Vicious circle of poverty, causes of poverty and determination of BPL

1. The idea

Ragnar Nurkse, in Problems of Capital Formation in Underdeveloped Countries (1953), described a “circular constellation of forces tending to act and react upon one another in such a way as to keep a poor country in a state of poverty”. His example at the level of the individual: a poor man does not have enough to eat; being underfed, his health is weak; being weak, his working capacity is low, which means he is poor, which means he does not have enough to eat. For the economy, the circle works through capital formation.

2. Supply side of the circle

Low real income → low capacity to save → low saving → low investment → shortage of capital → low productivity → low real income.

The supply of capital is limited by the small capacity to save, which reflects the low level of real income. The low income in turn reflects low productivity, which is due largely to lack of capital.

3. Demand side of the circle

Low real income → low purchasing power → small market → low inducement to invest → low investment → shortage of capital → low productivity → low real income.

Even if savings were available, businessmen would not invest because the market is too small to make new production profitable. Nurkse’s shoe factory example: a factory making shoes will not be built where people are too poor to buy shoes.

Diagram in words. Two rings side by side, each a chain of boxes joined by arrows in a closed loop, both passing through “low real income” and “low productivity”.

4. Other circles

• Market imperfection circle (Meier and Baldwin): underdeveloped natural resources ← backward people ← imperfect markets and immobile factors ← underdeveloped resources.
• Demographic circle: poverty → high birth rate → rapid population growth → lower per capita income.
• Human capital circle: poverty → poor health and education → low skills → low productivity → poverty.

5. Breaking the circle

1. Balanced growth (Nurkse, Rosenstein-Rodan): invest in many complementary industries at once, so each creates a market for the others. This attacks the demand side. (See balanced and unbalanced growth.)
2. Raising saving: taxation, public borrowing, small savings schemes, and mobilising disguised unemployment (Nurkse saw surplus farm labour as a concealed saving potential).
3. Foreign capital and aid to supplement domestic saving.
4. Investment in human capital: health and education.
5. Population control.
6. Land reform and institutional change.

6. Causes of poverty in India

• Low agricultural productivity and dependence of a large share of the workforce on agriculture.
• Unemployment and underemployment, especially disguised unemployment in agriculture.
• Rapid growth of population in earlier decades.
• Unequal distribution of land and assets.
• Low levels of education and skill.
• Inflation, which erodes real incomes of the poor most.
• Social factors: caste, gender discrimination.
• Historical factors: colonial deindustrialisation and the drain of wealth (Naoroji’s argument).
• Regional imbalance and weak infrastructure in backward areas.

7. Determination of the poverty line (BPL)

A poverty line is the level of income or consumption expenditure below which a person is considered poor. Persons whose monthly per capita consumption expenditure (MPCE) falls below it are said to live below the poverty line. In India the line has been drawn by expert groups of the Planning Commission:

By the Tendulkar method, the Planning Commission’s 2013 estimate put the poverty line for 2011–12 at MPCE of Rs. 816 (rural) and Rs. 1,000 (urban), and the poverty ratio at 21.9 per cent. The Rangarajan group’s higher lines (Rs. 972 rural, Rs. 1,407 urban) gave 29.5 per cent for the same year. The government did not formally adopt the Rangarajan line.

Identifying BPL households for schemes is a separate exercise from estimating the poverty ratio. It was done through BPL censuses by the Ministry of Rural Development using household scores on deprivation indicators, and later through the Socio-Economic and Caste Census 2011. NITI Aayog now also publishes a Multidimensional Poverty Index, based on the Oxford–UNDP method, which measures deprivation in health, education and standard of living rather than income alone.

How this is examined

“Vicious circle of poverty” is a regular short note (June 2025, August 2024); “Reasons for poverty” was the January 2026 short note. Write Nurkse’s sentence, draw both circles, give three ways to break them and Bauer’s criticism. If BPL is asked, give the meaning of the poverty line, the calorie basis, the table of committees, and the difference between estimating poverty and identifying BPL households.