Miscounting the poor

Using consumption expenditure to draw a poverty line leads to a flawed understanding of poverty.

Written by T.N. Srinivasan | Published:May 11, 2016 12:55 am
poverty, poverty ratios, poverty lines, Rangarajan Committee report, private expenditure, public expenditure, Rangarajan Committee, indian express columns, IE columns Poverty lines were meant to serve essentially two purposes: One, identifying those who are deemed poor according to some social norms, and given the norms, estimating their proportion in the population.(Illustrations: C R Sasikumar)

In their article, (‘A higher well-being’, The Indian Express, April 29), C. Rangarajan and S. Mahendra Dev “argue that the actual well-being of the household will be higher than what is indicated by the poverty lines if we take into account public expenditure along with private expenditure”. This conclusion does not follow from the analysis and data in the paper.

Poverty lines were meant to serve essentially two purposes: One, identifying those who are deemed poor according to some social norms, and given the norms, estimating their proportion in the population. In other words, calculating the so-called head count ratio (HCR) and indicators of the depth of poverty; two, given the social objective of eradication of poverty as soon as feasible, devising policies towards poverty eradication, and monitoring their performance in achieving the social objective. The concepts of well-being and happiness had no role in setting the norms.

The perspective planning division (PPD) of the Planning Commission, headed by late Pitambar Pant, prepared a 15-year perspective plan (1951-1976) to eradicate poverty, in the sense of providing a minimum level of living (MLL) for the entire Indian population — an idea that had already been mooted in 1938 by the national planning committee of the Indian National Congress. The PPD appointed an expert committee in 1962 to come up with what, from a social perspective, would constitute an MLL.

The committee came up with a bundle of goods and services per capita per month to which each and every Indian household should have access. Let us call it the minimum level of living bundle, or MLLB. It also argued that while a household with an adequate endowment of assets, including importantly its arable land and labour, should be able to acquire some of the MLLB from the market by spending their income from market returns to its endowments, there were others that the expert committee deemed as of such social importance for each household to have that it viewed them as a social obligation of the government to provide to each household, either free of cost or at subsidised prices. Let us call these components of MLLB as “state provided bundle”, or SPB. The cost, at market prices, of the MLLB net of the SPB, was the cost to a household out of its own pocket if it were to achieve the MLL. All households with adequate endowments will do so and the rest will not. It should be noted that the state was obligated to provide the SPB only according to the expert committee.

There was no legislation mandating the state to provide the SPB. Whether it, in fact, did or not cannot be determined.

It is natural to call those with inadequate endowments to achieve the MLL as “endowments poor”, or simply “poor”, and the out of its own pocket cost, at market prices, of the MLLB net of the SPB as the “endowments poverty line”, or the EPL. Strictly speaking, the “endowments poor” are those whose income from market returns is inadequate to meet the out of pocket costs to achieve the MLL. Since the National Sample Survey, for valid reasons, does not collect data on household income but collects data on its consumption expenditure, the latter is used as a proxy for income in order to compare it with the EPL.

Rangarajan and Dev point out that several committees, including the one most recent chaired by Rangarajan, have modified the poverty line — some for economic reasons and others in response to ill-informed criticisms of the media, particularly during the parliamentary and state elections.

Given the fact that deflated public expenditure related to the components of the SPB have increased over time, as Rangarajan and Dev show, how should the increase be reflected in poverty analysis?

First, since no copy of the expert committee’s report is available, it is not possible to say whether the committee had, in fact, proposed the components of the SPB in terms of the quantities of goods and services. Had these details been available one could have directly examined whether the quantities (per capita per month per household) the government actually provided were adequate to cover those promised in the SPB.

There is no information available on the distribution across households at each point of time of the deflated expenditure on the SPB. This means that even if we were to use the poverty line each year as the consumption expenditure per capita of the household, a purpose for which it was not intended, one has to treat the per capita per month per household real government expenditure on the SPB goods and services as income transfer to the household to conclude, as Rangarajan and Dev do, that the welfare (not necessarily well-being) of a household with poverty line income plus income transfer of the average public expenditure on the SPB goods and services must have gone up. Given that, neither assumption is warranted one has to conclude their conclusion is not warranted either.

However, there is an alternative. Since, by definition, the expert committee viewed that each household must have access to the goods and services of the MLLB inclusive of the SPB as social norms for the MLL, except that the SPB was to be provided by the state, one could view the sum of the poverty line expenditure, at current prices, and the aggregate per capita per household government expenditure on the SPB goods and services as if it is an amended poverty line, based on the MLL. And if the actual per capita consumption expenditure of a household is below this amended poverty line then it cannot afford the MLL, and calculate all the other indicators that one does with a poverty line and leave it at that.

The writer is Samuel C, Park Jr. professor of economics emeritus, Yale University
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