The Causes of Poverty in India

6. Low rate of capital formation, historically. For decades India saved and invested too little to equip its workers with the tools that would have raised their output. That has changed, with gross fixed capital formation at 30.0 per cent of gross domestic product in FY26, but the deficit of the earlier decades is still visible.

Group two: demographic causes

7. The rate of population growth. A population growing faster than output per head means the additional output is divided among more people. India's growth has outrun its population growth for decades, which is why poverty has fallen, but the arithmetic still works against a poor household with many members.

8. The dependency burden. A poor household typically has more children and more elderly persons per earner. The same income divided among more members produces lower consumption per head, which is what the poverty line measures.

9. Distress migration. Movement to a city in search of work, without skills, contacts or housing, converts rural poverty into urban poverty rather than curing it, and produces the informal settlements in which a large part of urban poverty lives.

Group three: social causes

10. Illiteracy and the lack of education. Education is what allows a worker to move to a job with higher output per hour. Without it, the only work available is casual and unskilled. This is why the multidimensional index treats years of schooling and school attendance as dimensions of poverty and not merely as its cause.

11. Poor health and the absence of health cover. Illness is one of the commonest ways an ordinary household becomes a poor one: earnings stop, expenditure rises, and the treatment is paid for by borrowing or by selling the household's only asset. Health expenditure that pushes a household below the line is called catastrophic health expenditure, and it is a major route into poverty.

12. Caste, tribe and gender. Disadvantage in India is not distributed randomly. Scheduled Castes, Scheduled Tribes and, within every group, women, are over represented among the poor, because access to land, to education, to credit and to particular occupations has historically been restricted.

13. Social customs and unproductive expenditure. Expenditure on marriages, dowry, funerals and religious ceremonies is often met by borrowing at a rate the household cannot service, and is a recognised route into permanent indebtedness.

14. Fatalism and the absence of information. A household that does not know a scheme exists cannot claim it. Awareness is a real constraint and it is the reason so much delivery is now designed around a single identity and a bank account.

Group four: institutional causes

15. Landlessness and insecure tenure. A rural household without land or with land it does not hold on record has no asset to fall back on and cannot borrow against it. This connects to the tenancy point made in [The Causes of Low Agricultural Productivity]: the invisible tenant is also the household outside the credit system.

16. Indebtedness to non institutional lenders. A loan at three per cent a month absorbs any gain the household makes. Debt taken to meet a health emergency or a ceremony is serviced out of the following year's crop, and the household never accumulates.

17. The informality of employment. Self employment at 55.8 per cent and casual labour at 18.9 per cent of all employment, on the Periodic Labour Force Survey for Q2 of FY26, means most Indian workers have no written contract, no assured monthly wage and no employer funded social security. Income is irregular, and an irregular income cannot be planned against.

18. Incomplete reach of public services. Where the school, the health centre, the road and the ration shop function, poverty falls faster than income alone predicts. Where they do not, a household's own income has to buy privately what other households receive publicly.

19. Regional concentration. Poverty is concentrated in particular States and, within them, in particular districts, which is why programmes are increasingly targeted at districts rather than spread evenly. The aspirational districts approach in [The Functions of NITI Aayog] and the 100 districts of PM-DDKY are both instances of that.

The vicious circle of poverty

This is the framework that holds the list together, and it is due to Ragnar Nurkse, whose formulation was that a country is poor because it is poor.

The supply side circle. Low income means low saving. Low saving means low investment. Low investment means low capital per worker. Low capital per worker means low productivity. Low productivity means low income. The circle closes.

The demand side circle. Low income means low purchasing power. Low purchasing power means a small market. A small market means little inducement to invest. Little investment means low productivity, and again low income.

Applied to a household rather than a country, which is how MU's question usually comes. A poor household cannot afford schooling, so the children work; working children earn a little now and very little for the rest of their lives; the household stays poor and its next generation begins where it began. The same circle runs through nutrition, through health and through debt.

Why the framework matters for policy. A circle has to be broken at some point, and the argument about poverty policy is really an argument about where. Those who would break it at capital argue for investment and growth; at education, for schooling; at credit, for microfinance and self help groups; at nutrition and health, for the public distribution system and health cover; at employment, for a work guarantee. [Poverty Alleviation Strategies] shows that India has attempted all of them.

A worked example: how one household became poor and stayed poor

The household. Suresh and Ratna, four children, 0.6 hectares of unirrigated land in a district with no industry.

How it became poor. Suresh's father held 2.4 hectares. It was divided among four sons. Suresh's 0.6 hectares, unirrigated, cannot feed six people, so he works as agricultural labour for part of the year. That is fragmentation, low productivity and underemployment together, and note that nobody made a mistake.

How it stayed poor.

• Ratna's mother in law falls ill. The treatment costs 40,000 rupees, borrowed at three per cent a month. That is catastrophic health expenditure producing indebtedness.
• The interest is serviced by selling the crop at harvest, when the price is lowest, instead of storing it. That is defective marketing converting a health shock into a permanent income loss.
• The two older children leave school to work, because the household needs their earnings now. That is the vicious circle closing on the next generation.
• The household is not on the record as a tenant on the land it also sharecrops, so the income support and the crop insurance go to the owner. That is the institutional cause.
• The nearest functioning health centre is 20 kilometres away, so the next illness will be treated privately too. That is the incomplete reach of public services.

What to notice. Not one of these causes acted alone, and no single remedy would have prevented the outcome. Health cover would have stopped the debt; a recorded tenancy would have brought the insurance; a functioning school with a meal would have kept the children in it. That is why the alleviation strategies in the next chapter operate on several fronts at once.

What beginners get wrong

"Poverty is caused by overpopulation." Population growth is one cause among many and it is not the largest. India's output has grown faster than its population for decades, and poverty has fallen sharply; a household's dependency ratio matters more to it than the national growth rate does.

"The poor are poor because they do not work." The overwhelming majority of India's poor work, often for long hours. The problem is what their work produces and what it pays, which is underemployment and low productivity, not idleness.

"Unemployment is the main cause." Open unemployment is low in India by international standards. Underemployment and low productivity employment are the real conditions, and an answer that says unemployment without qualifying it misses the point.

"Growth alone will remove poverty." Growth has removed a great deal of it, on every measure in [Poverty and the Poverty Line]. But growth concentrated in sectors that employ few workers removes it slowly, which is why employment and distribution matter as well as the growth rate.

Limits and criticism

The causes are also consequences. Indebtedness causes poverty and is caused by it; illiteracy the same. That is what makes it a circle and what makes single cause explanations unsatisfying.

The list is national and poverty is local. The binding cause in a district of eastern India, where land is fertile and credit and marketing are absent, differs from that in a dry district of the west, where water is the constraint.

Some causes have weakened considerably. Capital formation, literacy, electrification and connectivity are all far better than the standard list assumes, and an answer that recites the 1970 list without saying what has changed is dated.

Quick revision

1. Economic causes: low productivity, especially in agriculture; underemployment rather than open unemployment; employment growing more slowly than output; inequality of income and of assets; food price rise, which hits the poor hardest because demand for food is inelastic; and historically low capital formation.
2. Demographic causes: the rate of population growth, the dependency burden within a poor household, and distress migration that moves poverty rather than curing it.
3. Social causes: illiteracy; ill health and catastrophic health expenditure; caste, tribe and gender disadvantage; unproductive ceremonial expenditure met by borrowing; and lack of information about entitlements.
4. Institutional causes: landlessness and unrecorded tenancy; indebtedness to moneylenders; the informality of employment, with 55.8 per cent self employed and 18.9 per cent casual; incomplete reach of school, health centre, road and ration shop; and regional concentration.
5. The vicious circle of poverty, Ragnar Nurkse: on the supply side, low income to low saving to low investment to low productivity to low income; on the demand side, low income to small market to low inducement to invest.
6. Policy is an argument about where to break the circle: at capital, at education, at credit, at health, or at employment.

Test yourself

1. Classify the causes of poverty in India. Economic causes: low productivity, particularly in agriculture, where about two fifths of the workforce produces about a fifth of the output; widespread underemployment rather than open unemployment; employment growing more slowly than output because the fastest growing sectors employ few workers; unequal distribution of income and of assets, especially land; rises in food prices, which fall hardest on the poor because their demand for food is inelastic; and a historically low rate of capital formation. Demographic causes: the rate of population growth, the high dependency ratio within poor households, and distress migration. Social causes: illiteracy, ill health and catastrophic health expenditure, caste, tribal and gender disadvantage, unproductive ceremonial expenditure, and ignorance of entitlements. Institutional causes: landlessness and unrecorded tenancy, indebtedness to non institutional lenders, the informality of employment, the incomplete reach of public services, and the concentration of poverty in particular regions.

2. Explain the vicious circle of poverty. The formulation is Ragnar Nurkse's, that a country is poor because it is poor. On the supply side, low income permits only low saving, low saving permits only low investment, low investment leaves each worker with little capital, little capital means low productivity, and low productivity means low income again. On the demand side, low income means small purchasing power, small purchasing power means a small market, a small market gives little inducement to invest, and low investment again means low productivity and low income. Applied to a household, a poor family cannot afford schooling, so the children work; children who work earn little for the rest of their lives; and the next generation begins where the last one did. The importance of the framework is that a circle must be broken at some point, and disagreement about poverty policy is largely disagreement about where.

3. Why is underemployment rather than unemployment described as India's real problem? Because open unemployment, meaning people with no work at all who are seeking it, has never been high in India by international standards; a household without a cushion cannot afford to be idle and takes whatever work is available. What is widespread is work of very low productivity: family members on a small holding whose withdrawal would barely reduce output, which is disguised unemployment; seasonal work that occupies only part of the year; and work far below the worker's skill. The income from such work is low not because the worker is idle but because the work produces little, so remedies aimed at creating any employment at all miss the point, and what is needed is employment of higher productivity.

4. How does ill health cause poverty? Through three effects operating together. Earnings stop, because a sick earner cannot work and often an additional family member stops working to provide care. Expenditure rises sharply, and because a large part of Indian health spending is met out of pocket the amount is frequently beyond the household's savings. And the gap is met by borrowing at high rates from a non institutional lender or by selling the household's only productive asset, so a temporary illness becomes a permanent loss of income. Expenditure of this kind, sufficient to push a household below the poverty line, is called catastrophic health expenditure, and it is one of the commonest routes by which a household that was not poor becomes poor.

5. "Economic growth alone will eliminate poverty in India." Discuss. Growth has in fact reduced poverty substantially on every measure: estimates on the Tendulkar line fell from 21.9 per cent in 2011-12 to 4.7 per cent in 2022-23, and the Multidimensional Poverty Index from 55.3 per cent in 2005-06 to about 11.28 per cent in 2022-23. So growth is a large part of the answer. But it is not the whole of it, for three reasons. Growth concentrated in sectors that employ few workers per unit of output raises national income without raising many incomes, which is why India's employment problem is harder than its growth problem. Several dimensions of deprivation, sanitation, schooling, clean cooking fuel, nutrition, are not bought individually out of income but supplied publicly, and multidimensional poverty has fallen largely because those were supplied. And growth does nothing directly about the shocks, principally illness, that push non poor households into poverty. Growth with employment, public provision and social insurance is the complete answer; growth alone is not.

6. Why is poverty concentrated in particular regions, and what follows for policy? Because the causes are themselves regionally concentrated: districts with poor irrigation, low cropping intensity, weak credit, poor connectivity and few non farm opportunities produce low incomes together, and their populations have the least access to schooling and health services. Historical factors, including land tenure systems and the location of industry, reinforced the pattern. What follows is that a programme spread uniformly across the country will be partly wasted in districts that do not need it and inadequate in those that do, which is the reasoning behind district level targeting: NITI Aayog's aspirational districts programme, and the selection of 100 districts under PM Dhan Dhaanya Krishi Yojana on the criteria of low productivity, low cropping intensity and low credit disbursement.