Using state-level data for 1970-93, a simultaneous equations model was developed to estimate the direct and indirect effects of different types of government expenditure on rural poverty and productivity growth in India. The results show that in order to reduce rural poverty, the Indian government should give highest priority to additional investments in rural roads, agricultural research and education. These types of investment not only have much larger poverty impacts per rupee spent than any other government investment, but also generate higher productivity growth. Other investments (including irrigation, soil and water conservation, health, and rural and community development) have only modest impacts on growth and poverty per additional rupee spent.
