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Estimating Poverty in India

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Time and time again, various expert groups have been appointed by the Planning Commission to estimate the poverty line in the Indian context. Following are the groups, their estimations, methodologies and their critical evaluations:

  1. Working Group, 1962

Context and Objective:

A working group with eminent economists was constituted in 1962 by the Planning Commission to ascertain the minimum level of living for the India populace.

Methodology:

The Group seemed to have taken into account the recommendation of balanced diet made by the Nutrition Advisory Group of the Indian Council of Medical Research (ICMR) in 1958, however, the exact nutritional norm for arriving at the poverty line has not been articulated clearly.

The poverty line was computed by valuing a common basket of commodities at prices paid by the consumers, depending on where they resided. Thus, the methodology involved ascertaining separate poverty lines for rural and urban India in order to cover the higher prices of the physical volumes of commodities being noticed in urban areas, at that point of time. The estimations did not include expenditure on health and education, as they were assumed to be provided by the State, in accordance with the Indian Constitution and accounted for only those commodities that the households are expected to pay out of their own incomes.

Estimations:

The Group suggested that:

  • For a household of 5 people with 4 adult consumption units, the national minimum consumption expenditure should not be less than INR 100 for rural areas and INR 125 for urban areas, per month as per 1960-61 prices.
  • The per capita per month consumption expenditure should be not less than INR 20 in rural areas and INR 25 in urban areas at 1960-61 prices.

Evaluation:

The Group was the first step, in independent India to enumerate the poverty line in terms of a minimum food and non-food necessity of individuals for a healthy livelihood and it is in this context, that the group’s estimations must be appreciated. The aforementioned poverty line was widely used in the 1960s and 1970s to calculate the poverty ratio at the national level.

The critique of this evaluation manifests due to the modesty of its estimations in comparison to the one computed by KT Shah at 1938 prices, as TN Srinivas clearly states that the significant inflation between 1938 and 1960-61 isn’t reflected in the ascertained numbers.

Additionally, the poverty estimate is based on a head count measure of absolute poverty i.e. it counts as poor all persons who cannot afford to consume a particular basket of goods that is necessary for surviving and working, the construction of which is highly debatable.

  1. Task Force, 1979

Context and Objective:

In 1977, a Task Force was appointed by the Planning commission, under the Chairmanship of Dr. Y.K Alagh, to inspect projections of minimum needs and effective consumption demand which submitted its report in 1979.

Methodology:

The methodology entailed providing a quantitative measure of poverty by ascertaining the average calorie requirements, separately for the all-India rural and urban areas as a population–weighted average of the age-gender-activity specific calorie allowances recommended by the Nutrition Expert Group (1968) by reference to the 1971 population Census and then constructing a poverty line corresponding to the calorie requirement.

The projected calorie norm was 2400 kcal per capita per day in rural areas and 2100 kcal per capita per day in urban areas. To arrive at the monetary equivalent of these norms and the percentage of persons living below the poverty line, 28th Round (1973-74) NSS data relating to household consumption both in quantitative and value terms were used and adjusted pro-rata to correspond to the consumption estimates of National Accounts Statistics (NAS) made by the Central Statistical Office (CSO).

Estimations:

Following are the quantitative estimates as put forward by the Task Force:

  • Monthly Per Capita Consumption expenditure of INR 49.09 was associated with a calorie intake of 2400 per capita per day in rural areas and INR 56.64 with a calorie intake of 2100 per day in urban areas at 1973-74 prices. This expenditure accounted for food as well as non-food expenditure.
  • This Monthly Per Capita Expenditure (MPCE) was termed as poverty line. In the years that followed the Task Force, the poverty lines were estimated by updating the poverty lines of the year 1973-74 for price changes.

Evaluation:

The work of the Task Force must be appreciated for anchoring the poverty line to minimum nutritional requirements, specific to age, sex and activity, for the first time.

As already mentioned, the estimations are based on adjustments whereby the discrepancy between the NAS and the NSS estimates of consumption is allocated on a pro-rata basis across all expenditure classes. This practice has been widely criticised by experts, especially due to the increasing discrepancy in later years and its dissimilarity across all consumption expenditure deciles of the population.

Additionally, the estimates were based on the application of a single poverty line for all states, overlooking the price differentials as well as existence of variations in the fixed consumption baskets of the poor across the states and over time. This made the emerging picture of poverty in the country unrepresentative of the ground realities.

The magnitude of poverty ratio, as per the methodology of the Task Force, have been touted as underreported, primarily due to the adjusting factor, leading to lower allocation in anti-poverty programmes and developmental programmes.

  1. Expert Group (D.T Lakdawala), 1993

Context and Objective:

Given the increasing criticism for the existing poverty estimates rooted out of the Task Force’s methodology, the Planning Commission instituted the Lakdawala Committee in 1989 to "look into the methodology for estimation of poverty and to re-define the poverty line, if necessary".

Methodology:

The Group did not redefine the poverty line and retained the existential Task Force poverty line, at national level, in rural and urban areas. However, it went on step ahead and disaggregated these national figures into state-specific poverty lines, in order to account for inter-state price differentials as measured by Fisher’s index and state specific price indices so as to portray a more representative picture. Additionally, the consumption baskets bought by the households with per capita expenditures around the poverty lines were chosen as the poverty baskets and updated using the Consumer Price Index of Industrial Workers (CPI-IW) in urban areas and Consumer Price Index of Agricultural Labour (CPI-AL) in rural areas.

The All India poverty line was calculated as an interpolated value from the national consumption distribution obtained from the NSS consumer expenditure data and the national poverty ratio, estimated as a population-weighted average of the state-wise poverty ratios, separately for rural and urban areas.

The following two points about the methodology must be duly noted:

  • The NSS consumption distribution was used as it is, without adjustment to NAS consumption, which was a major difference between the methodology adopted by the Task Force and the Lakdawala Committee.
  • The exact estimates were calculated for 18 states. In the remaining States/UTs, where the poverty lines could not be computed because of non-availability of state-specific prices data, the poverty ratios were equated with one of these eighteen states based on the criteria of physical contiguity of areas and similarity of economic profile.

The methodology considered URP-consumption as collected from the households using 30 day recall period for all the items.

Estimations:

The Lakdawala methodology was followed by the Planning Commission until January 2011 and gave the following estimates for poverty ratio and number of poor:

Evaluation:

The methodology adopted by this particular expert group captures differences in cost of living better than the methodologies adopted earlier. It also attempted to anchor the poverty line rigidly to average energy norms and to ensure that the poverty baskets would be bought by consumers.

However, what this methodology fails to take note of is that the updated prices may not represent the calories norm that they were initially associated with, that the calorie norms should change because of demographic shifts in age and sex and change in occupational structure, that basic requirements like health, education, sanitation and housing are not included in the calculation of poverty line, that a reference period of 30 days may not be appropriate for low frequency items of consumption expenditure among others.

The method of using price indices for updating poverty line has been considered to be flawed as the commodity basket used to determine the price indices isn’t necessarily the same as commodity basket used for poverty estimates.

Also, this methodology battles with a lot of criticism due to the continued use of the original 1973-74 consumption basket without taking into account the structural and institutional changes within the economy which might have had affected the consumption patterns of the population over longer periods and rendered it outdated. For instance, the rural landless labour households, which constitute a major subset of the poor, used to get paid in kind till 1970s and no longer in 1993.

  1. Expert Group (S. Tendulkar), 2005

Expert Group (S. Tendulkar), 2005

Context and Objectives:

An Expert Group, under the Chairmanship of Suresh Tendulkar, was constituted in 2005 by the Planning Commission to:

  • Examine the issues relating to the comparability of the NSS 50th (1993-94), NSS 55th (1999-2000) and NSS 61st (2004-05) Round consumer expenditure data and suggest methodologies for deriving such comparability with past and future survey data;
  • Review alternative conceptualizations of poverty, and associated technical aspects of procedures of measurement and data base for empirical estimation including procedures for updating over time and across states
  • Recommend any changes in the existing procedures of official estimates of poverty.

Methodology:

This Group didn’t construct a new poverty line, but altered the existing one through the following three steps:

This methodology was developed as it was felt that as per Lakdawala estimates, the rural poverty figures seemed to be low and urban poverty was less controversial and thus the rural and all-India poverty lines were recalculated by using urban consumption (food and non-food) as the basis. The rationale behind adjusting rural poverty lines as per the urban poverty line basket is that urban living standard is usually regarded as better than and preferable to its rural counterpart.

Further, the national poverty ratio is estimated as a weighted average of state-wise poverty ratios.

Estimations:

The following are the estimations, as per this Expert Group:

  • National Urban Poverty Ratio in 2004-05 – 25.7% (identical to Lakdawala)
  • All India Urban Poverty Line Level of MPCE, based on MRP – INR 578.80
  • National Rural Poverty Ratio in 2005-05 – 41.8% (1.5 times Lakdawala estimate of 28.3%)
  • All India Rural Poverty Line Level of MPCE, based on MRP – INR 446.7

Evaluation:

The committee believes that the improvements in this methodology as against the earlier ones stem from its detachment from the underlying calorie norm, a uniform poverty line basket (PLB for both rural and urban population based on the current consumption expenditure data), construction of new price indices based on the unit prices of consumption expenditure survey and attempting to explicitly incorporate private expenditure on health and education in the price indices.

Criticism of this methodology comes from the stand point that it doesn’t measure poverty, but destitution and has exceedingly low poverty lines. It is based on bringing forward the base year poverty line using a price Index and keeps the consumption basket fix at base year level and there by assumes that the same commodities are available in the later year as in the base year. Price indexation does not capture the actual rise in the cost of living over longer period, due to implicit limitation of construction of price index.

Even though the poverty line was revised for special prices and this methodology raised the rural poverty lines, it was touted as an underestimate and alleged to have unduly abridged the calorie requirement from 2,100 Kcal per day for urban areas and 2,400 Kcal per day for rural areas to a single standard of 1,800 Kcal per day, leading to exclusion of a significant number of poor. The Committee justifies this shift by adhering to the revised calorie norms of 1,770 per person per day set for India by the Food and Agriculture Organisation (FAO). However, it forgets to note that this reduced calorie intake norm was devised as a Minimum Dietary Energy Requirement (MDER) for a person engaging in “light physical activity”, an example of which is “a male office worker in urban areas who only occasionally engages in physically demanding activities during or outside working hours”.This report was also criticised for underestimating health and education expenses considerably.

Additionally, a huge segment of the debate centres on using the urban poverty line basket as the standard for the rural populace as well and question the basic rationale of perceiving ‘urban as better.’

The Report is widely criticised for suggesting that even though the new methodology gives a higher estimate of rural headcount ratio at the all-India level for 2004-05, the extent of poverty reduction in comparable percentage point decline between 1993-94 and 2004-05 is not different from that inferred using the old methodology.

  1. Expert Group (C. Rangarajan), 2012

Context and Objective:

Battling with wide criticism over its poverty estimation, followings its filing an affidavit to Supreme Court in 2011, the Planning Commission appointed an Expert Group under the Chairmanship of C. Rangarajan in order to comprehensively review the existing methodology of estimation of poverty, to indicate whether on the basis of practiced followed by other countries, a particular method can be evolved for empirical estimation of poverty in India and to recommend how the estimates of poverty, as evolved above, should be linked to eligibility and entitlements for schemes and programmes under the Government of India.

Methodology:

The methodology, normatively, follows from the view that the poverty line should be based on certain normative levels of adequate nourishment, clothing, house rent, conveyance and education, and a behaviourally determined level of other non-food expenses. The steps used are:

  1. Calculating the average requirements of calories, proteins and fats based on ICMR norms differentiated by age, gender and activity for all-India rural and urban regions to derive the normative levels of nourishment
  2. Constructing a food basket that simultaneously meets all the normative requirements of the three nutrients as the poverty line basket.
  3. By observing that these nutrient norms are met for persons located in the sixth fractile (25-30%) in rural areas and for those in the fourth fractile (15-20%) in urban areas in 2011-12, using their average monthly per capita consumption expenditure on food as the food component of poverty line.
  4. Using the median fractile (45-50%) values of clothing expenses, rent, conveyance and education expenses as the normative requirements of the basic non-food expenses of clothing, housing, mobility and education of a poverty line basket.
  5. Considering the observed expenses of all other non-food expenses of the fractile classes that meet the nutrition requirements as part of the poverty line basket.
  6. Arriving at a poverty line estimate, by summing up the aforementioned 3 components.

Modified Mixed Recall Period consumption expenditure data of the NSSO is used. The national rural and urban poverty lines computed as above were used to derive the state-wise poverty lines.

Estimations:

  • The new poverty line turns out to be a monthly per capita consumption expenditure of INR 972 in rural areas and INR 1,407 in urban areas in 2011-12. For a family of 5, this translates into a monthly consumption expenditure of INR 4,860 in rural areas and INR 7,035 in urban areas.
  • 30.9% of the rural population accounting for 260.5 million individuals and 26.4% of the urban population translating into 102.5 million people were below the poverty line in 2011-12. The all-India ratio was 29.5% with 363 million below poverty in 2011-12.
  • The poverty ratio was noted to have declined from 39.6% in 2009-10 to 30.9% in 2011-12 in rural India and from 35.1% to 26.4% in urban India, a uniform 8.7 percentage points over the two years. The all-India poverty ratio fell from 38.2% to 29.5%.

Evaluation:

This Report is significant in several ways as it recommends discontinuing the urban-based poverty estimates, revises the calorie norms and uses a new methodology for poverty calculation. It also entails a shift from calorie-intensive diet towards a diversified diet high in proteins and fats and goes beyond just food requirement. This Report also suggests delinking poverty ratios from selecting beneficiaries under welfare programmes and using programme specific criteria.

However, despite the revision, these estimates still remain mostly consumption centric and uni-dimensional. Multi-dimensional aspects of poverty have not been taken into account fully and the line still appears to be a deprivation line.

Deaton and Dreze call the method proposed by the Rangarajan expert group to set poverty lines as both theoretically and empirically implausible and favour a simple and transparent benchmark, amenable to democratic debate. Questions are raised on using assumptions disconnected from ground realities, using different fractiles for different components of expenditure, on constructing a rural poverty line that is almost same as the earlier one, despite a different methodology and given twofold increase in urban poverty line and for justifying that numbers are higher due to computations based on the NSS’ “modified mixed reference period,” instead of the “mixed reference period” used earlier. The estimations lack internal validity with experts touting higher urban poverty in more than half states than rural poverty as being highly counter-intuitive and feeling that the figures do not add up.

Additionally, poverty estimate need not simply be a technical exercise of experts, but the approach should be bottoms-up where the poor get involved in the understanding of vulnerability, particularly in the implementation of policies as the poor have maximum stake in poverty analysis.


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