of a large numberof (relatively) affluent households. The expenditure distribution of RPW parti-cipants is positively skewed (the coefficient of skewness being 2.46) and leptokur-tic (the coefficient of kurtosis being 9.26). A test that combines these statisticsrejects normality of the distribution (the yj being 18.35) at the 5% level.35

In sum, the presumption that work-requirement by itself would be an effectivedeterrent for the non-poor is not corroborated by this analysis. In fact, asubstantial proportion—if not an overwhelming majority—of the total partici-pants, were non-poor.36

Out of the total participants in the IRDP, the poor accounted for less than aquarter (about 23%). The proportion participating in IRDP out of poor house-holds was also lower (4% as against 4.4% out of the non-poor).

Cross-classification of IRDP participants by landholding points to (relatively)low participation of landless/near landless (about 44%). The share of those withlandholdings exceeding 2 ha was considerably lower (about 19%) but notnegligible. Yet the proportion of this group of households participating in IRDPwas the highest (5.44% as against 3.78% of the first group and 4.56% of thesecond).37

Cross-classification of the participants into those belonging to SCs/STs and

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100

o

65 80 95 110 125 140 160 180 215 280 385

Expenditure (Rs.)

Figure 1.

the rest shows that the proportion of the former was less than half (about 43%).But the proportion of SC/ST households availing of IRDP assistance was higher(6.12% as against 3.47% of the residual group).

Weak targeting of IRDP is further confirmed by the substantially higher(mean) expenditure of a participating household than the poverty threshold (Rs.186.85 as against Rs. 97.50), implying the presence of relatively affluenthouseholds. The expenditure distribution of the participants was positivelyskewed (the coefficient of skewness being 1.72) and leptokurtic (the coefficientof kurtosis being 5.26). Although these departures from the normal distributionseem less pronounced than those of RPW, they are sufficiently large to rejectnormality (the %2 being 10.56) at the 5% level.

In sum, the targeting of IRDP was unsatisfactory too, as the participation ofpoor was limited.

Stochastic dominance tests that allow for a class of poverty indices and arange of poverty thresholds yield mixed results.38 Using a wide range of povertythresholds (ie Rs. 0 - 122.50, the upper limit being 25% higher than the widelyused cut-off point of Rs. 97.50 (at current prices)), the targeting of RPW iscompared with that of IRDP. At the all-India level, RPW first-order dominateIRDP. This is illustrated in Fig. 1. This implies that RPW were better targetedthan IRDP in terms of all P«indices over the entire range of poverty thresholds.At the state level, in 10 out of 17 cases, RPW first-order dominate IRDP.Besides, in three states, RPW second-order dominate IRDP. But in the remainingcases, IRDP was better targeted than RPW. Specifically, in one case, IRDPfirst-order dominates RPW and, in three cases, it second-order dominates.

This analysis raises serious doubts about the efficacy of work-requirement(more specifically, unskilled manual work) in targeting the poor. There areseveral reasons. One is that narrowing of the gap between agricultural and RPW

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wage rates weakens the screening mechanism. Also, given the liquidity con-straint among the poor, part payment of wages in the form of food-grainsreduces the attractiveness of RPW relative to other employment options. Finally,rampant corruption and delays in payment of wages further discourage thepoor.39 On the other hand, the use of an explicit income criterion in IRDPassistance/subsidy facilitates better targeting. Moreover, IRDP provides greaterflexibility to household members—especially women—in combining incomesupplementation opportunities (eg, in dairying) with their primary occupation.However, this calls for enterprise and ability to withstand shocks. Also, theamount of assistance provided is inadequate.

Organisational structure of panchayats

As noted earlier, panchayats have a major role in implementing anti-povertyprogrammes, especially JRY. Inadequacies of the new panchayat system and'capture' of Gram panchayats by influential groups/individuals are responsiblefor their weak implementation and unsatisfactory targeting, as elaboratedbelow.

Following the 73rd Constitutional (Amendment) Act, each state enacted itsown provisions within the broad framework laid down. Despite the flexibility inthe framework and the differences in the political regimes, there is a remarkablesimilarity in the organisational structure(s) enacted. Some of it was of courseunavoidable in view of the provisions in the 73rd (Amendment) Act. The salientfeatures are: a three-tier structure comprising District, Block and Village pan-chayats with the Gram Sabha (village assembly) as the foundation; direct andperiodic elections; quotas for Scheduled Castes/Scheduled Tribes (SCs/STs),backward classes and women; delineation of major areas of financial andadministrative responsibilities for each tier; budget and audit require-ments; a rational basis for sharing of resources between state government andpanchayats, provision for executive and supporting staff; clear-cut procedures fordissolution/suppression of panchayats, and mandatory elections within 6 monthsof dissolution.

Some specific aspects within this broad structure were either neglected orremained largely unresolved. Even though the Gram Sabha is visualised as thefoundation of this structure, its power and functions are vague and limited. Asa result, accountability of Gram/Village panchayat to the community is eitherweak or unclear.40 None of the state Acts made any attempt to narrow down theareas of financial and administrative responsibilities, let alone specify the dutiesand functions, for each level of panchayat. All that was done was to reproduceunchanged, or with minor modifications, the lists from the 1 lth Schedule (addedto the Indian Constitution following the 73rd (Amendment) Act. Nor was muchattention paid to minimising bureaucratic domination and political interference.41

Although financial viability of panchayats was emphasised, the concerns of thestate Acts were confined largely to a rational allocation of resources betweenstate government and panchayats. Given that most states are perpetually in

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deficit, regardless of the allocation criteria, the deficit at the panchayat level islikely to persist. Little, if any, attention was given to tax assignment to and otherforms of resource mobilisation (through matching grants) by panchayats, inorder to enhance their financial autonomy and capability. Incentive incompatibil-ity between panchayats and line agencies is unresolved. Although line agencystaff are placed at the disposal of the former, their transfer and promotiondecisions vest in the (parent) state Department. As a result, compliance of lineagencies with the concerns of panchayats is unlikely.

Is there a plausible explanation for the similarity of the organisationalstructure(s)? It could be argued that this is usually the fate of top-downinitiatives. Although this view has some plausibility, it is an oversimplecharacterisation of how such structures were enacted. In particular, the roles andinterests of politicians and bureaucrats must be clearly distinguished. If theycollude (tacitly or otherwise), it is a special case. The 73rd (Amendment) Actcombined features on which there was a consensus (eg quotas) with those whichallowed a great deal of flexibility to state legislatures in some crucial areas (egcomposition of Block and District panchayats and allocation of responsibilitiesat different levels). Thus, it was convenient for politicians to consolidate/broadentheir constituencies and to preserve or extend their patronage network.42 In otherwords, there were no political compulsions to evolve more specific or rigidstructures. On the other hand, bureaucrats could secure their authority andcontrol over the elected bodies if the existing administrative structure remainedunchanged or intact. In this regard, the Act in question did not pose any threats(the control of the District Rural Development Agency or DRDA over IRDP andJRY, for example, remained intact). Hence, there were no administrativeimperatives either to fashion or design a completely new organisational structureof panchayats. Consequently, the broad organisational structure embodied in the73rd Constitutional (Amendment) Act was substantially reproduced. But this isnot to suggest that the stronger group did not extend its domain of influence atthe expense of the other.

In this context, Uttar Pradesh and Karnataka provide a striking contrast. Outof all areas assigned to panchayats in the UP Act, only rural sanitation was infact assigned to them. All other areas remained under the overall control andsupervision of district/state agencies. Above all, given that the District Magis-trate is Chairperson of the DRDA and District Planning Committee (DPC) andthe CEO of Zilla Parishad (District panchayat) is subordinate to him/her in theofficial hierarchy, overall responsibility for some of the most important pro-grammes (including JRY and IRDP) vests in the District Magistrate. That thebureaucracy (or, more generally, official agencies) could over-extend its (their)domain(s) in violation of the provisions in the state Act had a lot to do with anunstable coalition (between the Samajvadi Janta Party and Bhartiya Janta Party)and unsettled conditions in the hill areas.

The Karnataka case points to a different type of domination. Given a relativelystable political environment and a well carved-out role for the bureaucracy, thebattlefield shifted to panchayats. As it turned out, most of the major schemes

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were monopolised either by the Zilla panchayats or Taluk panchayats, with aminimal role for the Gram panchayats.43

Implementation

These weaknesses/anomalies of the new panchayat system are often com-pounded by the excessive influence of a few individuals and large-scale diver-sion of funds for anti-poverty programmes in a highly stratified region. In orderto illustrate the process of 'capture' of Gram panchayats, a small survey of threedistricts in Uttar Pradesh was undertaken in 1998.44 The findings are summarisedbelow.

Some glaring shortcomings in the implementation of JRY came to light in oursurvey. The amounts received by a Gram panchayat ranged between Rs. 16,000and Rs. 18,000 in 1996-1997, and these were utilised mostly for making brickroads. The Chairpersons claimed that 200-250 persons participated in thisactivity for seven to ten days. The bricks were supplied by the Chairpersons. Asthe muster rolls were maintained by them and none of the villagers interviewedinitially were aware of how the JRY operated, the Chairpersons/panchayatSecretaries were requested to name a few participants.45 Some of the personsnamed denied receiving wages but admitted contributing free labour to preventwater-logging in residential areas. The numbers of participants reported seemgrossly inflated also because the wage rate implied was well below the officialJRY wage. That the whole operation was master-minded by the Chairpersons,panchayat Secretaries, and Village Development Officers for their personalbenefit is further corroborated by the fact that none of the panchayat membersknew anything about the scheme—financial outlays, nature of activities andnumber of participants.46 In fact, in one case, it was discovered that the bricklaying activity was completed well before the JRY grant was received.47

Whether the poor benefited at all from this scheme thus seems doubtful.IRDP was a dismal failure too.48 Instead of the Gram Sabha identifying the

beneficiaries, the Chairpersons of the Gram panchayats selected them. In onecase, it was widely known that the Chairman extracted hefty 'fees'. Followingcomplaints, he absconded. Even under the new Chairman, little seems to havechanged. Lack of awareness of the scheme and weak accountability mechanismsin the village community tend to perpetuate the status quo.

The role of the Gram panchayat in other rural development schemes, egvillage hygiene and sanitation, literacy, consolidation of holdings (chakbandi),and land transfers, reflected gross negligence or the unmistakable influence of afew dominant groups. Few panchayat members (including the Chairpersons)seemed concerned about lack of access to drinking water, primary health carefacilities, non-functioning schools, unhygienic conditions, etc.49'50 When theirattention was drawn to some of these concerns, the District agencies wereblamed for the meagreness of the outlays. Several instances of chakbandifavouring a few influential/wealthy individuals came to light. Large plots nearerthe main road were assigned to them by the Chairpersons in connivance with a

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few village officials, for a 'fee'.51'52 Equally, land transfers—specifically leasingout of panchayat land—invariably benefited a few influential individuals, whenthe beneficiaries were supposed to be exclusively SC/ST families (under a newscheme initiated by Ms Mayawati under her Chief Ministership of UP).53

As panchayats have a near monopoly in some activities (eg land allotment,public employment, education, health care), there are ample opportunities forearning 'rents'. Even under the new system, as revealed by our survey in UttarPradesh, transparency in decision-making of panchayats is lacking. Through theVillage Development Officer (VDO), the Chairperson had access to informationon various government schemes. Financial records were maintained by thepanchayat Secretary. By limiting access to such information, this group extractedmonopoly rents. Important decisions were taken by this group, mostly withoutany involvement of other panchayat members. Nor did the community have arole, as Gram Sabha (Village Assembly) meetings seldom took place. Evenwhen they did, they were no more than rituals.54 Higher authorities werepowerless under the new legislation, as the Chairpersons can only be dismissedif there is a no-confidence motion against him/her. On the other hand, highdegree of social stratification, with upper castes occupying key positions, limitedprospects of collective protest.55

Given that panchayats are ill-equipped to carry out the responsibilitiesassigned to them, there is a strong case for selectivity.56 A small cluster ofareas/functions could be identified through a systematic application of someeconomic considerations. Economies of scale and interjurisdictional externalitiesfavour areas/functions to the higher levels, while need for local information andaccountability favour assignment to Gram panchayats. Complementarities be-tween some areas may also favour joint provision. Simultaneous involvement ofmore than one level of panchayat in an area may be necessary when each levelhas specific comparative advantages.57 Consider, for instance, primary education:the buildings could be constructed by District or Block panchayat while theresponsibility for running the schools could be vested in Gram panchayat.

Incentive incompatibility between panchayats and official agencies on the onehand, and between panchayats and line agencies on the other, raise seriousconcerns, as it causes delays in disbursals and utilisation of funds.58'59 It isarguable that the incompatibility could be reduced through a clearer demarcationof responsibilities and specification of performance indicators.60

Although there is considerable emphasis in the state Acts on the accountabilityof panchayats to higher authorities/bodies, it is not matched by a concern foraccountability of Gram panchayat to Gram Sabha.61 There are in fact someglaring lacunae in the existing provisions. Although Gram panchayat is requiredto place the statement of accounts, budgets and other proposals before GramSabha, its approval is not binding. Nor does Gram Sabha have the power todissolve Gram panchayat in case there is deliberate default (eg, the embezzle-ment of funds).62 There is thus a case for broadening the functions and powersof Gram Sabha and for making its approval mandatory with a view to preventingthe 'capture' of Gram panchayat by locally influential groups.

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But these reforms by themselves may not guarantee that the interests of thepoor would be better protected or promoted. A strong coalition of the poor couldmake a difference, as elaborated below.

Empowerment of Poor

Co-operation depends on whether co-operative action was successful in the past.The latter may be associated with shared norms of fairness, reciprocity and trustin a community.63 Whether such norms would be observed in 'vertical' socialnetworks (as opposed to horizontal ones, involving people of similar status andpower) is of course debatable.64 In particular, caste hierarchies could act as abarrier to co-operative or collective action among the poor. Some evidence,however, suggests that if the gains are large, these could overcome the disadvan-tages of a socially heterogeneous membership (eg, the absence of a sense ofcollective identity).65 The problems of social heterogeneity are neverthelesssometimes compounded by those of economic inequalities. Capture of organisa-tions such as panchayats by the local elite, for example, remains unchallengedby the poor, as the latter are often trapped in interlocking transactions with theformer (an agricultural labourer, for example, is usually in debt to his employer).Land reforms, or, more specifically, land redistribution through (possibly) amarket-mediated mechanism could weaken the dominance of the elite andinduce more effective participation of the poor in panchayats.66'67 P. Bardhanputs it succinctly,

One beneficial by-product of land reform, underemphasised in the usual economic analysis,is that such reform, by changing the local political structure in the village, gives more voiceto the poor and induces them to become involved in local self-governing institutions andthe management of local public goods. (Bardham, op. cit., note 23, p. 60)

A related issue is whether economic betterment must precede empowerment. J.Manor is somewhat sceptical of this view.68 Participation of the poor in localself-governing institutions does of course help in evolving a sense of collectiveidentity and inculcating a sense of public duty. But this process of empowermentis often slow and incremental, if not uncertain. A more rapid process ofempowerment usually follows economic betterment.

Case studies in M. Carr et al (1996) provide a vivid portrayal.69 Of particularinterest are the roles of Self-Employed Women's Association (SEWA) and theCo-operative Development Foundation (CDF). Promotion of women's producergroups by SEWA and of women's credit and thrift societies by CDF—despiteinitial scepticism among the members—has led to more than moderate incomegains among the members on a regular basis. Income gains coupled withexperience of managing producer groups/co-operatives have imparted to themgreater self-confidence, security and independence both within and outside thehousehold. There is a sense of solidarity among them. Caste divisions haveweakened. Women now advise their husbands on cropping decisions. Their

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advice is also sought on community matters (eg sanitation). Greater politicalawareness has led to more active participation in local elections.70

If the centrality of economic betterment in empowerment is accepted, thecomplementarity between panchayats and other rural organisations (eg co-oper-atives, labour unions) acquires an added significance. As a result of economicbetterment, through self-managed activities, the poor/weaker sections becomebetter equipped to play a more assertive role in panchayats. On the other hand,to the extent that there are fixed costs in organising the poor, through meetings,awareness campaigns, and dissemination of information, labour unions couldreduce them significantly by enlarging their membership. Given the positiveexternalities among rural organisations, the government has a promotional role,of which two components are delineated below.

One is the creation of an enabling environment which would allow ruralorganisations to grow and to perform their functions more effectively. As wehave already dealt with the legal framework for panchayats in detail, we willconcentrate here on the economic policy framework.71 An aspect of thisframework is whether it is conducive to competition among rural organisations.Arguably, competition helps avoid accepting too many bad projects (ie type IIerrors). A case in point is inter-jurisdictional competition, say, between panchay-ats administering anti-poverty programmes in two different villages. If grants arelinked to performance, overall cost-effectiveness of anti-poverty programmesmay improve provided there is mobility across villages. Site-specificity ofprojects, high costs of migration and inter-village externalities may, however,limit the gains from a competitive environment.72 So, while an element ofcompetitiveness is desirable, there is a risk of overstating its importance. Farmore serious are the consequences of capture of rural organisations by elite/influential groups. Accordingly, greater attention must be given to strengtheningthe positive externalities among rural organisations in so far as they impingeon the economic betterment of the poor. From this perspective, the capacity-building role of the government is crucial. The process, however, must not beimposed from above. Rather, the organisations themselves must be closelyinvolved in it. Some areas, eg basics of accounting, recording and othermanagement systems that contribute to efficient internal control and systematicmonitoring of activities/projects, could be identified and training imparted.7374

Concluding observations

Some observations are made below from a broad policy perspective. The policyreforms initiated in mid-1991 had some unfavourable income distributionaleffects. Although a definitive assessment of the overall impact could not begiven, it was argued that some impoverishment during the initial phase was adirect consequence of these reforms. Decontrol of fertiliser prices and with-drawal of fertiliser subsidy had a dampening effect on agricultural output ofsome sections of cultivators. On the other hand, consumer prices rose sharply,partly as a result of contraction of agricultural output but mostly due to higher

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procurement prices. Although revamping of the PDS had a dampening effect, itwas not large enough to offset the effects of contraction of agricultural outputand hikes in procurement prices. As a result, some sections suffered substantialincome losses.

Anticipating unfavourable effects of policy reforms on some sections, outlayson anti-poverty programmes (eg, JRY) were enhanced substantially. Higheroutlays by themselves would accomplish little, given the unsatisfactory targetingof major anti-poverty programmes. The latter reflects in large measuredeficiencies in design and implementation. As panchayats have been assigned amajor role in the implementation of some anti-poverty programmes—especiallyJRY—much of the analysis focused on whether the restructuring of panchayatswould make a difference. Analysis of a few state Acts, following the 73rdConstitutional (Amendment) Act, revealed that inadequate attention was given towhether panchayats—especially Village panchayats—were equipped to handlethe responsibilities assigned to them, incentive compatibility between officialagencies and panchayats on the one hand, and panchayats and line agencies onthe other, and accountability of panchayats to the village community. Given theweaknesses in the new system, it is not surprising that some anomalies/distor-tions appeared. Of some concern is the fact that, in blatant violation of theprovisions in the state Act in UP, the dominance of official agencies in areasassigned to panchayats—especially Village panchayats—persists. More seri-ously, the 'capture' of some Village panchayats by their Chairpersons incollusion with a few officials (in another part of the same state) suggests that afew individuals benefited from JRY and IRDP, at the expense of the poor. Theinescapable conclusion is that, unless a strong coalition of the poor emerges, itis unlikely that panchayats would act in their interest.

Although the evidence is limited to a few special cases, it suggests thateconomic betterment through self-managed activities is key to empowerment.By contributing to the former, co-operatives, labour unions and other ruralorganisations could enable large sections of the poor to play a more assertiverole in panchayats. These positive externalities among rural organisations,impinging on economic betterment of the poor, warrant government involve-ment, in creating an enabling environment for them and in building theircapacities.

A presumption is that the poor matter in the context of policy reforms.Participation of the poor in the growth process is imperative both for enhancingtheir welfare and for strengthening the political constituency for policy reforms.Failure to protect their legitimate interests could imperil the sustainability ofpolicy reforms, as awareness among them of their collective identity grows.75

To conclude, from the perspective of minimising the social costs of adjust-ment, the emphasis must shift from larger outlays for anti-poverty programmesto improvements in their design and implementation. Although greater involve-ment of panchayats in their implementation could make a difference, it would beover-optimistic to expect a significant improvement without a strong coalition ofthe poor.

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Notes and references1. Some of the work was done by the first author during his stay at the Department of Economics, Stanford

University. The encouragement and advice of Anne Krueger are gratefully acknowledged. Subsequently,some additional work was done at the Centre for International Studies, MIT, and CASI, University ofPennyslvania. The analysis benefited from the valuable suggestions of Myron Weiner and FrancineFrankel. Discussions with T.N. Srinivasan, Bina Agarwal, M. Lipton, C.J. Bliss, Pranab Bardhan, J. Drèze,K.L. Krishna, Atul Kohli, P. Seabright, A. Varshney, V.N. Pandit, Gobind Nankani, Hans Binswanger andRohini Nayyar have helped refine the arguments. We are particularly indebted to P.D. Kaushik forgenerously sharing with us the preliminary findings of an on-going collaborative study, and to M.A.Gandhi for his help with the analysis of household data. None of the above is of course responsible forthe deficiencies that remain. An earlier version was presented as an invited contribution to the Panel onDemocratisation and Economic Reforms: Lessons from Asian Experience, International Convention ofAsia Scholars, Noordwijkerhout, The Netherlands.

2. Sometimes two major components of policy reforms are distinguished. One is stabilisation, aimed atcontrolling the fiscal and balance of payments deficits and maintaining a low rate of inflation. This issought to be achieved through an appropriate exchange rate, interest rate, fiscal and monetary policies.Another is structural adjustment, aimed at opening up of the economy to international trade and investmentthrough a movement in policies towards a neutral trade regime and domestic deregulation. A difficulty,however, is that some policy measures (eg devaluation) are common to both components. Hence a rigiddistinction is eschewed. Much of the focus of the present analysis is on the initial phase of policy reforms.

3. (a) For elaboration and review, see V. Joshi and I.M.D. Little, India's Economic Reforms 1991-2001(Delhi: Oxford University Press, 1996), and T.N. Srinivasan, 'Indian economic reforms: background,rationale and next steps' (New Haven; Economic Growth Centre, Yale University, 1995). For a differentperspective, see D. Nayyar, Economic Liberalisation in India: Analytics, Experience and Lessons(Calcutta, Orient Longman, 1996). (b) P. Pattanaik, 'Economic policy and its political management in thecurrent conjuncture', Panel 4: Economic reforms and regional politics, in a conference organised by CASI,University of Pennyslvania, and UPIASI, New Delhi, 1997, however, over-emphasises the role of importliberalisation in the macro-economic crisis, as the evidence cited is patchy and inconclusive. For a critique,see R. Gaiha, 'Economic policy and its political management in the current conjuncture--a comment',typescript, 1997.

4. Other major subsidies (eg on electricity and irrigation), however, remained intact, despite their heavierfiscal burden.

5. Allocations for the Jawahar Rozgar Yojana (JRY) and Integrated Rural Development programme (IRDP),for example, were raised by about 49% and 56%, respectively, between 1992-1993 and 1993-1994 (in realterms).

6. The PDS supplies specified quantities of rice, wheat, coarse cereals, edible oils and sugar at prices belowruling retail market prices to holders of ration cards through designated shops. Although initially the PDScovered (except in Kerala) only urban areas, at present rural areas are also covered. Procurement anddistribution are organised by the Food Corporation of India (FCI) and corresponding state-level agencies.

7. Following J. Behrman and A. Deolalikar, 'The poor and the social sectors during a period of macro-econ-omic adjustment: empirical evidence for Jamaica', The World Bank Economic Review, Vol. 5, No. 2, 1991,a shift in the trend in a macro or sectoral indicator is attributed to policy reforms. For details, see R. Gaiha,'Structural adjustment, markets and the rural poor in India--a comparative analysis of Andhra Pradesh,Maharashtra and Karnataka' (Stanford: Department of Economics, Stanford University, draft, 1996).

8. (a)These measures of poverty--special cases of the Foster-Greer-Thorbecke class of poverty indices(Pα)—are widely used to capture alternative dimensions of poverty corresponding to its incidence, depthand severity, respectively. H is given by the proportion of the population whose per capita consumptionor income is below a given cut-off point. PG is the average distance below the poverty cut-off point amongthe poor. SPG is based on the individual poverty gaps raised to a power of 2. For more detailedexpositions, see M. Ravallion, Poverty Comparisons (Washington DC: World Bank, mimeo, 1992), andR. Gaiha, Design of Poverty Alleviation Strategy in Rural Areas (Rome: FAO, 1993). (b) Note that theall-India estimates on which these changes are based differ from the population-weighted estimates derivedfrom those for individual states in Table 1. The latter are confined to the estimates for 14 major states,excluding some small ones. For details, see G. Datt and M. Ravallion, 'Economic reform and its impacton the poor--a case study for India', Review of Development Economics, Vol. 1, No. 2, 1997.

9. For details, see S. Tendulkar, 'Indian economic policy reforms and poverty: an assessment', in I.Ahluwalia and I.M.D. Little (eds) India's Economic Reforms and Development (New Delhi: OxfordUniversity Press, 1998).

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10. A referee has drawn attention to the opposite effects of a price rise on food producers and buyers. Whileproducers gain, consumers lose. As a result, the net effect of a price rise on poverty may be small. Butsince a large majority of rural poor comprise small fanners and labourers--both net buyers of food--thenet effect is likely to be substantial. For an empirical illustration, see R. Gaiha, 'Does agricultural growthmatter in poverty alleviation?', Development and Change, Vol. 26, 1995.

11. See, for example, S.P. Gupta, 'Economic reform and its impact on poor', Economic and Political Weekly,3 June 1995, for a confirmation of the adverse effects of policy reforms on the rural poor.

12. C.H.H. Rao, 'Agricultural growth, sustainability and poverty alleviation--recent trends and major issuesof reform,' Economic and Political Weekly, 18 July 1998, notes that 'there was a sudden rise of 30% inthe prices of nitrogenous fertilisers and a doubling of the prices of phosphatic and potassic fertilisersfollowing their decontrol in the early 1990s. This led to a sharp decline in the growth rate of fertiliserconsumption from 8% per annum during the 1980s to only about 2% per annum in the first half of the1990s' (p 1944). He further points out that, since fertiliser is a land augmenting input, small and marginalfarmers with surplus labour use it as much per hectare as large farmers. The reduction in its use followinga higher price would thus imply substantial reduction in output.

13. Datt and Ravallion, op cit, note 8.14. The sample consists of 54 households each in Andhra Pradesh and Karnataka, and 51 in Maharashtra.

Three households in Maharashtra did not respond.15. For further details, see Appendix 1 in Gaiha, op cit, note 7.16. Given the greater representation of poverty prone groups, viz small and marginal fanners, and labourers

in the sample, it is not surprising that both the incidence and intensity of poverty were (relatively) highin both years.

17. The impoverished comprised the poor who became poorer and the non-poor who became poor.18. For details, see R. Gaiha, 'Income and expenditure switching among the impoverished during structural

adjustment in India', Delhi (Faculty of management Studies, University of Delhi, mimeo, 1998).19. The price elasticity of fertiliser demand is estimated from all-India data for the period 1970-1994 and the

output-fertiliser elasticity from the ICRISAT panel survey for Maharashtra for 1989. For details, seeGaiha, op cit, note 7.

20. During the field-work in Karnataka, several farmers confirmed that, following the withdrawal of fertilisersubsidy, supplies were disrupted. As a result, farmers had to make do with small quantities of fertiliseror none at all, implying much larger production losses in the sample villages.

21. Note that the absence of a significant negative impact of adjustment on agricultural/food production is notinconsistent with more than moderate reductions in some sample villages.

22. For some econometric evidence, see Gaiha, op cit, note 7.23. Large landholders--comprising one quarter of the ICRISAT sample--accounted for about 60% of

agricultural income in the Maharashtra villages in 1989. They also accounted for close to 73% of the hiredlabour in these villages. Although the ICRISAT survey did not investigate whether large landholderscolluded (tacitly or openly), it cannot be ruled out since their number was small. There is of courseevidence of tacit or open collusion in other parts of rural India. For details, see Gaiha, op cit, notes 7 and10 and P. Bardhan, Land, Labour and Rural Poverty (New York: Columbia University Press, 1984).

24. For details of the tobit analysis, sec Gaiha, op cit, note 7.25. For details, see Gaiha, op cit, note 18.26. Rao, op cit, note 12, arrives at a similar conclusion.27. See, for example, R. Gaiha, 'Food, prices and income in India', Canadian Journal of Development Studies,

October, 1998.28. Village panchayats have overall responsibility for the implementation of JRY but a limited one for IRDP

(ie confined to the identification of the beneficiaries).29. Even if the targeting is good, the (net) benefits would be small if there are disincentive effects (eg

reduction in labour supply). For some evidence on the dependence of the poor on rural public works (or,specifically the Employment Guarantee Scheme (EGS) in Maharashtra), see R. Gaiha, 'How dependent arethe rural poor on the Employment Guarantee Scheme in India?', Journal of Development Studies, Vol. 32,1996.

30. See, for example, the applications in P. Bardhan and T.N. Srinivasan (eds), Poverty and IncomeDistribution in India, Sankhya, Series C, Vol. 36.

31. RPW provide wage employment in building social assets/infrastructure (eg roads, schools, wells). Usually,an explicit income criterion is not laid down on the presumption that work-requirement would by itselfdiscourage all except the poor from participating in RPW. IRDP, on the other hand, is designed to promoteself-employment through subsidised credit tied to income-generating assets (eg mostly dairy animals). Anincome criterion is laid down for selecting the beneficiaries. For details, see R. Gaiha 'Poverty alleviationprogrammes in rural India: an assessment', Development and Change, Vol. 22, 1991.

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32. Using indices of F and E errors, or number of poor excluded and number of non-poor included in thescheme out of the total rural population, respectively, a similar conclusion is obtained. The F error wasabout 24% while the E error was a litle over 3%, yielding a combined measure of about 27%. The muchlarger F error points to the larger number of poor excluded than non-poor included in the scheme inquestion. For an exposition of the targeting errors, see G.A. Cornia and F. Stewart 'Two errors oftargeting', in D. van de Walle and K. Nead (eds), Public Spending and the Poor: Theory and Evidence(Baltimore: Johns Hopkins University Press, 1994).

33. Unfortunately, the NSS data do not permit a finer classification of landholding size--in particular, of thethird open-ended interval. But if participation in the Employment Guarantee Scheme in Maharashtra isanything to go by, a non-negligible share of the participants (about 16%) owned land between 5-10hectares in 1989. For details, see R. Gaiha, 'Rural public works and the poor: the case of the EmploymentGuarantee Scheme in India', in S. Polacheck (ed), Research in Labour Economics (JAI Press, 1997).

34. That the landless are most poverty prone is confirmed by recent evidence. For details, see R. Gaiha andVani Kulkarni, 'Is growth central to poverty alleviation in India?', Journal of International Affairs, Vol.51, 1998.

35. For details of this test, see R. D'Agostino, A. Belanger and R. D'Agostino Jr, 'A suggestion for usingpowerful and informative tests of normality', The American Statistician, Vol. 44, 1990.

36. Similar conclusions are obtained from state-level data. For details, see R. Gaiha, 'Do anti-povertyprogrammes reach the rural poor in India?', Oxford Development Studies, forthcoming.

37. As in the case of RPW, the F and E errors were 24% and 3.30%, respectively, implying much largerexclusion of the poor than inclusion of the non-poor.

38. Usually, there is considerable disagreement on the poverty threshold. Nor is the use of a particular povertyindex appealing, since different indices capture specific aspects of deprivation. Accordingly, some tests ofstochastic dominance have been devised. These enable ordinal poverty comparisons for a class of povertyindices--specifically, the Foster-Greer-Thorbecke class (Pα)--and a range of poverty thresholds. If thepoverty incidence curve for a distribution lies above that for another, the first order dominance holds,implying that, over the range of poverty thresholds, the poverty is greater for all Pα measures (in thepresent context, the targeting of the anti-poverty intervention is better). If, however, the two curvesintersect, the poverty deficit curves are compared. This is the second order dominance test, restricted toall Pα measures except Pα = 0 (the head-count index). For an exposition, see Ravallion, op cit, note 8.

39. Corruption is an equally serious concern in the context of IRDP. For some evidence, see J. Drèze, 'Povertyin India and the IRDP delusion', Economic and Political Weekly, 29 September 1990, and Gaiha andKulkarni, op cit, note 34.

40. Approval of the Gram (Village) panchayat budget by a simple majority of the Gram Sabha is mandatoryin Uttar Pradesh (UP). In Maharashtra and Andhra Pradesh, however, there is a provision only for thereporting of the budget.

41. Out of the three states studied, viz Uttar Pradesh, Karnataka and Maharashtra, Maharashtra was the onlystate which excluded local MLAs, MLCs, and MPs from the membership of panchayat Samiti (Blockpanchayat) and Zilla Parishad (District panchayat). Also, the Collector (administrative head of a district)was not assigned any formal role. But, at the same time, the overall responsibility for two centrallysponsored poverty alleviation schemes, IRDP and JRY, remains vested in an official agency, District RuralDevelopment Agency (DRDA).

42. As noted earlier, two out of the three states studied allow for inclusion of MLAs, MLCs and MPs in Blockand District panchayats.

43. For details, see R. Gaiha, 'Participation or empowerment--the case of panchayats in India', OccasionalPaper No. 4 (Philadelphia: CASI, University of Pennsylvania, 1996).

44. The districts covered were Gautam Budh Nagar, Mahamaya Nagar and Bulandshahar in the relativelyaffluent and prosperous region of Western Uttar Pradesh. Gautam Budh Nagar is the most advanced, witha well developed non-farm sector. Bulandshahar and Mahamaya Nagar, on the other hand, are predomi-nantly agricultural. Each of these districts is highly stratified, with Brahmins and Thakurs as upper castesand Jatabs and Balmikis as lower castes. From each village, two panchayats were purposively selected.The Chairpersons and a few members of panchayats, district and village officials, and some householdswere interviewed. Further details will be furnished upon request.

45. This is in blatant violation of the requirement that 'Copies of the muster rolls duly certified by panchayatHead should be displayed at a public place in the villages, such as, panchayat office, a prominent wall orany prominent public place', Government of India (GOI), Jawahar Rozgar Yojana--Manual (New Delhi,1994, p 20). The GOI, ibid further stipulates that supervisors ' . . . should also sign the pages of muster rollsinspected by them' (p 29).

46. Evidently the guidelines in the GOI, ibid were completely ignored. The Manual stipulates: 'The plans fordevelopment of villages ... should be discussed thoroughly in the meetings of the Village panchayat and

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the final decisions arrived at should determine the plan of works to be taken up during a particular year.While preparing the plan of works, ... highest priority should be given to works benefiting the SCs/STs,women and the other weaker sections of the village society. The Gram Sabha (village assembly) shouldbe appraised of the progress of implementation of the programme at least twice in a year.' (p 25).

47. An observation made by J. Manor, The Political Economy of Decentralisation (Washington D.C.: WorldBank, draft, 1997), in the context of decentralisation in Karnataka seems pertinent here too. Contrary tothe general impression, devolution to the panchayats was associated not so much with more corruption (iemore money being diverted through corrupt means) as with greater pervasiveness of it (ie with an increasein the number of individuals who had to be bribed).

48. Drèze's, op cit, note 39, meticulous assessment of IRDP in Palanpur (UP) is equally pessimistic. Hisfindings arc: ' . . . (1) some of the most vulnerable groups (notably the landless and households without anadult male) have practically no involvement in IRDP; (2) the poorest of the poor are largely excluded; (3)affluent households have been liberally included in the programme; (4) overall, there is no discriminationin favour of the poor in the allocation of loans.' Among various reasons, an important one is that, ' . . . thepoor are at a disadvantage in the competition for institutional loans. The poor... are not well placed topay large bribes, fill complicated forms, influence the village headman and find themselves 'guarantors"(P A-97).

49. Not surprisingly, some of the worst-off areas in terms of unhygienic conditions were the poor settlements.50. A glaring example of negligence is the apathy of the Gram panchayats to the Pulse-Polio Campaign of the

Government of India. All Chairpersons were instructed by the District Administration to play an active partin adding to the awareness of it in the village community and ensuring its participation. This campaignwas largely neglected, as the villagers interviewed reported that they became aware of it only through themass-media. In fact, in one of the sample villages, the Chairman was absent during the entire campaign.

51. A large plot was assigned to a business family for starting a brick kiln, through a benami transfer (ie undera false name) from an old labourer, for a substantial 'fee'.

52. In another case, the cremation ground of a poor community was declared as farmland and allotted to aninfluential family.

53. In Gautam Budh Nagar district, it was reported, a Scheduled Caste Chairman did not transfer land to asingle poor person during his tenure.

54. The Gram Sabha meetings were not publicised, their frequency was disputed, the agenda were manipu-lated, caste and other factors influenced important decisions, and not infrequently strong arm methods (egintimidation, violence) were employed to force compliance.

55. One Chairperson confided that, if he did not follow the dictates of the upper castes, they would finish himoff. Since the nearest police station was 8-10 km, and the head was a Rajput (an upper caste), it wouldbe naive to dismiss such apprehensions as baseless. On the other hand, in a few cases, there was alsoevidence of collusion between the Chairperson and the local police.

56. In UP, for example, rural electrification is listed as an area for Gram panchayats.57. For a systematic exposition, see P. Bardhan, The Role of Governance in Economic Development (Paris:

Development Centre Studies, OECD, 1997).58. While panchayats are in principle accountable to their communities, official agencies are not.59. Given the uncertainty in disbursing National Rural Employment Programme funds in West Bengal, the

Gram panchayats were forced to undertake very small projects--in fact, in a survey of 37 Grampanchayats, it was found that the average cost of a project was less than Rs. 2000. See J. Echeverri-Gent,The State and the Poor, (Berkeley: University of California Press, 1993).

60. (a) When there is a multiplicity of goals and functions, some of which are vaguely defined, a fuzzyequilibrium may prevail in which the agency in question does not get full credit for a good performancenor full stigma for a poor one. J. Tirole, 'The Internal Organisation of Government', Oxford EconomicPapers, Vol. 46, 1994. (b) Commenting on the accountability of bureaucrats to elected representatives,Manor, op cit, note 47, suggests that ' . . . this can only be achieved if high level decentralisers empowerlower level authorities to exercise influence over bureaucrats, and then back them with helpful interven-tions where necessary' (p 77). The experience of UP reviewed earlier, however, raises serious doubts aboutthe workability of this proposal--especially because it underestimates the manipulative skills of bureau-crats in an unstable political environment.

61. Whether five-yearly elections would enforce greater accountability of Gram panchayats seems unlikely.62. The UP Act is an exception in so far as it provides for the dismissal of the Chairperson of Gram panchayat

by Gram Sabha.63. For a fascinating exposition in a game theoretic formulation and a demonstration using Indian data on

co-operatives, see P. Seabright, 'Is cooperation habit forming?', in P. Dasgupta and K.G. Mäler (eds), TheEnvironment and Emerging Development Issues (Oxford: Clarendon Press, 1997).

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64. R. Putnam, Making Democracy Work (Princeton: Princeton University Press, 1993), for example, issceptical.

65. For a sample of evidence, see Seabright, op cit, note 63.66. For an elaboration of the market-mediated land redistribution, see Gaiha, 1993, op cit, note 8.67. Questioning the view 'success is impossible unless serious land reform precedes decentralisation', Manor,

op cit, note 8, points out that, 'Prior land reform helps facilitate success, but it is patently not essential.Such institutions have also worked well in areas where land reform has made little headway, such asneighbouring Bangladesh or the Indian state of Karnataka' (p 49). In general, however, decentralisationis likely to be more effective in poverty alleviation, when land is more equitably distributed. See R. Gaiha,'Poverty, development and participation', Asian Survey, Vol. 35, 1995.

68. Commenting on A. de Janvry's view expressed in, The Agrarian Question and Reformism in LatinAmerica (Baltimore: Johns Hopkins University Press, 1981), that the only reliable way to achieve anincrease in participation and the collective action potential of poorer groups is to increase the resourcesavailable to them through redistributive policies, Manor, op cit, note 8, argues 'Poor as well as prosperouspeople participate more and increase their collective action potential as a result of decentralisation evenwhere it works mainly to the advantage of élites. Over time, the greater transparency offered by democraticsystems at lower levels, the increased participation of poorer groups, and their developing skills atinfluencing those systems may well assist them in curbing the power of rural élites to appropriate benefits'(p 43). The point of the evidence cited below, however, is that economic betterment induces a more rapidempowerment.

69. M. Carr, M. Chen and R. Jhabvala (eds), Speaking Out: Women's Economic Empowerment in South Asia(New Delhi: Vistaar Publications, 1996).

70. (a) For similar evidence from Bangladesh, drawing upon the experience of women members of BangladeshRural Advancement Committee (BRAC)--an NGO seeking to improve the social and economic positionof the rural poor through group schemes for credit and income generation--see B. Agarwal, 'Bargainingand Gender Relations: Within and Beyond the Household' (Washington D.C.: IFPRI, FCND DiscussionPaper No. 7, mimeo, 1997). (b) Admittedly, the evidence is limited to a few special cases, and it is a mootpoint whether it is amenable to generalisation. But even if it cannot be the basis of generalisation it wouldbe a mistake to ignore it altogether.

71. For a comprehensive review of the legal framework for other rural organisations, eg co-operatives, seeN.C. Saxena, 'Policy and legal reforms for the poor in India' (New Delhi: UNDP, mimeo, 1997).

72. The argument sketched above is a variant of the Tiebout model of inter-jurisdictional competition ofgovernments, as a revelation mechanism of preferences for public goods. The critique draws uponBardhan, op cit, note 57.

73. Maintaining up-to-date records is usually beyond the capacity of Gram panchayats. Echeverri-Gent, op cit,note 59, for example, found that at least 25% of Gram panchayats in his survey did not maintain properrecords of expenditure. Nor were they able to submit utilisation certificates in time. As a result, there wereconsiderable delays in disbursal of grants. But, if our survey of panchayats in UP is anything to go by,the absence of up-to-date accounts/records could also be partly deliberate so that the embezzlement offunds does not come to light.

74. G.K. Lieten's survey of panchayats in Muzzaffarnagar reported in 'Panchayats in Uttar Pradesh: namesakemembers', Economic and Political Weekly, 28 September 1996, revealed that 88% of them were newmembers. If this finding has some general validity--as it is likely to because of the quotas--the case forcapacity-building along the lines indicated is timely and appropriate.

75. In a perceptive paper, J. Manor, 'The political sustainability of economic liberalisation in India', in R.Cassen and V. Joshi (eds), India: The Future of Economic Reform (Delhi: Oxford University Press, 1995),draws attention to the difficulty of dealing with five important interest groups. The first three of these arethe groups emphasised by P. Bardhan, The Political Economy of Indian Development, Oxford, BasilBlackwell, 1984: the industrial bourgeoisie, prosperous farmers, and professionals. To these Manor, op cit,this note, adds unionised workers and the poor. Since the government cannot please them all, as a matterof strategy, it could concentrate on a large subset or an 'encompassing' coalition. No matter what theoverall composition of this coalition is, the poor--especially in rural areas--must figure in it. In that case,the design and implementation of social safety nets acquire an added significance. On this, see M. Lipton,'Liberalisation, poverty reduction and agricultural development in India', in Cassen and Joshi (eds), op cit,this note.

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