Poverty estimations in India

INTRODUCTION-

The poverty estimates have not only been used for evaluating development efforts, but over time, have found use in the allocation of funds for poverty alleviation programmes among the States. An acceptable and representative quantitative index of poverty is, therefore, necessary.

The definition of poverty line in the Indian context was attempted for the first time in 1962 by a Working Group of eminent Economists and social thinkers after taking into account the recommendations of the Nutrition Advisory Committee of the Indian Council of Medical Research (ICMR, 1958) regarding balanced diet.

OFFICIAL METHODOLOGY OF POVERTY ESTIMATION-

Following the recommendations of the Task Force on Projections of Minimum Needs and Effective Consumption Demand’ (1979), the Planning Commission has been estimating the proportion and number of poor separately for rural and urban India at national and State levels. These estimates have been released from the year 1972-73 onwards, using the full survey data on household consumption expenditure collected by the National Sample Survey Organisation (NSSO) at an interval of five years.

The methodology behind these estimates, often termed as the official methodology’ has been outlined in the following sections.

The Basis of Official Estimates

  1. Calorie Norm : The official estimates are based on a calorie norm of 2400 calories per capita per day for rural areas and 2100 calories per capita per day for urban areas. The poverty line for the base year 1973-74 has been taken as the per capita expenditure level at which these calorie norms have been met, on an average, for the country as a whole, as per the NSS household consumption expenditure survey for the corresponding year.
  1. Poverty Line in the Base Year : The Task Force (1979) defined the poverty line as the per capita expenditure level at which the calorie norms were met on the basis of the all- India consumption basket for 1973-74. This was equivalent to Rs.49.09 and Rs.56.64 per capita per

month for rural and urban areas respectively at 1973-74 prices.

  1. Deflators : The poverty line so defined needs updating over time to take care of changes in the price levels. Initially the wholesale price index was used to reflect the price changes.

However, private consumption deflator derived from the National Accounts Statistics (NAS) was recommended for this purpose by a Study Group on “The Concept and Estimation of Poverty Line’, (Perspective Planning Division, Planning Commission, November, 1984).

  1. The Adjustment Procedure for Estimating Poverty Population: In order to arrive at the estimates of the number of poor., Planning Commission has been making adjustment in the National Sample Survey (NSS) data on distribution of households by consumption expenditure levels. Such an adjustment has been felt to be necessary because the aggregate private household consumption expenditure as estimated from the NSS data is different from the aggregate private consumption expenditure estimated in the National Accounts Statistics (NAS).
  2. The poverty population is, thus, estimated by applying the updated poverty line to the corresponding adjusted NSS distribution of households by levels of consumption expenditure. To estimate the incidence of poverty at the State level, all-India poverty lines and the adjustment factors have been used on the State specific NSS distribution of households by levels of consumption expenditure uniformly across the States.

ISSUES IN OFFICIAL METHOD AND CRITICISM BY INDEPENDENT RESEARCHERS-

According to the report of The EXPERTGROUP formed byPlanning Commision , the methodology and computation followed in official estimates of poverty at national and at State levels, has been regarded as inappropriate and even inadequate in giving a representative picture of incidence of poverty in India.

The States have become very sensitive about their respective estimates of poverty. Representations have been received from some of the State Governments. Scholars and academicians have also raised conceptual and methodological issues in this regard. The issues are based mostly on the following points-

  1. The Base-Year Consumption Basket

The poverty line has been anchored in a given calorie norm and the corresponding all-India consumption basket for the year 1973-74. The poverty line needs to be updated overtime for changes in price levels relevant to the consumption of the people around the poverty line.

Updating the poverty line over time can be done in two ways:

(a) The poverty line as estimated for the base year (i.e. 1973-74) can be updated for

changes in prices overtime;

(b) A fresh poverty line can be calculated from the latest available consumer expenditure survey data using the procedure suggested by the Task Force.

In the consumption behaviour due to shift in individual preferences, the two methods of updating the poverty line would give different results. In particular, method (b) would not give results comparable overtime. As per the recommendations of the Task Force 1979, the Planning Commission has been

using method (a). but the method (a) again has problem of having a proper price deflator to match the current prices to the base line prices.

  1. Choice of Price Deflators

It has been argued that the deflator for poverty line should be based on the cost of living of the poor. Construction of such an index requires a detailed information on the consumption basket of the poor and the relevant and appropriate prices. While it may not be impossible to construct such an index, there may be practical difficulties in obtaining reliable information in time and in sufficient details to construct such an index for the year for which poverty is to be estimated. It has been further argued that the assumption of identical price vector for the consumption baskets of people in rural and urban areas is highly questionable. It is observed that the relative price movements of the rural and urban sectors are distinct and are also different from CSO’s consumption deflator.

In order to accommodate both the points discussed above a suggestion has been made that taking the commodity group indices available from Consumer Price Index of agricultural laborers(CPIAL) for rural areas and the consumption pattern of the people around the rural poverty line at the national level for 1973-74 as weights, a special index may be constructed for updating the Rural poverty line. Similarly, for urban areas a special index of consumer prices may be constructed using the sub-group indices of industrial workers weighted by the consumption pattern of the population group around the urban poverty line. A simple average of this index and the CPI for urban non-manual employees for the urban areas can be used to update the urban poverty line. The Expert Group favors the use of this option in its report.

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  1. Estimation of Poverty at State Level

The Planning Commission’s methodology to estimate State level poverty implicitly makes the following assumptions:

(i) Age-sex and occupation distribution of population in the States follows the all- India pattern. Hence, calorie requirements per capita are the same in different States.

(ii) The price structure of the consumption baskets and price trends across the States are identical.

It has been pointed out that there are important inter- State differences in terms of

Population structures, activity status, climatic and topographical considerations, and so on, which would need to be reflected in calorie requirements. Accordingly, normative calorie requirements would differ from State to State.

The consumption basket of the poor also differs significantly across the States. It is inherent in the poverty line concept that non – food expenditures such as clothing, housing and fuel are not normatively estimated. The food habits will depend on local availabilities as well as on cultural and consumer preferences reflected in differing choices between vegetarian and non- vegetarian food items, between fine and coarse food grains and in the greater or smaller use of milk and

milk products.

Ideally the inter-State differences in population structure, activity composition, climate and topographical price structures and their trends over time should be reflected in the State –specific poverty lines. On practical consideration, the Planning Commission had adopted the all- India calorie norms and used a common deflator for all the States for estimating the incidence of poverty. A number of States were of the view that given the current methodology, Planning

Commission grossly underestimated their poverty status. There is therefore a need to streamline the methodology in this respect. In this context, it has been argued that there should be States specific poverty lines reflecting the State -specific price differentials of the relevant consumption basket and that the national poverty line should be a weighted average of these ‘State-specific poverty lines to ensure consistency.

If the concern is to ensure comparability across states as well as over-time we need to adopt the same consumption basket for all the States. For this the obvious candidate is the all- India basket. In making such inter-State comparisons in any given year, we have to take into account the fact that prices of different commodities in different States are not the same in any given year nor are the changes in prices similar over the years.

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4. Differences in NSS and NAS Estimates of Consumption Expenditure-

The practice in the Planning Commission has been to raise the expenditure levels reported by the NSS across all expenditure classes by a factor equal to the ratio of the total private consumption as obtained from NAS and the total as estimated from NSS. This factor is applied uniformly to all expenditure classes. Poverty is then estimated from this adjusted distribution of population by expenditure classes. Since the NAS estimates of per capita private consumption are generally higher, this procedure gives a lower estimate of the incidence of poverty than the estimate derived without adjusting the NSS data.

5.Special Problems of Hill Areas-people in the hilly areas have to have a higher daily calorific intake even for performing the normal activities related to their work and living. Besides, due to climatic conditions, the average resident has to incur heavier expenditure on clothing, food and energy for cooking and heating needs, compared to his counterparts in the plains.

6.Inequality and poverty are, of course, distinct concepts but there is a close causal relationship between the two. Given the level of development and the level of per capita income/consumption expenditure, a less unequal distribution would result in lower incidence of poverty. A practical way of looking at the inequality issue would be to look at the share of lower deciles in the aggregate income/consumption expenditure. But this method of poverty estimation doesn’t depict anything about the inequality status.

Other cricisms-

S.Guhan , senior fellow at MADRAS INSTITUTE OF DEVELOPMENT STUDIES also agrees that Standardisation of calorie norms and the consumption basket have been found to be necessary to enable aggregation of State-wise estimates and comparisons across States at each point of estimation. However, he simultaneously emphasizes the need of taking in account of State- level normative calorie requirements and State- level differences in consumption baskets.

On this basis, the separate set of State- level estimates could be based on all-India calorie norms , State-level consumption baskets in the base year, and State- level price indices and deflators relatable to the respective base year consumption baskets at the State level.

Utsa Patnaik in the article “neoliberalism and rural poverty in india” in economic and political weekly, criticizes the official methodology heavily pointing out the fact that not only is the level of absolute poverty in

India high, there has also been an adverse impact of neoliberal policies on poverty.

And yet, the poverty estimates by the Planning Commission and many

individual academics, both using a method that renders irrelevant the question of a nutrition norm, show low levels as well as decline in poverty over the 1990s and beyond. According to the article both comparisons over time of the all-India and state-level estimates of poverty as well as any comparison at a point in time of poverty levels across states, obtained by the official method, are invalid.

This measure using a nutrition norm is an absolute measure of poverty as distinct from the relative measures used in many advanced countries – such as considering all those to be poor,who have less than half the average per head income in the economy [Anand 1983, 1997; Subramanian 1997]. With a relative measure of poverty, rise in inequality will imply rise in poverty. The absolute poverty measure adopted in India however requires stronger conditions for poverty to show a rise. Increase in the inequality of income and of expenditure could be quite consistent with poverty so defined, showing a decline. Only an absolute decline in expenditure for substantial sections of the population (not offset by rise for other sections), would lead to average poverty rising.

Using a direct poverty estimation route of inspecting and

calculating from current National Sample Survey data the percentage of persons not able to satisfy the nutrition norm in calories, the author finds that in 1999-2000 nearly half of the rural population who are actually poor have been excluded from the set of the officially poor. For 2004-05, while the official estimate of rural poverty is 28.3 per cent, the author’s direct estimate of persons below the poverty line is 87 per cent. There is clear evidence of a large and growing divergence over time between the direct estimates of poverty and the official indirect estimates.

CONCLUSION-

The official method though being used for long in estimation of poverty in India, has many methodological and computational flaws in it which have been criticized by different scholars ,academicians and independent researchers over the period of time. The major criticism revolve around the adoption of uniform calorie norms and fixed consumption basket, base year price differentials and uniformity of deflators across the States and the practice of adjusting the NSS distribution.

Also the limitations of the poverty line approach like its absolute and reductionist nature, insensitiveness to mobility, effects of geographic, cultural and occupational manners etc have established it as an invalid method.

There is a need to revise the official method to have a closer to real estimate of the poverty so that the allocation of resources to those who are in need and efforts towards equality among different strata could be made more effective.

As suggested by the Expert Group ,three important improvements can be : (a) the abandonment of the NSS-NAS adjustment procedure (b) initial estimation of poverty State-wise and its aggregation for deriving all-India estimates (c) adoption of price indices and deflators that are related to consumption around the poverty line .

Along with this there is a need to take into account taking in account of State- level normative calorie requirements and State- level differences in consumption baskets.

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