The Great Poverty Debate

How does GDP growth translate into economic prosperity for Indians? ‘Inclusive growth’ and ‘governance’ are two key terms politicians, policy-makers, researchers, the media and public use in debates on the subject. The statement ‘there are many Indias’ is used casually, and often begs the question: which India and whose India are we talking about? Regardless of the flip side, it cannot be denied that economic liberalisation and financial inclusion have benefited the masses. But these, as yet, are disproportionately skewed in favour of the top of the income pyramid,1 where the top 10 per cent of Indian households, roughly estimated to be 125 million consumers, accounts for 36 per cent of total income. This figure is slightly higher than that of China (31 per cent) as per World Bank estimates in 2005. Furthermore, and this is extremely crucial to note, that by the end of this decade, based on current growth, the projected income share of rich Indian households is expected to reach 45 per cent (close to Brazil’s which was 48 per cent in 2005). It is equally important to note that the income ratio of the richest 10 per cent of Indians to that of the poorest 10 per cent is about 15 (author’s calculation), which does provide an idea of disparity in purchasing power and well being. Similar estimates for the United Kingdom, USA and China are estimated to be 13.8, 15.9 and 21.6 respectively (Human Development Report, 2009).

Historically, from the slogans of ‘garibi hatao’, used by Indira Gandhi in the early 1970s, to the latest phrase of ‘inclusive growth’, public discourse, whether in the political or policy-making realm has been dominated by the issue of poverty. The measurement of poverty, its trend over time, the role of policy and development strategies aimed at reducing poverty, have all been at the heart of the contentious policy debate. Such debates have spilled over the pages of the Economic and Political weekly (EPW on to the editorials and opinion sections of leading financial dailies. The public outcry one witnessed when the Planning Commission defined poverty at a daily consumption expenditure of less than Rs 32 in urban areas ( and more recently Rs 28 ) and Rs 25 in rural areas was no surprise.

It is important to lay bare the issues of the ‘Great India Poverty Debate’. First, the National Sample Survey Organisation (NSSO) Consumption Expenditure Survey (CES) data which forms the basis of poverty estimation has been consistently under-reporting consumption expenditure when compared to the National Account Statistics estimates arrived at from private final consumption . The extent of underestimation has actually been increasing over the years. Although it is very likely that the extent of underestimation would be higher and more concentrated around the top end of the distribution, the estimates nonetheless do cast aspersions on the accuracy of the data.

The measurement of poverty, its trend over time, the role of policy and development strategies aimed at reducing poverty have all been at the heart of a contentious debate

Then there is the criticism of the poverty line itself. It is routinely stressed that there is now a huge difference between the NSS estimates of proportion of people with less calorie intake than the norm (79.8 per cent rural and 63.9 per cent urban in 2004-05) and the official poverty headcount (28.3 per cent rural and 25.7 per cent urban). However, when the original poverty lines were constructed, the Expert Group used calorie norms only as a peg to derive Monthly Per-Capita Expenditure MPCE norms with which to measure consumption poverty. It neither applied calorie norms to obtain 1973-74 state-specific poverty lines nor suggested their use to track poverty changes over time. Additionally, as shown by Sen (2005), although actual calorie intake around the poverty line was well below norm in 1999-2000, calorie norms could have been met in most states without reducing non-food expenditure if those around the poverty line had spent the same amount on food but consumed the more cereal-intensive diet of the average poor. The present poverty lines, based on the Tendulkar committee report, are anchored in the earlier urban poverty line, which is the least controversial estimate. This estimate makes an adjustment for prices drawing on information obtained from other NSS surveys to compute expenditure on items such as health. Many still argue though that even these figures are still too low.

An exploration of the poverty debate should ideally begin by examining the rationale for estimating the poverty line itself. Estimating the poverty line, and as a result the proportion of households that are characterised as poor, serves as a yardstick to measure progress over time. It is a barometer to check whether economic growth has permeated down to the economically backward sections of society. The more relevant issue however is the uses to which the poverty line are put. Before I elaborate on this, it is important to understand a crucial facet of this confounding debate. The poverty lines estimated under the aegis of the Planning Commission are applied to the NSS CES data only to provide an estimate of the proportion of households/population which are below the poverty line. The actual identification of households is done by the Below Poverty Line (BPL) census, which uses a completely different methodology and a different set of definitions. The Planning Commission estimates of the headcount ratio are simply used to cap the BPL census numbers and thus determine which households are eligible for government subsidies. This complicated procedure leads to massive errors of inclusion and exclusion. Numerous studies carried out have amply demonstrated non-poor availing benefits meant for the poor. Coming under scathing attack for being insensitive to the needs of the poor, the Planning Commission has agreed to delink poverty estimates from the identification of beneficiaries for social assistance.

Unlike some western countries, poverty in India is an absolute concept. In the EU and for the OECD, ‘Relative Poverty’ is defined as an income below 60 per cent of the national median equalised disposable income. Thus, for example, if the all-India median annual household income rose from Rs 27,000 in 1994-95 to Rs 40,800 in 2004-05, the poverty line would have risen from Rs 16,200 to Rs 24,480. In other words, the line is automatically updated, circumventing problems that arise on account of price indices, consumption basket, expenditure allocation, etc.

The other issue that needs to be explored is that of the educational and occupational profile of the bottom. At the national level we have observed a significant rise in the share of income accruing from non-farm sources over the past decades. Although one expects this trend to continue, one should examine the sources of non-farm income in order to gauge their reliability/regularity and scalability. Closer inspection reveals that non-farm income accruing to the bottom three deciles is predominantly in the form of income derived from agricultural and non-agricultural labour and not from regular salaried employment, which forms a miniscule portion of total income in these deciles. With income from such sources being irregular and/or seasonal in nature, rectifying this should be our primary concern. This leads us to our other variable of interest, namely, education. Income earned from wage and salaried income is predominantly a function of education. On the supply side, it is undeniable that education levels have risen. However, although the quality of education is doubtful, education levels haven’t risen enough to make a meaningful impact.

Let us expand the scope of this debate beyond the issues centering on poverty to include the distribution of income/expenditure as well. We regularly hear of anecdotal evidence of worsening inequality. Actual numbers shed some more light on this. Analysing the distribution of income according to deciles over the years, it is astounding to see that the bottom three deciles account for roughly 10 per cent of the total income in 1994-95 and 2004-05. On the other hand, the top decile alone accounts for over 33 per cent of total income in 2004-05, up from 29 per cent in 1994-95. If one examines the distribution of the increase in income over the decade, it is interesting to note that majority of the income, roughly 55 per cent, is accounted for by the top two deciles alone. The bottom three deciles account for roughly 9 per cent.

“Wealth increases human happiness when it lifts people out of abject poverty and into the middle class but it does little to increase happiness thereafter… money helps in improving happiness if it is to provide the most basics of physical needs… Beyond that, money has little effect on happiness.”

Daniel Gilbert, Psychologist

Bearing in mind, the educational and occupational profile discussed earlier, it is important to point out that more than half the top decile consists of households where the highest recorded literacy level is that of a graduate. Additionally, over 40 per cent of these households have regular salary as their major source of income, with income from self-employment in non-farm sector accounting for 25 per cent of income.

One would normally expect that relationships such as those between education and occupation, which in my mind would be the principle enablers for uplifting a household out of poverty and are intuitive, would easily be taken up by policy-makers. However the ease with which policy-makers fall back on grand centralised schemes, which have a proven track record of being extremely inefficient, is appalling. The food security bill is yet another example of this peculiar Indian penchant for designing elaborate, one–size-fits-all schemes. Despite being aware of the pitfalls of such centralised schemes, the substantial leakage in the system and that these schemes have not worked for decades, the complete reluctance to adopt a different strategy is inexplicable.

While exploring the issue of poverty, it makes sense to also explore to explore the political context in which the debate normally shapes up, because of the different approaches that are adopted by individuals of different ideological persuasions.

An intriguing narrative espoused by political analysts post the election results of Uttar Pradesh is that populist policies no longer influence voting patterns. The fact that the party, which advocated such a populist agenda, finished a miserable last, in a four-cornered political slugfest, was considered sufficient proof of such a policy’s diminishing returns. Although it would be foolish to ignore other probable explanations for the defeat such as lack of state organisation and state leaders, etc, the view echoed by many is that the Congress has failed to realise the paradigmatic changes in the population at large.

From a nation of voters who were dependent upon the state’s largesse to lift them out of their poverty, growth over the last decade has led to a change, which in simplistic terms can be dubbed as an unleashing of aspirations. Observing the phenomenal growth around them, the ‘poor’ ‘aspire’ to be part of the India growth story and no longer want to be solely dependent on state dole outs. This has important ramifications for the use to which the poverty line is put, which I alluded to earlier. If voters, especially those who aspire to take part in the India growth story, aspire for ‘goods’ such as education, roads, electricity, etc, which will help augment their earning capacity and pave a new path for them, then schemes such as the food security act are best left on the backburner for subsidies are palliative at best. They do not address the root cause of the problem, which at the basic level can be reduced to the lack of ability to earn a living.

The unleashing of aspirations has in my view actually helped usher in a new language of politics, which is no longer a prisoner of populist, yet inefficient, poverty eradicating measures. This new language of politics seeks to provide aspirants the tools necessary to succeed in today’s world. Nobody can deny that poverty, as is currently measured, has reduced, but it needs to be pointed out that wasteful government expenditure, leakages in the system and the inability of the state machinery to efficiently discharge its duties has resulted in India’s ranking actually slipping on several social indicators in the global context. We are thus in the unenviable position of high growth and falling development indicators. Although the Tendulkar Committee report acknowledges the multi‐dimensional nature of poverty, it falls back on the conventional approach of poverty estimation and fails to come up or at least suggest an alternative, more holistic definition, which can be effectively used for poverty estimation. Instead of estimating how much an individual needs to meet his basic needs, isn’t it more humane to adopt a multi-dimensional approach to the issue and move towards addressing and thus identifying the basic living standards of society? This implies that in addition to an individual’s purchasing power, should not various other indicators such household asset ownership, access to drinking water, sanitation facilities, health facilities, etc, be incorporated to create a holistic index in order to determine who the poor really are?