India's Poverty Estimates: Don't just get Outraged, Understand them!

Udit Misra
Updated: Mar 21, 2012 05:25:18 PM UTC

I have been with Forbes India since late 2008 and currently work as Assistant Editor. In the past , I have reported for Mint newspaper and produced special shows for CNN-IBN news. In my spare time i follow sports, esp cricket, and enjoy reading/listening urdu poetry. You can reach me at udit.misra@network18online.com and follow me on twitter @misraudit

In a curiously timed press release yesterday, the Planning Commission of India, government’s official think tank, announced the latest “poverty line” for India.

Now, poverty line in India, along with the other related issues, has almost become a mysterious concept. This is primarily because there are too many people, who know too little about poverty, speaking too much about it.

A usual suspect is our everyday TV news anchor, who feigns gross outrage at the insensitivity of the poverty estimates, irrespective of the number in question. This fake outrage – and it is fake because no one seems to have taken the trouble to understand why at all do we have poverty estimates and how do we calculate them- on the part of media routinely misinforms and misguides the readers about this very important issue.

One big casualty, for example, is the reputation of Late Prof. Suresh Tendulkar, one of the most important scholars on poverty in the world. The way Tendulkar Committee’s efforts are manhandled in casual chats, it appears as if the legendary economist had an ulterior interest in keeping India poor! But, I wonder if people know that before Tendulkar revised them upwards,India’s poverty line was Rs 12 for rural areas and Rs 17 for urban areas.

Let me spend some time to clear the haze a bit and attempt to de-mystify a few things about India’s poverty and its estimates.

However, given the various misconceptions around it, I am tempted to repeat Sherlock Holmes, when he said, “This is quite a three pipe problem.” I would urge the readers to hear me out before reaching any conclusions.

Let us look at the facts first.

According to yesterday’s statement, using the Suresh Tendulkar Committee’s method  and the latest available sample data (which is for 2009-10), the new poverty line (in terms of money spent on consumption) is Rs 29 per day per person in Urban areas and Rs 22 per day per person in Rural areas.

As a result, when compared to similar sample data of 2004-05, the poverty estimates have “declined by 7.3 percentage points from 37.2% in 2004-05 to 29.8% in 2009-10.” The rural poverty has declined by 8.0 percentage points from 41.8% to 33.8% and urban poverty has declined by 4.8 percentage points from 25.7% to 20.9%.

Now, as I understand, the biggest issue among the people, is about the actual poverty line number.

Some of the things that I have heard (not necessarily on TV):

“Rs 29 or Rs 32 or whatever the hell it may be – it is just too low!”

“How can you have Rs 29 or Rs 22 for daily consumption as the poverty line?”

“How can anyone in the Planning Commission, expect that you are poor at Rs 29 and not poor at Rs30?”

“How can they be so stupid as to think that Rs 30 per day is enough for living a decent life in urban areas?”

“Why don’t they make Rs 100 as the poverty line? That would be the only decent thing to do, no?”

All valid questions except they betray a complete lack of understanding about why countries have a poverty line at all. Or for that matter, what is a poverty line.

So what is poverty? And why is it so difficult to get a poverty line?

Poverty is a relative concept. [This appears straightforward but it is very crucial to understanding the problem in estimating poverty.] Let me elaborate a bit.

“Fundamentally, the concept of poverty is associated with socially perceived deprivation with respect to basic human needs,” states the Tendulkar committee report.

This means a person’s poverty depends most on how he/she is perceived by his surroundings. Of course, self-perceptions also matter, but it is how one stands “relative” to his surroundings that mainly determines how rich or poor he is.  For starters, it is a bit like saying that with Rs 100 in your hand, you are “rich” relative to the person who has just Rs 10 and “poor” relative to the person with Rs 1000. In that sense, as long as people have different incomes in a society, there will always be “poverty” since some will always be worse off than others.

This relative nature makes poverty one of the most complex issues to define and measure.

The reason why calculating a poverty line is fraught with difficulties is because a poverty line is an absolute measure of a relative concept. So, no matter what number you choose for delineating the rich from the poor, it would be arbitrary at one level.

Why do governments calculate a poverty line at all? And how is it done?

One of the main concerns for any welfare oriented government in any country, including China, is to provide relief to the poorest population. To this end, governments come up with policies like providing cheap foodgrains, or free education or some kind of unemployment benefit etc. And to know whether these schemes are working or not, government (and its economists) draws a “poverty line” and monitors whether its policies are raising the well being of its poorest people.

The idea behind a poverty line is to choose a number, partly based on some educated assumptions and some sample data, which would capture the picture of the lowest 20% - 30% of the population. This way, the government gets to know the exact standard of living of its poorest population. And as such, it can then tailor its anti-poverty programs more accurately. In a country like India, which is poor relative to, say, most western countries, such a poverty line often looks like a “starvation line.”

However, if, as many seem to suggest while in the throes of sham outrage, government was to draw a poverty line, which includes say 75% of the population, then it will only muddy the government’s policy prescription for the poorest people.

Why and How?

Imagine you are the government responsible for preparing the best pro-poor policies in a country of 5 people: A, B, C, D and E.

Now, total income in the economy is Rs 100 out of which A earns Rs 35, B earns Rs 30, C earns Rs 20 and D and E earn Rs 10 and Rs 5 respectively.

In one look, you would intuitively understand that D and E are the poor in the economy and as such, you might draw the “poverty line” at Rs 10. That way you will be able to narrow down your focus to the two most poor. The next person is C with twice the income of D and four-times the income of E.

Two things will happen if you raise the “poverty line” to Rs 20 and include C in your poverty list. One, you will have fewer resources left to be given to D & E, who are decidedly much “poorer” than C.

Secondly, when you study C’s income and consumption pattern and use them to shape the pro-poor policies, you might miss out on the real needs of D & E – the relatively poorer of the lot.

For example, C may not need subsidized food grains. Instead, C may need some help with skills, perhaps in the form of some government subsidy to allow C to pick up a skill. However, a decision to opt for subsidized skill development instead of subsidized grains may prove fatal for E, who is likely to be severely malnourished and acutely incompetent, in the short term, to earn even two square meals. Remember, governments have limited resources.

Now, with greater clarity about the concept at hand, let us get back to the more current issue of Tendulkar Committee and revision of poverty rates.

Contrary to the common perception, the committee headed by Prof Tendulkar did the country a huge favour by revising the way we estimate our poverty. The sum and substance of the new methodology, suggested by the committee in 2010, was that India is poorer than we thought.

The Tendulkar method revised the poverty line from Rs 12 in rural areas to Rs 15 and from Rs 17 in urban areas to Rs 19.  As a result, overall poverty ratio in the country is 37.2% instead of the old figure of 27.5%, thus recognizing an additional 120 million as poor.

The reason why Tendulkar’s method shows higher poverty levels is primarily that he has moved away from the traditional practice of benchmarking poverty by certain calorie consumption levels.

Instead, for the first time ever, it recognized the fact that apart from the expenditure to consume minimum calories, individuals also have to spend on two other basic requirements -- healthcare and education. In the past, it was assumed that healthcare and education is already provided by the government and so the poor do not have to spend from their pocket on both.

Tendulkar Committee’s inclusion of expenditure on private healthcare and education is seen by most economists as an open acceptance that the State has failed to provide the most elementary of all the services it was supposed to.

However, the upward revisions did not mean that poverty reduction has not happened over the years because his method threw up even higher poverty estimates for the years gone by.

The Politics of Poverty Estimates

Typically, poverty lines are not estimated to put a cap on the beneficiaries of government schemes. But with limited resources, poverty estimates came to be used as ceilings for choosing beneficiaries during the 1990s. Thus instead of a universal public distribution system, we introduced the Targeted PDS.

The logic was simple. If the government did not cap its programs at some arbitrary number, its budget deficits would soar, given the high level of “poor” in the country.

This unhealthy convention of using the poverty line to identify beneficiaries or cap the number of beneficiaries has been the real bone of contention.

So on the one hand, you had the planning commission justifying literally a “starvation line”, and on the other hand, you had activists asking for a higher poverty line so that more people could benefit from the government’s anti-poverty schemes.

Things came to a head in September last year when the Planning Commission filed an affidavit in the Supreme Court quoting the Tendulkar Report to justify that the Poverty Line given by Tendulkar is “adequate” for identifying the beneficiaries for various government subsidies.

What I understand from my interactions with Prof Tendulkar and some of his colleagues in the committee, Tendulkar had meant that his method is adequate for broadly measuring the poverty line, not for identifying the beneficiaries.

However, after a long fight, in October last year, the Planning Commission finally relented and announced that poverty line would no longer be used to cap the number of beneficiaries in any government scheme.

Sadly, this decision has not yet been implemented. And with the deliberations of the national food security bill about to begin, the latest press release seems to suggest government’s efforts to bring down the expectation from the bill.

Be that as it may, the point to remember is that there is no point fretting over Rs 29 or Rs 32 as the poverty line. It is only meant to be a pointer which should be revised regularly. For example,China has revised its poverty line twice in the past two years.  The latest revision in November 2011, nearly doubled the poverty line. The move is seen as a reflection of the improving standard of living in China.

Going back to the earlier example, suppose in five years time, the economy grows fast and each individual’s income doubled. As a result, A now earns Rs 70, B earns Rs 60, C earns Rs 40, D earns Rs 20 and E earns Rs 10. Now if you still want to focus on the poorest lot, you will have to double your poverty line from Rs 10 to Rs 20.

A higher poverty number will make sense only when India’s poor are better off. If we arbitrarily increase the poverty line we would do the poor a great disservice.

So why has the Poverty Line come down from Rs 32 in 2011 to Rs 29 today?

There are two reasons for this.

One, the Tendulkar committee not just gave a new method to estimate poverty but also a new method of updating poverty line. Typically,Indiaused the CPI-AL (consumer price index for agricultural labourers) and CPI-IW (for industrial workers) for updating the poverty line. CPI-AL gave 80% weightage to food articles. But as Tendulkar found out, the poor are also increasingly spending on education and health. So his committee recommended the use of Fisher Price Index which updates the poverty line on the basis of actual consumption data. This index gives just 60% weightage to food articles.

Two, and the bigger reason is that when Planning Commission came out with the Rs 32 poverty line last year, it had done a quick, and provisional, calculation based on CPI-AL for June 2011. When it released the poverty line yesterday, it used the Fisher Price Index for prices during 2009. Between the two years, prices have gone up by roughly 14%. As a result, the data for 2009 shows a poverty line at Rs 29.

In short, this fall is just a statistical difference. It does not mean that suddenly a large number of poor have been lifted out of poverty. Neither does it mean that the poor are not slightly better off. They are. But that again is relative.

P.S This blog post has been updated with the addition of a few paragraphs since it was first published.

 

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