Comprehensive analysis of poverty in India

A comprehensive insight into povery dynamics in India.

Comprehensive analysis of poverty in India

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• The story: Some reports have suggested that poverty in India increased between 2012 and 2020. Since the present government has worked on the political promise of "Achhe Din" (good days), this debate is now quite polarised and intense. So it is crucial to see the facts clearly.
• Defining poverty: In 2009, the report on poverty estimation, chaired by Late Prof Suresh Tendulkar, stated: “Fundamentally, the concept of poverty is associated with socially perceived deprivation with respect to basic human needs”. This is a crucial definition to consider since the Tendulkar committee’s estimation method is the last officially recognised method for arriving at poverty numbers in India. The key phrase in the definition above is “socially perceived deprivation”.

1. So poverty is a “relative” concept. It is about how you are “relative” to those in your surrounding.
2. For example, with Rs 1,000 in your pocket, you may be “rich” if those around you have no more than Rs 100 with them. But, in another setting, say around those who have no less than Rs 10,000 with them, you will come across as “poor”.
3. So as long as there are variations in the income and/or wealth levels in a society, there will be “poverty”.
4. There surely is "abject poverty" also, and it refers to 'a state where a person is unable to meet his most basic needs such as eating the minimum amount of food to stay alive'.

• Poverty line: From the point of view of policymaking, poverty levels refer to some level of income or expenditure below which one can argue that someone is poorer than the rest of the society. Why? Because policymaking is done to improve the living standards of the poorest in India. To design policies, one must first know what the target group is, how much does it earn (or spend, since robust data on income is not easily available).

1. Policymakers are interested in figuring out what percentage of the population is poor relative to the rest.
2. This is done by choosing a “poverty line” — or a level of income or consumption expenditure that divides the population between the poor and non-poor.
3. In a relatively poor country such as India — where per capita income is roughly one-fifth of China’s and one-thirtieth of US’s — the income or consumption levels chosen as the cut-off point for poverty (also called the poverty line) are often quite similar to “starvation” levels (or lines).
4. A decade ago (in March 2012), there was a massive furore when Indians realised that the poverty line suggested by the Tendulkar Committee was Rs 29 per day per person in urban areas and Rs 22 per day per person in rural areas. People were aghast how the government and the members of the Tendulkar Committee could expect anyone to survive at such paltry sums.
5. The truth was that before the Tendulkar Committee’s recommendation, India’s poverty line was Rs 12 for rural areas and Rs 17 for urban areas. These numbers were not the levels that academics such as Prof Tendulkar believed were good enough for a person to survive but the levels that were arrived at after looking at the data from the consumption expenditure surveys.

• How to choose a poverty line: The purpose behind choosing a poverty line is two-fold.

1. One, to accurately design policies for the poor. Suppose there are five people in an economy — A, B, C, D and E. Suppose further the total GDP or income of the country is Rs 100 and that they earn Rs 35, Rs 30, Rs 20, Rs 10 and Rs 5, respectively. For the government, likely policy focus would be D and E — that is, a poverty level of 40%. One can intuitively draw the poverty line at Rs 10. Doing so allows govt. to target your policies towards the two poorest people. Often such policies are redistributive in nature — such as giving subsidised food grains or providing some kind of social security like MGNREGA. (i) Any other poverty line will adversely affect the government’s ability to target the priorities of the genuinely poor. If instead of Rs 10, it chose Rs 20 as the poverty line then the policy focus and solutions will get altered because now govt would have to focus on three people — D, E and C — instead of two. Because C’s income levels are twice that of D’s and four-time that of E, it is quite likely that the policies required to help C are dramatically different from the policies required to help D and E. For instance, C may not require subsidised food grain but may require some kind of skill training or initial capital to start a business. (ii) In an ideal world a government would have the resources to help everyone in the economy but in reality even the government’s work within some financial or budgetary constraints. As such, they prefer to focus on a poverty line that gives them a reasonable chance to address the concerns of those who are economically worst-off in society.
2. The other point of poverty lines is to assess the success or failure of government policies over time. If the overall GDP doubles but C’s income falls to Rs 15, while that of D and E remain the same, then the government would know that its policies are not bearing fruit. If when the GDP doubles everyone’s incomes also double — that is, A starts earning Rs 70 and E starts earning Rs 10 etc. — the government could simply re-draw the poverty line at Rs 20 and continue to focus on D and E. Neither the poverty level (in terms of percentage) nor the number of people below the poverty line would have changed. (i) But suppose over time, as the total GDP doubles, the income break-up becomes Rs 65, Rs 55, Rs 45, Rs 27 and Rs 8, respectively for A, B, C, D and E. In other words, everyone’s income increases, and crucially, D’s income moves closer to C’s and the rest with only E languishing far below the rest. (ii) In such a case, the government could claim that it has reduced poverty by halving both the number of people below the poverty line (which is now at Rs 20) from 2 to 1 and reducing the incidence of poverty from 40% to 20%. It could, from now on, focus singularly on E’s requirements because the other four are relatively well-off.

• India’s fight against poverty: There are two ways to assess India’s performance. One is to look at the headcount ratio of poverty (the percentage of India’s population that was designated to be below the poverty line), and the other is to look at the absolute number of poor people in the country.

1. If one looks at the headcount ratio then India made rapid strides since 1973. The table shows that the incidence of poverty fell quite sharply from 55% in 1973 to under 28% in 2004.
2. Then came the Tendulkar poverty line, which was defined differently from the past poverty line. In the past, poverty lines were essentially about the amount of money required to meet a certain minimum amount of calories. But during this phase, it was assumed that the government would take care of two other basic requirements — healthcare and education.
3. The Tendulkar Committee recognised that in reality these needs were not being met by the government. As such, the committee included the money required to meet the growing expenses on healthcare and education. This raised the poverty line and essentially told us that India was poorer than what it previously believed — that is why the table mentions two poverty numbers for 2004.
4. But the fact remains that no matter which way one drew the poverty line, the incidence of poverty (in terms of percentage of population) came down sharply right through India’s history.
5. In fact, in just 7 years between 2004-05 and 2011-12 — the phase that saw India register its fastest GDP growth rates — this incidence fell by 15 percentage points — from over 37% to under 22%.
6. So, even though the Tendulkar Committee revised the poverty line upwards, it also showed that the 7-year phase starting 2004 saw an unprecedented decline in poverty — in percentage terms — in India.

• The sad part: The story changes when one looks at the absolute number of poor in the country. Even though the percentage of people below the poverty line were coming down over the years, the absolute numbers remained stubbornly at the same level — as the third column of the table above shows — until the start of economic reforms in the early 1990s. Between 1993 and 2004, close to 20 million people were brought above the poverty line.

1. The truly remarkable period was between 2004 and 2011 when close to 140 million people were brought out of poverty in just 7 years.
2. What has happened to poverty levels since 2011-12? Unfortunately, even though India is home to possibly the largest number of poor people in the world, there has been no official update on India’s poverty levels since.
3. Poverty levels are updated by using the Consumer Expenditure Survey, which is conducted by the National Statistical Office (NSO) once every five years. The last such survey was conducted in 2017-18. That survey reportedly showed that for the first time in four decades consumer expenditure in India had fallen. If that survey’s data was plugged into poverty line calculations, several economists believe it would have shown that poverty levels, as well as the absolute number of poor, had risen between 2011-12 and 2017-18.
4. The findings of that survey were scrapped by the Modi government in 2019. The government claimed that the survey suffered from “data quality” issues. The next round of the Consumer Expenditure Survey (CES) was supposed to be conducted in 2021.
5. Unofficially, two academics Santosh Mehrotra (Research Fellow, IZA Institute of Labour Economics, Bonn) and Jajati Keshari Parida (teaches economics at the Central University of Punjab) have attempted to ascertain the impact on poverty between 2011-12 and 2019-20. They have done so by looking at the consumption related questions in NSO’s Periodic Labour Force Survey.
6. According to their calculation — and they used the Tendulkar poverty line, which is the last official method — even though the incidence of poverty has come down marginally — from 21.9% in 2012 to 20.8% in 2020 — India has witnessed an increase in the absolute number of poor in the country. This is a sad first in India’s history of poverty estimation.

• Three reasons why it happened: According to Prof. Mehrotra, there are three main reasons why poverty went up sharply in past 8 years. As against pulling 140 million out of poverty between 2004 and 2011, India saw more than 76 million fall back below the poverty line between 2012 and 2020.

1. First –India’s GDP growth rate has faltered. In particular, he points to the phase post demonetisation — which was announced exactly 5 years ago on November 8. It is a fact that India’s GDP growth rate had registered a secular deceleration between the start of 2017 and 2020.
2. Second – The second and related factor is the unprecedented rise in joblessness. The first PLFS, which corresponded to the 2017-18 period, showed that unemployment had touched a 45-year high. This tallied with the fall in consumer expenditure findings. Initially, that is, before the Lok Sabha elections of 2019, the Modi government tried to run down the findings of PLFS as well. However, after coming back to power later that year, it accepted the PLFS unemployment data. However, thanks to the faltering growth since then — India’s GDP growth decelerated from 8.2% in 2016-17 t0 just 4.2% in 2019-20 — unemployment levels have remained at close to five-decade highs.
3. Third – The third factor is what has happened to wages . A key reason why so many millions were pulled out of poverty between 2004 and 2011 was that sharp rise in non-farm employment and associated wages. But over the last 8 years, for many of those workers, real wages have either fallen or stagnated,” he says.
4. Finally, this finding does not take into account the full impact of the Covid pandemic, which completely decimated non-farm employment and sent millions of workers back to villages, seeking MGNREGA work at minimum wages.

• Summary: What is even scarier is that this data is before the full impact of the Covid pandemic. The total increase in the number of poor could well be around 90 million. That is a catastrophic situation.

1. Other metrics suggest growing economic distress among Indians between 2011-12 and 2019-20.
2. Take, for example, the percentage of people, as well as the absolute number of people, living “above the poverty line or APL” but below the level set by twice the Tendulkar poverty line.
3. While Mehrotra and Parida’s estimates may not be the official ones, they are not only in sync with all the other relevant data sets available for this period but also point to statistics that have long been ignored by the government.
4. The government has to do far more —and far more swiftly — if this slide is to be arrested. The focus should be on creating more jobs, especially in labour-intensive sectors, such as textiles and food processing etc. Just in the past four years, India has lost half of all the jobs in its manufacturing sector alone.

• EXAM QUESTIONS: (1) Explain the concept of 'poverty line' in India. (2) What are the emerging dynamics of poverty in India in 2021-22? Explain.

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